On-Premise ERP Systems are Endangered Species

2021-04-20

Business software applications based on cloud technology used to be a novelty; nowadays, a large number of businesses inside and out of China use cloud-based applications to manage at least part of their business data and processes. However, there are still a number of business areas where many companies will give serious consideration to on-premise applications. Pure cloud-based enterprise management systems like NetSuite still compete against systems that are installed on local servers, such as SAP, Yonyou, MS Dynamics and other systems based on traditional client/server architecture.

There are arguments on both sides about whether cloud or on-premise solutions are preferable for managing critical business data. Arguments on either side generally revolve around comparative functionality, cost and system security and stability.

The Elephant in the Room

Now, as a long term NetSuite user, I am obviously already persuaded by the benefits of the cloud. However, regardless of your own preference, there is one objective consideration that is hugely important when decided whether to adopt cloud-based software for your business. The elephant in the room is this:

Whether you are a fan of the cloud or not, cloud and software as a service is the future dominant delivery model for enterprise management software.

This has major implications for businesses and the decisions they make about enterprise management software within the next few years. One implication is that even if you personally prefer on-premise solutions for your business, the only truly future-proof solutions available are cloud-based.

Buying On- Premise Software is like buying a Vinyl record player

Cloud technology adoption mirrors many other technological trends. Take music recording technology for example: even now, there are some people that prefer the sound quality of old vinyl records to digital audio formats like CDs and MP3s.

Like vinyl, there may still be a niche demand for on-premises. I imagine nuclear power plants will continue to keep their data on premise and make heavy investments in system security measures to ensure their viability. But for the majority of businesses, cloud-based software will be the mainstream choice.

In case there were any doubts that this trend is already in progress for ERP systems, the August 2016 edition of CIO magazine’s cover story was “ERP heads for the cloud”. Citing research from Gartner, veteran software writer Michael Nadeau proclaimed on-premise software an endangered species and predicted the cloud to become the default option for software deployment.

We are seeing a similar picture emerging, not just for enterprise software, but for all kinds of software applications as well. Shortly after their acquisition of LinkedIn, another cloud-based service provider, Microsoft CEO Satya Nadella commented on Windows 10: “We are not building an operating system for just a single device, when I think about even Windows 10, the way we conceptualized it is, we are building an operating system for the user across all the devices,” CEO Satya Nadella said. “It is a service, that is how I think of it.”

In other words, Windows will no longer be released as discreet versions on physical CDs sold at a fixed price. Instead, Windows will be made available as a recurring subscription service, complete with consistent, incremental upgrades rolled out to all users as internet downloads.

In the same way as audio recording technology, personal preference will soon become irrelevant in the face of prevailing market trends. Soon, it won’t matter whether you prefer manually installing Windows CDs on your PC every few years, or receiving the product as a recurring subscription. Microsoft has already decided that internet-based subscription is the major delivery model that they will use for their products the future.

Cloud is Cannibalizing IT Spending

According to Gartner, more than 1 Trillion USD of IT spending will shift to the cloud in the next 5 years. Of this, the market for cloud-based SaaS applications is already worth 36 billion and is expected to continue to grow by an average of 38% CAGR over the next 5 years. It is only a matter of time before the majority of mainstream business management software is offered as subscription-based cloud applications.

What is more, it is abundantly clear that the overwhelming majority of business software innovation in future years will take place on the cloud. Cloud-based subscription model software vendors have a business imperative to constantly deliver new functionality to justify the recurring costs of their product, which will shrink the gaps in functionality between competing cloud and on-premise products over time. In many ways, cloud products actually already offer functionality surpassing their on-premise counterparts.

Not only that, cloud-based software systems will also find more and more ways to interact with one another using integration bundles and web-based APIs. Increasing integration between these systems will lead to the emergence of increasingly strong software ecosystems on the cloud that will multiply the added value proposition of individual cloud products. An example would be NetSuite, which easily integrates with SaaS E-Commerce marketplace manager ChannelAdvisor, which in turn integrates with TMall, Amazon, EBay and a variety of other e-commerce platforms. Companies that adopt on- premise business applications like SAP or Yonyou that are difficult to integrate with other may soon find their on-premise software isolated among an increasingly sophisticated collection of integrated cloud-based applications.

The bottom line here is any company with plans over the next few years to scale their business, innovate and deploy new business processes to drive productivity, and maintain or upgrade their business systems in an efficient, low cost way, will find their efforts inhibited if they invest in software applications based on traditional on-premises client/server architecture.

All of this means that the writing is on the wall for on-premise business applications (as well as “fake” cloud applications offered by SAP, Yonyou and Kingdee that are client/server-based but hosted on a cloud instance, rather than pure on-demand SaaS products). The combination of prevailing market forces and technology trends means that on- premise business applications will soon go the way of the typewriter, vinyl records and VCR video players.

So whether you like the cloud, and on-demand software as a service or not, if you want to build a business based on applications that will still be viable many years in the future, you need to invest in cloud solutions today.