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Cloud-Based ERP May Be Approaching the Tipping Point

I spent some time last week at NetSuite's first user conference in San Francisco. I've known NetSuite for much of its history, but I wanted the opportunity to mingle with hundreds of companies that have adopted ERP in the cloud. My immediate impression was that the enthusiasm level among customers and prospects was uncharacteristic of the rather staid enterprise application world. It isn't easy to find people who are excited about their ERP systems, but this group certainly was.

One of the reasons I went to the conference was that I'm getting more and more questions from clients about cloud-based ERP. They aren't necessarily ready to adopt it - some aren't even looking for a new ERP system - but everyone wants to know if "it's ready for prime time." NetSuite certainly isn't the only vendor offering ERP on a software-as-a-service (SaaS) basis, but it's been at it since 1998 and delivered thousands of SaaS ERP systems, so this seemed like a good place to get a real sense of the market.

Although there was a feeling of "early adopter fever" in the air, I was very impressed with the sophistication of the customers I listened to and spoke with. Many of them came from small companies, but they're using their ERP systems to support very complex business processes, market requirements and organizational structures. I talked to senior managers in companies running high-velocity global supply chains, integrated financial systems in dozens of countries and very sophisticated multichannel retail operations. In every case, they were adamant that using a cloud-based ERP system was a significant advantage.

As expected, nearly everyone was convinced that ERP in the cloud is much less expensive than on-premises ERP, but they tended to be much more focused on the speed and agility advantages. Everyone seemed to have stories about how quickly they had gone live with parts of the suite, or how they responded to some business change in days instead of months.

One of NetSuite's featured customers was Groupon, the latest social networking phenomenon, which has been growing at an almost unbelievable speed. The company discussed its project to roll out financial systems to 26 countries in three months, and that seemed to inspire the rest of the attendees to talk about their own deployment accomplishments. It may be true that the companies most likely to buy cloud-based ERP are the ones in a hurry. I had the feeling, though, that many of these organizations bought for other reasons, but discovered along the way that "speed changes everything." They like the ease of use, the subscription pricing and managed services. But being able to deploy the system in days or weeks? That seems to be the game-changer for SaaS ERP.

One of the other things I noticed at the NetSuite conference was that the average age of the attendees was about 10 or 15 years younger than the people I see at SAP or Oracle user events. Most of them had business roles, but they were very knowledgeable about technology, and came armed with the usual assortment of mobile devices to stay in constant communication with both their work and personal lives. Having grown up with the internet, their general view seemed to be that applications in the cloud were completely logical, and they had none of the usual concerns about security, data privacy, reliability or integration.

I talked to Zach Nelson, NetSuite's CEO, about where he saw the opportunity to sell SaaS ERP to larger companies, and he said that his company was getting lots of interest from large organizations that were trying to match the speed and agility of small ones. This is particularly true in industries like high-tech and consumer products, where rapid time to market is so essential. I was reminded of a similar phenomenon in the early 1980s, when minicomputers and packaged applications first emerged. Like cloud-based applications, these minicomputer systems were initially targeted at small businesses and divisions or departments of larger companies. However, their functionality rapidly improved, and it became apparent that they offered a huge improvement in usability, cost and deployment time relative to mainframe systems. Despite some concerns about risk, reliability and vendor viability, large corporations began implementing packaged minicomputer applications as a part of their strategies to become "more entrepreneurial" and less centralized. Within 10 years, the enterprise application market was dominated by minicomputer-based apps, and mainframe applications were viewed as dinosaurs.

As I think about the pace of today's business environment and listen to the attitudes of the people who will be making application decisions in the next few years, I'm convinced that we're finally at the point where cloud-based applications may begin to rapidly take market share from on-premises applications. We've already seen it in some segments, such as sales force automation, talent management, and travel and expense management, but the ERP market has been slow to move. I think we'll see companies with large, on-premises ERP deployments begin to add more cloud-based, departmental applications and, in some cases, develop a two-tier strategy, with the second tier running in the cloud. As the economic recovery continues and companies start thinking about replacing their legacy ERP systems, they're likely to find the cost and deployment speed of cloud ERP very compelling.

Source: Gartner

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