Companies can implement ERP systems in two ways, using on-premise software or using software-as-a-service (SaaS).

On-Premise ERP Implementation

Depending on the types of value chain processes managed by the ERP system and a company’s specific value chain, there are three strategic approaches to implementing an on-premise ERP system. These approaches are:

The vanilla approach: In this approach, a company implements a standard ERP package, using the package’s built-in configuration options. When the system is implemented in this way, it will deviate only minimally from the package’s standardized settings. The vanilla approach can make the implementation quicker, but the extent to which the software is adapted to the organization’s specific processes is limited. Fortunately, a vanilla implementation provides general functions that can support the firm’s common business processes with relative ease, even if they are not a perfect fit for those processes.

The custom approach: In this approach, a company implements a more customized ERP system by developing new ERP functions designed specifically for that firm. Decisions concerning the ERP’s degree of customization are specific to each organization. To utilize the custom approach, the organization must carefully analyze its existing business processes to develop a system that conforms to the organizations particular characteristics and processes. In addition, customization is expensive and risky because computer code must be written and updated every time a new version of the ERP software is released. Going further, if the customization does not perfectly match the organization’s needs, then the system can be very diffi cult to use.

The best of breed approach: This approach combines the benefits of the vanilla and customized systems while avoiding the extensive costs and risks associated with complete customization.

Companies that adopt this approach mix and match core ERP modules as well as other extended ERP modules from different software providers to best fit their unique internal processes and value chains. Thus, a company may choose several core ERP modules from an established vendor to take advantage of industry best practice.

Software-as-a-Service ERP Implementation

Companies can acquire ERP systems without having to buy a complete software solution (i.e., on-premise ERP implementation).

Many organizations are utilizing software-as-a-service to acquire cloud-based ERP systems. In this business model, the company rents the software from an ERP vendor who offers its products over the Internet using the SaaS model.

The ERP cloud vendor manages software updates and is responsible for the system’s security and availability. Cloud-based ERP systems can be a perfect fit for some companies. For instance, companies that cannot afford to make large investments in IT, yet which already have relatively structured business processes that need to be tightly integrated, might benefit from cloud computing.

The relationship between the company and the cloud vendor is regulated by contracts and by service level agreements (SLAs). The SLAs define the characteristics and quality of service; for instance, a guaranteed uptime, or the percentage of time that the system is available. Cloud vendors that fail to meet these conditions can face penalties.

The decision about whether to use on-premise ERP or SaaS ERP is specific to each organization, and it depends on how the organization evaluates a series of advantages and disadvantages.

Three major advantages of using a cloud-based ERP system are:

• The system can be used from any location that provides Internet access. Consequently, users can work from any location using online shared and centralized resources (data and databases). Users access the ERP system via a secure virtual private network (VPN) connection with the provider.

• Companies using cloud-based ERP avoid the initial hardware and software expenses that are typical of on-premise implementations. For instance, to run SAP/R3 on-premise, a company must purchase SAP software as well as a license to use SAP. The magnitude of this investment can hinder small- to medium-size enterprises (SMEs) from adopting ERP.

• Cloud-based ERP solutions are scalable, meaning it is possible to extend ERP support to new business processes and new business partners (e.g., suppliers) by purchasing new ERP modules.

There are also disadvantages to adopting cloud-based ERP systems that a company must carefully evaluate. Three main disadvantages of using a cloud-based ERP system are:

• It is not clear whether cloud-based ERP systems are more secure than on-premise systems. In fact, a 2012 survey conducted by North Bridge Venture Partners indicated that security was the primary reason why organizations did not adopt cloud-based ERP.

• Companies that adopt cloud-based ERP systems sacrifice their control over a strategic IT resource. For this reason, some companies prefer to implement an on-premise ERP system, utilizing a strong in-house IT department that can directly manage the system.

• A third disadvantage is a direct consequence of the lack of control over IT resources. This disadvantage occurs when the ERP system experiences problems