What is Cloud ERP Software and How Does It Work?

Updated Dec 6, 2022.
What is Cloud ERP Software and How Does It Work

Many companies rely on ERP systems to aggregate and organize data from their various independent departments.

Traditional ERP solutions are expensive to install and run for small to medium-sized businesses. They are usually housed within a company’s own server infrastructure and need regular servicing to stay current and relevant to the company’s needs.

Due to the huge cost associated with the traditional (on-premise) ERP solutions, many businesses are turning to cloud-based ERP solutions. 

Since the cloud-based ERP systems are based in the cloud, companies do not have to spend a lot on acquiring hardware. The cloud-based ERP vendor automatically upgrades the software on your behalf. 

In this article, you will learn the meaning of cloud ERP software, the components of cloud ERP software, cloud ERP concepts and glossary, the differences between cloud ERP and on-premise ERP, types of cloud ERP software, benefits of cloud ERP software, and the challenges of cloud ERP.

Let’s get started.

What is Cloud ERP Software?

Cloud ERP software is a type of Enterprise Resource Planning (ERP) software that runs on a provider’s cloud computing platform. It is also known as Software as a service (SaaS). Cloud ERP software gives users access to applications that share computing resources. The resources are controlled in data centers designed to host applications on numerous platforms.

The Cloud ERP model has lower upfront costs compared to on-premise ERP. They have lower upfront costs because they make payments either monthly or yearly. So, instead of making an exorbitant one-time payment, you can renew when due.

Cloud ERP allows a company to access the software from any location at any time. It is instrumental to small and average-scale businesses because it provides optimum functionality at an affordable price, i.e. access to the software without having to pay for lifetime access. 

With the cloud ERP software, companies can measure the productivity level and growth rate over a period. Companies use the cloud ERP software because they can access the globally-connected systems operating with advanced technology.

Cloud ERP software integrates some or all the essential ERP modules needed to run a business such as accounting, order and inventory management, eCommerce, human resources, customer relationship management (CRM), business intelligence, financial management, and others into one complete ERP system. 

ERP Software market size in 2021
Source: FinancesOnline

Components of Cloud ERP Software

Your ERP system may be filled with mind-blowing features, but if it doesn’t have the main components, it is still not the right software package for your business. You need to evaluate ERP vendors by checking for the ones with the complete components for your company. 

Here are the key components of cloud ERP software, they include human resources, customer relationship management (CRM), supply chain management (SCM), inventory management, business intelligence (BI), and financial management. 

1. Human Resources

Proper management of employees results in maximum productivity. Your staff should be your topmost priority if you want to successfully run a company. Your human resources ERP component should be able to manage your employees effectively, from the administration to the timekeeping.

The most important feature a company needs from human resources ERP components is the payroll system. Submitting payrolls and issuing deposits manually can be time-consuming and stressful. But an HR component will automate payments of salaries, tax deductions such as payroll tax, cash benefits, etc. 

With an accurate timekeeping feature, you can automate the hourly payments of some workers. It will save you the stress of inputting the time record sheets manually.

2. Customer Relationship Management (CRM)

Customer relationship is the next priority after the management of employees. Customers are so important that your business will not survive, let alone thrive without them. 

The CRM component helps you follow up on every detail of your customers. Whatever insight you get from the follow-up can be used to strengthen or overall your marketing strategies and sales plans.

One of the major uses of the CRM component is keeping sales records for different buyers. With that information, you can up-sell or try to add an item the customers are likely to buy into their purchase list. You can also track the conversation that ensued between the sales unit and the customers.

3. Supply Chain Management (SCM)

Creating a supply chain is not an easy task at all, even with the help of cloud ERP software. The supply chain management component is the best feature to help out with the supply chain. It helps you to optimize your supply chain, of which the first step is to collect real data from supplies.

The data gives you access to in-depth knowledge of the well-being of your supply chain. With the data, you can rectify any technical issues as soon as you notice them. You can also make accurate predictions with the information you get from the supply chain. The supply chain management component can also help your company to track your production volume to meet the demands.

4. Inventory Management

The inventory management component is one of the most important components in an ERP system. Inventory management is also similar to supply chain management but extends its processes to other aspects, such as warehousing. The main purpose of the inventory management system is for receiving orders and stock warehouses.

The inventory management system comes with automatic tracking features, which do not need the help of manual control. The features include revision level tracking, serial number tracking, and more.

5. Business Intelligence (BI)

The business intelligence component is pretty new, relative to other components. Nowadays, companies want to make data-driven decisions, that is why this component became one of the standards for every ERP software. The business intelligence (BI) ERP component helps you collect, analyze, and integrate data, which will provide you with insights on the next line of action.

This component gives insights into reports. It makes it easy for you to analyze the data you have. Some reports come in the form of numerals, tables, or charts. Also, reports come in visuals, allowing you to infer a lot from a fast glance. Ensure your software has the data visualization feature so that data can be deciphered.

6. Financial Management 

The financial management component deals with the data gotten from other components. Since every ERP component deals with money in one way or the other, this component manages and works with all other components.

The financial management ERP component manages all your financial data, including the assets, liabilities, accounts receivables and payables, budgets, and more. It gives you insights into your income and expenditures. This component also deals with your financial statements such as balance sheets and income statements.

You can discover your profits and losses trends, and know where you are overspending. The insights are being used to maximize profits while reducing the costs of spending.

Although your business might require some other components from your cloud ERP software, these are the minimum that every business should have for smooth digital operations. Ensure the cloud ERP software you purchase has all the features your business needs.   

Cloud ERP Concepts and Glossary

  • On-premise ERP is an ERP software that is installed on the company’s site and managed by the company’s IT staff. 
  • Cloud-based ERP is an ERP software that is managed by the ERP vendors on a third-party server. It is always in the cloud and accessed via the internet.
  • Mobility solutions refer to the system, tools, and information that can be privately accessed by the company or customers with mobile gadgets like smartphones, tablets, etc. anywhere, anytime.
  • Infrastructure costs are the amount of money you spend on keeping the systems, tools, technology, and information up to date. They are used to make operations run smoothly. It is spent by companies who use the on-premise ERP because they host the software on their server.
  • IoT is the acronym for the Internet of Things. It refers to the tools and systems that are interconnected across the globe through an online network. With IoT systems, machines and tools can work together to produce optimum service with little or no human labor. 
  • End-to-end security is the encrypted connection between you and your cloud ERP vendor. It is a secure connection that exists in the cloud when you manage your business welfare and customer’s information.
  • Deployment strategy refers to the way you handle and implement your ERP software system in your business. Examples of deployment strategies are SaaS single-tenant, managed hosting, SaaS multi-tenant, etc.
  • Shared infrastructure is the system that gives multiple users access to tools in a shared network space. Cloud ERP users enjoy the benefit of shared infrastructure when they receive updated technological tools at a low cost.

Cloud ERP vs On-Premise ERP

Cloud ERP is a system that is being hosted by an ERP vendor on a third-party server via the internet. Companies use the cloud ERP to integrate the numerous operations of the business. On-Premise ERP, on the other hand, is hosted on the company’s server and managed by an IT staff. 

These two types of ERP are very instrumental to the seamless operation of small and large-scale businesses. Although they arrive at a common goal, they have their differences.

Cloud ERP vs On-Premise ERP

1. Cost of Installation

The cost of installing on-premise ERP software is expensive compared to a cloud ERP. Why? If your company needs cloud ERP software, you can just contact an ERP vendor for the installation. 

Then, you can decide to make payments monthly or yearly, depending on your convenience. Alongside your periodic payments, some ongoing costs will be introduced for maintenance and improved functionality.

For on-premise ERP, you pay upfront costs for lifetime access to the software. Your one-time payment grants you access and you do not have to renew every month or year. Although, you might need to pay some ongoing costs too as you access the software but they do not recur as frequently as for cloud ERP.

2. Management and Operation

The software for cloud ERP is hosted on a third-party server while the one for on-premises is hosted on the company’s server. 

Cloud ERP software is controlled and managed by the vendor in the ‘cloud’. The vendor is responsible for the installation, configuration, customization, and other operating services. The infrastructure and systems upgrades are done by the ERP vendor. But there is end-to-end encryption to secure the company’s data.

On-Premise ERP software, on the other hand, is installed and managed by the company’s IT employee on an internet server. The company licenses the software from the vendor and buys networking infrastructure to run it on its server. 

Cloud ERP vs On-Premise ERP - by OptiProERP
Source: OptiProERP

Types of Cloud ERP Software 

Not all cloud ERP software is equal. Cloud EP software comes in various forms, serves different purposes, and differentiates on several grounds. The various types of Cloud ERP include single-tenant SaaS ERP, multi-tenant SaaS ERP, public Cloud ERP, private Cloud ERP, and hybrid ERP.

1. Single-Tenant SaaS

A single-tenant SaaS is when a single ERP software is dedicated to a single organization. This type of ERP offers you all the benefits of hosting your ERP system on the cloud.

The software and server environment are not shared with any other organization. Total management of the cloud servers is also put in the hands of the service provider, giving you more time to focus on other things. 

2. Multi-Tenant SaaS

A multi-tenant SaaS cloud ERP is when a single software is shared by several organizations. The information of each organization is, however, inaccessible to other organizations using the same software. It is the most common type of cloud ERP used by businesses.

A multi-tenant SaaS is cheaper than a single-tenant SaaS but comes with its drawbacks.

3. Private Cloud ERP

A private cloud ERP is when a single cloud server is dedicated to a single organization. It may be more expensive but the resources are not shared and you enjoy more benefits.

4. Public Cloud ERP

A public cloud ERP is when a cloud server is shared by multiple organizations. This does not mean that the server workload of one organization affects the other organizations.

The environment is shared but the resources are fenced. What this means is that each organization has its own dedicated portion on the cloud server that cannot be exceeded. Where it is exceeded, other organizations are not affected and only the exceeding organization is expected to scale up its resources.

Type #5. Hybrid ERP

A hybrid ERP is when an organization combines the use of both an on-premises ERP and a cloud ERP for its data computing, storage, and service provision.

Benefits of Cloud ERP Software

An increasing number of businesses are opting for cloud ERP over on-premises ERP systems and for good reasons. They include reduced infrastructure costs, more scalability, faster implementation, improved mobility, better reliability, disaster recovery, and security, and extended customization.

The Economic of Cloud ERP

1. Reduced Infrastructure Costs

One obvious and unmistakable benefit that a cloud ERP system offers you over-on-premises ERP is the lower costs of infrastructure and operation. 

With an on-premises ERP system, aside from the purchase of the software program, organizations still need to spend some extra on the dedicated physical servers to host their ERP on. You also spend money, time, and energy on hardware maintenance, electricity, a dedicated IT staff, initial implementation, and security, among a whole lot others.

Most cloud ERP providers are SaaS providers. It means that you avoid spending on extra infrastructure. The security, maintenance, and management of your servers are put in the hands of your ERP system providers.

You only need your team and internet-capable devices to run your organization's ERP. You also do not have to pay upfront for application software licensing.

2. Better Scalability

Cloud ERP software offers you scalability both in cost and server resources. This is something on-premises ERP systems lack.

As your business grows, your needs grow, and to take care of these needs, more infrastructure needs to be put in place. On-premises ERP systems require you to either replace them with larger hardware or supplement them with new hardware. This is very costly.

Cloud ERP enables you to easily scale your cloud server resources up as your business needs to grow. A lot of service providers also offer you a pay-as-you-go pricing scheme, which means you only pay for what you use.

You can start with as little server resources as you need to run a small business and seamlessly keep on increasing them as you grow. There is no purchase of extra resources that are not needed, meaning you do not have to pay extra money. 

3. Faster Implementation

Integrating an ERP system into your business operations causes you to experience downtime.  The downtime accompanying the initial implementation is one hurdle that every organization faces with ERP systems.

However, unlike on-premises ERP systems, the implementation of a cloud ERP is way quicker to complete. You do not have to take time setting up multiple hardware components or training your IT staff to run it.

SaaS ERP providers take care of all these for you and you get your business operations up and running in no time.

4. Improved Mobility

The world is fast-moving and never stays in one place. An on-premises ERP system slows you down for obvious reasons. You cannot manage your ERP system from anywhere and are only limited to where the hardware component is located. Cloud ERP software offers you more.

A cloud ERP system is managed in the cloud and only requires internet-capable devices to be accessed. This gives you a whole lot of options.

Running a global team is way easier and you can access your information in real-time. Important business decisions can be made accurately from anywhere and at any time. Team collaborations are also kept productive no matter how remote they are.

5. Better Reliability, Disaster Recovery, And Security

Disasters are not far off in this day and age. Fire hazards, water damage, or unexpected system failures can absolutely wreck the operations of any business. 

The possibility and negative effects of these are inflated if a company operates a physical ERP system and does not have sufficient disaster recovery strategies. 

Cloud ERP systems give you much-needed reliability. Cloud providers usually operate multiple data centers across different geographical locations. Backup of your data is made and they also provide you with sufficient security measures to fight against external cyber-attacks.

Organizations may be skeptical about leaving their data in the hands of third-party companies. Nonetheless, they need to spend a lot of money to efficiently manage data on their own.

Cloud ERP providers offer regulatory-compliant services, assuring you that they are certified to keep your data safe and secure. With all these, you can maintain high uptime to keep your business operations running for as long as you want.

6. Extended Customization 

On-premises ERP systems are customizable but only to a limited extent. They are typically limited to the immediate features accompanying the hardware and software. New features and updates are not so easy to implement and this could leave your business behind compared to others.

With cloud ERP, coupled with the scalability in price and server resources, you also have access to great customizable features, integrations, and add-ons. As your business evolves, you have access to easy customizations and integrations with other internet platforms.

Every part of your ERP system is easily upgradeable too. Updates on software features can easily be installed and you never get left behind on service improvements. 

With these seamless updates, customizations, and integration, your business needs are wholly covered and your workflow is streamlined across all platforms.

Benefits of Cloud ERP
Source: TechJockey

Cloud ERP Challenges

Cloud ERP is definitely the smartest way to go about managing your internal business information and relations. Trends are pointing towards its complete dominance.

Sadly, there are certain factors and challenges preventing different organizations from adopting it. Some of these cloud ERP challenges include difficult migration from the on-premises system, strict regulations and policies, and internal opposition to loss of control.

1. Difficult Migration From On-Premises System

Companies who have made use of an on-premises ERP system for a long period will experience a certain level of difficulty while migrating to cloud ERP. This is most especially true when it comes to large organizations.

Accessing and extracting the data stored on the physical ERP systems is difficult for just any staff to do. Even the IT personnel hired to operate it may find difficulty with these.

External help and technical support from the ERP provider are needed to complete this migration. This could set back the operations of the organizations for a while as it also requires a significant amount of time.

2. Strict Regulations And Policies

Both internal and external policies could bring about difficulty when it comes to cloud ERP. Seeing companies set very strict restrictions on the management of their data is not uncommon. This is usually done to prevent easy vulnerability to cyber-attacks and theft of company and customer information.

Government regulations may also limit organizations or businesses from hosting client information in the cloud also.

Thankfully, regulatory bodies and certifications like GDPR, HIPAA, and ISO have given a certain level of legality and reliability to cloud ERP software providers. Providers with these certifications can assure companies of safe and secure hosting services.

The fear remains, however, and organizations still hold back on embracing cloud ERP systems.

3. Internal Opposition To Loss Of Control

Another hurdle caused by internal factors in an organization is the refusal to leave the control of business processes to external providers.

A lot of organizations wish to maintain as much control over their data and business processes as possible. Dealing with SaaS ERP software providers only makes this wish a little bit difficult to uphold.

Large organizations with large IT teams also experience internal resistance to the loss of administrative and operational control. It could be because of a fear of loss of jobs or certain stakeholders seeing migration to cloud ERP as an unnecessary move. 

Internal resistance only makes the adoption of a cloud ERP more difficult. No matter the challenges, it is obvious that there are benefits to being gotten from a cloud ERP system. Internal resistance to its full adoption only limits your business operations.

Cloud ERP FAQ 

Does Cloud ERP Need to Be Updated?

Yes. Seamless software updates are one of the advantages of using a cloud ERP system and you should take it to your advantage.

Whether to fix existing bugs or provide extra features and functionalities, ERP software providers make updates available at intervals. Ignoring an update only keeps you on a less recent software version that offers you less than what the updated version gives.

By implementing regular updates, you get the most out of the highly customizable nature of cloud ERP systems.

Who Uses Cloud ERP Software Systems?

Cloud ERP software systems can be used by any type or size of business. However, certain organizations enjoy more benefits and efficiency from their use than others.

For instance, if you operate a global business that works together with clients from distant geographical areas, you benefit from the extended mobility and accessibility cloud ERP software provides.

Businesses that are planning on growing in size and business operations get to benefit from the easy scalability a cloud-based ERP system offers.

As a small business, you can also benefit from the scalable pricing and cost-efficiency offered by cloud ERP systems. This is especially important if you can not afford on-premises hardware and technology used by a bigger company. 

Cloud ERP software systems give you access to standard-level tools at lower costs. With SaaS capabilities, you also get to focus on growing your small business into one your competitors would be envious of.

How Much Does A Cloud ERP System Cost?

Cloud ERP providers typically set their prices after consultation with them. However, prices can be as low as $25 per user per month on low plans and $75 per user per month on high plans.

Generally, final prices are determined by the number of users, the amount of customization and add-ons you want to implement, and implementation costs, if you are just migrating. Prices can also go way higher than these and vary based on the cloud ERP service provider. Learn more about the cost of an ERP system from this ERP pricing guide.

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Martin Luenendonk

Editor at FounderJar

Martin loves entrepreneurship and has helped dozens of entrepreneurs by validating the business idea, finding scalable customer acquisition channels, and building a data-driven organization. During his time working in investment banking, tech startups, and industry-leading companies he gained extensive knowledge in using different software tools to optimize business processes.

This insights and his love for researching SaaS products enables him to provide in-depth, fact-based software reviews to enable software buyers make better decisions.