Rubenstein Justman Management Consultants

Question for the ERP Experts: Is “Hosted” ERP Right for Me?

Question for the ERP Experts: I am hearing a lot about “hosted” ERP systems. How do I know if this is an option I should explore for my company?

Answer: This question comes from Rich in Los Angeles. Thanks, Rich, for your question.

First, some definitions. A hosted Enterprise Resource Planning (ERP) system means that the system’s software physically resides on servers that are outside of your company’s physical infrastructure. Hosting also typically means that an outside party is managing and maintaining the database and code on which the ERP system runs. The more traditional method for setting up and managing an ERP system has always been to manage the system with company employees maintaining servers that reside within the company’s headquarters or other locations.

Hosting an ERP system provides some line-item cost savings by requiring little or no “on premise” hardware and by reducing the staff necessary to maintain both the hardware and the software. The hosting service, though, adds a new cost to the IT budget – and this cost can be substantial. In addition, this cost never goes away.

The persistence of the monthly hosting charge means that in the course of the first three years or so, a company that is hosting its ERP system has spent more for hosting than it would have laid out for a hardware purchase. This all by itself does not indicate whether hosting was a good or bad decision, however. The company has, after all, been saving on its staffing costs all of that time.

In addition to cost savings – or additional costs incurred – with hosting, there is the concern of whether managing an ERP system is the type of skill that this company wants to build and nurture while spending money recruiting, hiring, training the staff necessary to manage the system. If the company is a manufacturer, couldn’t these IT dollars be more wisely spent on IT staff who specialize in productivity-enhancing software tools for the shop floor or managing product design and lifecycle systems for the company’s critical engineering function? In other words, if large-system IT management is not a core competency, then why not let an outside expert do the job?

RJMC finds that companies with a lean IT staff often find hosting to be a solid option. This allows the company to maintain its focus on its core functions and its competitors, without worrying about whether the back-end system is up and running.

Companies with a large existing IT infrastructure are less likely to find the higher long-term costs of hosting to be an acceptable trade-off. These companies have the resources to recruit and train adequate resources to support an on-premise system and will not want to give up the agility that this sort of in-house skill can provide.