Is ERP facing its Tech Upgrade Cliff?

I have written before, in another context, that this year will see the start of what I have called the Tech Upgrade Cliff. This is where the cost of upgrading large on premise business applications, particularly after a time of austerity where an upgrade or two has been missed because of a combination of cost and minimal increase in benefits provided, will be the lever that moves many companies towards adopting cloud delivery of services.

The signs are that this is now starting to happen, and happen with one of the most important applications that most businesses have: the ERP system.

According to Netsuite Senior Vice President of International Products, Craig Sullivan, some very large enterprises with established ERP installations and global presence are starting to talk to the company seriously about moving their ERP requirements into the cloud.

“We are now in conversation with many Tier 1 ERP users, and they are starting to move beyond the fear. This is particularly the case as SAP is still not really delivering in the cloud”

Netsuite is, of course, already a supplier to many of these enterprises, but only as a Tier 2 ERP services vendor. The two-tier ERP model has grown as a marketplace over the last few years as a way of providing large businesses with greater flexibility and agility. Tier 2 has been based on the availability of ERP systems in the cloud, where SaaS-delivered services provide business management resources required by regional locations, subsidiary companies, large departments and the like.

Here it has been faster and more cost-effective to have a smaller, localised ERP installation than try to re-configure an instance of the central ERP system to cope with such specific requirements. The on-premise Tier 1 system is then used as the central repository of data generated by the Tier 2 systems running designated branches and departments.

As Sullivan points out, Netsuite has not stood still in developing its own capabilities, and he suggests that the company’s SaaS service is now at the point where it can take on the Tier 1 role as well for a growing number of major enterprises.

“We have built a suite that can now manage the entirety of such businesses,” Sullivan said, “and this year we will see some of these businesses making the move. We will see the low-hanging fruit start to deliver real results. It is surreptitious, but it is inevitable.”

This will obviously be a major step for many companies, as the financial, technological and even emotional drag created by existing installations and applications – what Sullivan refers to as the `sump cost’ - will be hard to overcome with any speed. But he is finding evidence that the movement has started in earnest.

“We are having conversations with existing Tier 2 customers where they are now talking about getting rid of their Tier 1 installations from the likes of SAP and Oracle, they are really getting engaged in the conversation and they realise they should no longer let their decisions about what happens tomorrow be based on decisions that were made yesterday.

“And in many cases these businesses are not even using all the technology they have paid for,” he added. “They have to accept it and have to ask themselves the hard questions, such as whether they can now really leverage the old iron to advance the business?”

So the next important milestone will be when some of these large enterprises not only make the move to a single-tier, SaaS-based ERP environment, but also start reporting on the results that follow. If they achieve what Sullivan hopes and expects, the rate of transition could become rapid.