Oracle ERP Cloud vs On-Prem: Part 2 - Analysis

Part 2:  Analysis

Internal Analysis

Figure 2.1:  Value Chain for a typical manufacturing/operations firm

The value configurations of all corporations include finance as one of the activities.  (Figure 2.1) When analyzing the impact of Oracle's Financial ERP applications, specifically, the discrete activities can be broken down into business analysis, development, implementation, maintenance, and support.  (Figure 2.2) Drivers are structural factors derived from the corporations' previous activities and investments; these include economics, agility, and talent.  Economics determine the cost impacts of various Oracle ERP offerings to a corporation's bottom line.  Agility measures the security, control, and customization aspect of an implementation.  Lastly, a highly-skilled talent pool is required to carry out implementation of any type (McPherson).  The total value system of the Oracle ERP Financial application includes the Procure to Pay (P2P), Acquire to Retire (A2R), and Order to Cash (O2C) financial sub-processes.  These processes are closely integrated within the system and provide accounting data to the Record to Report (R2R) processes which is then used to develop reports and provide financial information to reporting agencies, sponsors, and key stakeholders (Figure 2.2).  

Figure 2.2:  Value chain for Oracle ERP Financial applications

Offerings

Cloud Analysis

Cloud Software-as-a-Service (SaaS) platforms provide peace of mind to the clients by means of predictable costs of the ERP system through a subscription without requiring any investments in infrastructure and hardware.  The ERP cloud application is hosted on Oracle's infrastructure and can be privately hosted for a single client or the resources of this infrastructure may be shared between multiple clients in a public cloud environment (Stoecklein).  Clients are not required to keep up with security standards for the infrastructure as the vendor is responsible for data security.  The implementation costs relatively low compared to an on-premise ERP system.  These factors may present an incentive for some corporations looking for a quick implementation at low up-front costs, but these costs can add up overtime and exceed an on-premise implementation. 

On premise analysis

While a traditional on-premise ERP installation has obvious drawbacks with investments in infrastructure, it does add value to financial processes by the ability for clients to perform highly complex processes through customizations since the client would own the Oracle ERP software.  Moreover, some organizations which are not adept at practicing the latest data security protocols would need to integrate data-security and disaster recovery for their financial ERP systems into their existing collection of applications (Stoecklein).  Larger corporations which already have in-house data-security and infrastructure for other applications may not find a cost benefit in implementing a cloud application.  Since vendors incorporate costs for data security, disaster recovery, and other practices into the cloud licensing costs, clients with on-site security teams can take advantage of the lower licensing costs by implementing on-premise ERP applications.

Hybrid analysis

Lastly, for clients which require an ERP installation to conduct financial business processes but neither implementation fits directly with their current strategy, Oracle provides an option for a hybrid solution which combines flexibility of on-premise ERP with the outsourced model of Oracle cloud ERP SaaS.  It provides the ability for clients to move instance in-house at a later date, or vice versa.  This offering has become more common as SaaS is gaining popularity and clients become wary of the hype in cloud implementations.  This model is also suitable for companies which haven't been able to make up their mind about which implementation to pursue with or if their desired choice does not fit into the value model. 

Cost

The choice between the different Oracle Financial ERP offerings boils down to one factor between the IT and Finance Executives:  margin.  An Oracle Financial ERP application plays an integral role in a company to help manage and integrate important aspects of financial business functions such as paying vendors, placing orders with customers and receiving payments, tracking assets, and generating accounting and financial statements.  A financial ERP system presents opportunities for corporations to improve efficiency, increase revenues, and control costs.  (Hedges) In the past, Oracle ERP implementations were accessible only to large enterprises due to implementation, support, and licensing costs.  While an Oracle Cloud Financial ERP implementation alleviates the cost factor, it can prove to be costlier than an on-premise implementation over the course of time for clients with large footprint if not thoroughly analyzed.  In order to make a fair assimilation of application costs, they must be evaluated over long-term.  The general rule of thumb is for companies to expect total cost to be between 4 to 6% of the annual revenues of the company.  (Erik) Some factors which influence implementation costs include size of user base and divisions, level of customization, required resources.  These include costs for ERP software, database management system, infrastructure, employees and consultants.  Below is a cost analysis breakdown for small firms with revenues under $250 Million, medium firms with revenues ranging from $250 Million to $1 Billion, and large enterprises with revenues greater than $1 Billion. 

Table 3.3:  Company Size

Small Businesses Costs

Smaller firms with revenues less than $250 million represent approximately 60% of the clients.  These corporations have an average of 100 users in the Financial ERP application and do not have hefty investments in infrastructure and full-time employees to manage the infrastructure and manage data-security in-house.  Instead they rely on offshore contractors and 3^rd party vendors to manage and maintain their applications, making them ideal candidates for Oracle Cloud ERP implementations.  (Kimberling) Prior to the cloud, smaller companies would opt for Tier II vendors such as Microsoft Dynamics, Lawson, NetSuite, among others.  With the advent of cloud computing, Oracle is able to offer an advanced ERP system at similar costs by allowing multiple clients to share the same resources and infrastructure.  There are still, however, some scenarios in which small businesses would require an on-premise implementation.  If a corporation is involved a specialized financial environment which requires a highly customized code or highly technical expertise, a cloud implementation would not fully support their business processes, however, the customizations may not provide sufficient value compared to the high costs of on-premise ERP implementation for small businesses.  A scenario in which on-premise would be required is when there are strong legislative requirements on how the data is stored and secured.  This generally applies to corporations which focus mainly on government contracts, requiring heavy industry data security and data stored in a secured firewall to comply with regulatory guidelines.  Due to the lower number of users and hence processing power, all aspects of the ERP system (application, database, and user interface) can be integrated into one physical box, also known as 1-tier architecture. 

Medium Businesses Costs

Medium businesses represent roughly 30% of the clients which range from over $250 million to less than $1 billion in revenues.  Performing cost analysis is most critical and complex for medium size businesses; the cost benefit of an Oracle Cloud Financial ERP is guaranteed in a small-business environment whereas it is not as straightforward in a medium business environment.  If not thoroughly analyzed, small businesses risk driving losses either through ineffective use of users' time on a non-customizable cloud platform or through spending more on an on-premise ERP which does not provide any distinct advantage over the cloud.  To evaluate the costs, medium size businesses must consider costs for software licensing, implementation and customization, infrastructure, IT personnel, maintenance, and training for both cloud and on-premise Oracle Financial ERP implementations.  Moreover, due to the similar outcome of costs, mid-size businesses also have the option for hybrid implementations (Lippincott and Wettemann).  It is possible that the mid-size corporation does not require a highly customized implementation, but as the company continues to expand into several different countries, hybrid would be a plausible solution.  Otherwise if cost of implementing cloud and installing an on-premise ERP are the same, cloud will allow for more continuity and can be recommended over on-premise. 

Large Business Cost Analysis

Lastly, large businesses represent the remining 15% of the clients which earn greater than $1 Billion in revenues each year and have a user base greater than 2500.  All large corporations are multi-national enterprises which conduct business over dozen countries.  This adds complexity to financial processing, requiring businesses to have highly customized processes varying by country, department, legal regulations, and user roles.  Implementations in such environments can be continuous and would not allow corporations to keep up with testing and training due to upgrades based on vendor selected schedules.   When strictly considering between SaaS Oracle ERP and on-premise for large enterprises, the decision for on-premise is clear.  

Agility

Many small and medium-sized corporations are involved in a cycle of ERP replacement driven by global economic conditions and increasingly complex financial business processes.  This paves an ideal path for Oracle to market their Cloud Financial ERP application due to low implementation timelines and up-front costs.  However, the adoption has been less than stellar.  Clients are not convinced with the technical and functional limitations of Oracle's Cloud ERP application, while others worry about security and control. 

Security

A cloud environment can either be private or public.  In a private cloud environment, the application is hosted on vendor's site in a segregated environment for an individual client.  Whereas, in a public cloud environment, multiple clients share same resources and infrastructure.  Although users from one client cannot access data for another client, it poses higher security risks since the hackers have a greater advantage of obtaining vital financial data financial process information from multiple companies with one security breach (Erik).   This has led to security as the highest-ranking concern with clients.  The American National Standards Institute (ANSI) rates Oracle data at a Tier 4 rating - the highest rating.  Oracle suggests IT leaders to consider matching internal security and service levels standards of top quality data centers and consulting partners to avoid security leaks through users (Oracle). 

Control

The Oracle Financial ERP Cloud software is shared in a public cloud environment; hence, clients will be on the same software version and will have less control over when upgrade patches are installed.   Upgrades requires clients to validate system operability, perform end-to-end testing of business process being affected, and train the users on the differences in functionality.  Oracle releases three patches a year, one for each quarter leaving out the fourth quarter due to annual financial close processes.  All testing and maintenance needs to be performed by a deadline specified by Oracle (Oracle).  Private offerings enable companies to install upgrades on their own schedules, however midsize companies tend to fall behind on upgrades because of the time, money, and resources required.   Moreover, by revoking access to the database, cloud-based services, in general, are not as effective in solution development and problem solving.  To obtain data from the database, instead of writing a script to pull data themselves, developers and consultants are required to create service requests (SR's) with Oracle (Oracle).

Customizations

In most finance process scenarios, clients require customizations to extend the application's ability to adapt to their business needs.  On-premise Oracle implementations offer customizations through additional configurations and in-house extensions built on top of the core functionality, commonly known as RICEFW objects (Reports, Interfaces, Conversions, Enhancements, Forms, and Workflows).  In the on-premise environment, these customizations can be made efficiently through the combination of external resources (applications such as PL/SQL scripts, Oracle Application Framework, and workflows) and internal resources (developers and IT professionals).  Oracle Cloud ERP applications are still fairly new and the wide industry penetration is yet to be experienced.  As it stands, Oracle Cloud ERP's have significant restrictions on type of customizations which can be made on the vendor's SaaS platform (Lippincott and Wettemann).

Talent

The resource pool of ERP implementation, support, and developer consultants continues to grow as availability remains to be in short supply.  The technology and tools for on-premise applications have existed for decades with subtle changes, resulting in resources with broad skills in vast numbers to match required skills and knowledge.  Cloud is a fairly new concept and cloud provides advantages and presents new challenges in terms of talent.  Due to the recent introduction of cloud and popularity of the platform, cloud professionals are in high demand, however, not many job seekers have accumulated sufficient experience to perform at the same level.  Employees working on newer cloud platforms result in lower turnover but these employees have a tendency of getting poached by other employers with better salaries.  Alternatively, companies can also outsource demands to implementation partners such as Infosys (Lippincott and Wettemann).   

Continue to part 3:  Oracle ERP Cloud vs On-Prem: Part 3 - Recommendations