April 04, 2011

Are cloud–based ERP systems the future for SMEs?

The first ERP systems were highly expensive and often demanded major business process changes or costly customizations. Although this characteristic of ERPs was acceptable for large enterprises it was inappropriate for SMEs (Johansson and Bjørn-Andersen 2007).

SMEs are generally limited in financial resources and also in IT skills making them highly dependable on the characteristics of their owner/manager (Levy 2009). Due to their small number of employees they often end up with non-structured organizations, were one employee can fit many hats (Deep et al. 2008). Thus cost was not the only reason why ERP systems were not adopted by SMEs, other major reasons were the required organizational changes and the ease/speed of implementation (Johansson and Sudzina 2009).

Following the change from mainframe systems to client-server ERPs, some think that we are now entering a 3rd generation of ERPs based on cloud computing, in particular SaaS (Software-as-a-Service) (Johansson and Bjørn-Andersen 2007; Hofmann 2008). After the Y2K period the high-end market is saturating, and major ERP vendors such as SAP and Oracle are now looking into the SME sector which make over 90% of all enterprises (Deep et al. 2008; Carvalho and Johansson 2010).

New ERP vendors are also providing ERP solutions based on cloud. An example is Manu Online who are providing a SaaS ERP solution for the manufacturing and material supply markets (Manu 2011). They say that “As a Saas (software as a service) package Manu Online immediately saves you money because we have removed the need to buy and maintain an expensive IT infrastructure”.

In fact SaaS has a very valid advantage over other technologies because it does not involve any upfront costs, which makes it highly attracting to SMEs. SaaS solutions normally offer a pay-as-you-go payment service; hence an SME would not require any expenditure in hardware (servers), licensing, or any other equipment except for a pay-per-use fee (Barot et al. 2010).

This might all sound very simple and an obvious solution for SMEs. However, as Buonanno et al. (2005) pointed out ERP implementation is not just about technical effort, the business aspect of the implementation is also highly critical. Therefore the question is how can SaaS ERPs fit the business requirements of an SME?

SaaS solutions generally offer a one-size-fits-all solution (Barot et al. 2010), which means that all of its clients will be using the same system with maybe a few configurable parameters. But SMEs are very different from each other, and often they want to take a competitive advantage by customizing their IT system (Taylor and Murphy 2004).

So, to conclude, in my opinion, yes SaaS can solve the technical problems by reducing up-front capital investments in IT, but how will they address the business aspects required for the successful implementation of an ERP system? How will they adapt to different SMEs needs? Will SaaS ERP vendors end up customizing their system for all their customers? If yes, what effect will this have on the performance of their system?


Barot, P. et al. (2010). The future of Cloud Computing: Opportunities for European Cloud Computing Beyond 2010 (Expert Group Report for European Commission). In Jeffery, K. and Neidecker-Lutz, B. (Eds). Retrieved March 25th, 2011 from the European Commission CORDIS website: http://cordis.europa.eu/fp7/ict/ssai/docs/cloud-report-final.pdf

Buonanno, G., Faverio, P., Pigni, F., Ravarini, A., Sciuto, D., & Tagliavini, M. (2005). Factors affecting ERP system adoption: A comparative analysis between SMEs and large companies. Journal of Enterprise Information Management, 18 (4), 384 – 426.

Carvalho, R. & Johansson, B. (2010). Enterprise Resource Planning Systems for Small and Medium-sized Enterprises. Handbook of Research on Software Engineering and Productivity Technologies: Implications of Globalization. Retrieved March 22nd, 2011 from the 3gerp website: http://3gerp.iwvi.uni-koblenz.de/docs/HSEDeCarvalho-Johansson.pdf

Deep, A., Guttridge, P., Dani, S. & Burns, N. (2008). Investigating factors affecting ERP selection in made-to-order SME sector. Journal of Manufacturing Technology Management, 19 (4), 430-446.

Johansson, B. & Bjørn-Andersen, N. (2007). Identifying Requirements for Future ERP system. Proceedings of the 30th Information Systems Research Seminar in Scandinavia - IRIS 30 (Ed.: Tiainen), 467-480. Retrieved March 22nd, 2011 from the 3gerp website: http://3gerp.iwvi.uni-koblenz.de/docs/Identifying%20Requirements%20for%20Future%20ERPs_IRIS%202007%20paper.pdf

Johansson, B. & Sudzina, F. (2009). Choosing Open Source ERP Systems: What Reasons Are There For Doing So? IFIP Advances in Information and Communication Technology, 299 (2009), 143-155.

Hofmann, P. (2008). ERP is Dead, Long Live ERP. IEEE Internet Computing, 12 (4), 84-88.

Levy, M. (2009). An Exploration of the Role of Information Systems in Developing Strategic Growth in Small and Medium-sized Enterprises. Unpublished doctoral thesis, University of Warwick, Coventry.

Manu (2011). Online ERP for companies in material supply or manufacturing. Retrieved April 4th, 2011: http://www.manuonline.com

Taylor, M. & Murphy, A. (2004). SMEs and e-business. Journal of Small Business and Enterprise Development, 11 (3), 280-289.

- 2 comments by 1 or more people Not publicly viewable

  1. Extremely good insight for referring to SaaS and link it with ERP. As you discussed, decrease of initial costs and lack of customisation is the main strength and drawback of SaaS respectively. Yes, it sounds sensible and plausible; yet, from my point of view it might be a one-side proposition.

    In my dissertion of bachelor degree, I investigated the current situation and development of SaaS market from second-hand data. By checking the results of the survey, although initial costs of adopting SaaS for firms may be much lower than that of implementing ERP system, high cumulative rental and enhancement expenses make SMEs hard to afford, leading to unsatisfactory financial troubles. Lu and Sun (2009) also refine this disadvantage of SaaS in their study. On the other hand, several SaaS market leaders, such as Salesforce.com, have provided enough options and tools such as Apex platform and AppExchange online marketplace of Salesforce.com for meeting customers’ requirements. Thus, customisation is also not a big drawbak of SaaS now.

    As a whole, the adoption of SaaS for firms, especially for SMEs, should be more critical to analyse, test and evaluate, not just rough judgement on the face of it.


    Lu, Y. and Sun, B., 2009. The fitness evaluation model of SaaS for Enterprise Information System. In: ICEBE ‘09 IEEE International Conference on e-Business Engineering. Macau, P. R. China 21-23 October 2009.

    10 May 2011, 01:02

  2. Yes. The limitation of customization is always controversial for ERP. The valuable part of ERP is the “best practice” built in the software, which makes it a strong tool to faciliate business process reegineering rather than merely automate the orginal processes. However, the re-engineering will destory the valuable culture and even the core business process of SMEs. Although there are tools that can help to customize the system, the main point is to decide the degree of customization to combine both of the strength of ERP and the original compentence of the business.

    Moreover, the scale of the implementation of ERP in a business is also important for cost-benefit when considering the small size of SMEs. But as you mentioned, to utilize the SaaS, the initial and maintanance cost should be reduced, which might mean an opportunity for SMEs to try cloud-based ERP. I am not quite sure about the pricing of the service and the benefit SMEs will gain from the service. But the risks of using the cloud naturally will affect the choice of SMEs, including loss of control over data, difficulties proving compliance, and additional legal risks as data moves from one legal jurisdiction to another (according to a assessement of cloud computing risks from the European Network and Information Security Agency ).

    21 May 2011, 23:19

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