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Don't Confuse How You Deploy ERP with How You Pay For It

By: Cindy Jutras

Cindy Jutras is principal, Mint Jutras, LLC, Windham, NH, an independent research-based consulting firm that specializes in analyzing the business impact of enterprise applications.

Monday, August 01, 2011
 

With all of the hype circulating about the cloud, it is no wonder that there is ample confusion over how ERP software is bought and paid for. Even for seasoned enterprise application buyers, terminology can be confusing. SaaS. Cloud. On Demand. Hosted. On Premise. Perpetual License. Term License. Subscriptions. Multi-Tenant. Multi-Instance.

Do you know how all of these are different and where they have similarities? Let’s get down to basics.

How to Pay for ERP

Enterprise application software typically is not bought and sold; it is instead licensed for use. It may be licensed to be used by a company, on a particular computer or by other criteria such as number of users. This is similar to consumer software. Buying it once doesn’t mean you can duplicate it and share it with all of your friends, or even sometimes with all of your own computers.

A software license can be perpetual. That means you pay for it once and then can use the enterprise application forever—maybe. This once was the case, but more often nowadays a perpetual license agreement might include a stipulation that provides the right to use the software only for as long as you continue to pay maintenance fees to the software vendor providing the product.

If your software knowledge base only comes from consumer software, there may be no equivalent. Buyers of Microsoft Office or Adobe Acrobat can continue to use the software on their computers for as long as they want. But if Microsoft or Adobe come out with a newer version, they don’t just give it to their users. You might get a break on the price if you buy the newer product, but you still must buy it.

The Maintenance Agreement

A maintenance agreement—a recurring cost—typically provides technical support as well as certain innovations. Some of those innovations will be included in the maintenance fee and others you may still have to purchase. Maintenance typically is priced as a percentage of the software license; the going rate at list price currently is around 22 percent for ERP.

But perpetual licenses are not the only type offered. Instead, your license might cover a specified period of time. This generally is referred to as a “term license.” At the end of the term, you must either renew the license or discontinue use of the software. In fact the application might have the equivalent of a kill switch in it that disables it and prevents continued use at the end of the term. This requires the embedding of a license management code in the software, and is not als done, particularly in older software. If it is not and you don’t renew, you might find a software auditor at your doorstep.

Subscription-based pricing usually represents a form of a term license. This can cause confusion: You can use the software as long as you keep your subscription current, but people often equate subscription to software as a service (SaaS). With SaaS, the customer doesn’t purchase a license, and instead pays for the software as a service. So, most applications delivered as SaaS are paid for through a subscription.

On-Premise, Hosted, and Cloud Applications

When software is installed at the company’s site, it generally is referred to as “on-premise.” But some companies prefer to outsource the care and feeding of the application to a third party. This, however, does not necessarily mean that the software is delivered as a service. Often, the software is simply delivered to a different destination and licensed just as it would be if it were running on-premise. This generally is referred to as a hosted environment, and services also may be purchased to perform that care and feeding, in addition to the hosting fees.

In a hosted environment, the company that licenses the software may in fact be responsible for running the application itself, and then outsource the technical infrastructure and maintenance. Or, it may decide to outsource much of the work involved in running the application. This generally is referred to as application-managed services (AMS).

If the software is not located at your physical site but you can access it virtually, this operating environment is referred to as cloud. A cloud can be private—nobody can access it except your company. Or, a cloud can be public—you access it through the Internet and you may, indeed, share the software with other companies, even though your data is secure. This is more likely to be a SaaS environment. In a SaaS or on-demand model the software itself is neither licensed nor owned by the company using it. The software is delivered as a service and typically is paid for through a subscription for the service provided.

Multi-Tenant and Multi-Instance

SaaS purists will insist that in order to be true SaaS, the solution also must be multi-tenant. This means there is only one instance of the software itself, and the data belonging to each subscriber is segregated and secured. However, everyone runs a common set of code and configuration settings tailored and personalized for its business processes. But in fact, the software can be delivered as a service in a single tenant or multi-instance, rather than a multi-tenant environment.

The solution provider benefits most directly from being able to offer a multi-tenant solution, because this allows it to scale delivery with less cost. Obviously, delivering bug fixes and product innovations to a single instance of software supporting many customers is far easier and more efficient for the vendor.

But, in fact, some vendors choose not to deliver their SaaS solutions as multi-tenant, for one of two reasons: Either their solution is not constructed to support this; or they feel they can deliver a more customized solution through multiple instances. And in fact some companies purchasing ERP solutions prefer to not run in a multi-tenant environment, for the same (latter) reason. While it is not impossible to deliver customized solutions through a multi-tenant SaaS solution (Plex Online SaaS ERP does this, for example), it does add a level of complexity for the solution provider.

To the nontechnical ERP users, the most important aspect is that they are able to connect to the application and its data from any computer with a browser. This may be accomplished with any of these deployment and license options. If in fact this is possible, often times the end user does not know or care which of these deployment options actually are being used to deliver the application, and they are even less likely to care how it is paid for.

But for those responsible for the purchase and deployment decisions, it is important to understand all of the potentially confusing options. MF

 

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