Increasingly in today’s marketplace companies are turning to web-based and SaaS services in which a third party hosts the application. The underlying software driving the SaaS solution can be either commercial or open source. Salesforce is an example of a commercial solution that supplies both software and services and supports itself by charging for software, services, configuration, training, and customizations. WordPress is an example of an open source solution that offers software that is written by a community of developers without license fees.
In the case of open-source software such as WordPress, a SaaS solution is only available through service providers who charge for the providing services that can range from simple hosting to full application support.
SaaS ERP and Open Source
Open source is estimated to account for approximately 1.5% of the total ERP market. For a long time companies that wanted ERP could only choose from among various proprietary commercial solutions. Recently, however, more open source ERP solutions have matured.
Software as a Service (SaaS) includes software and services needed to run the software over the internet. The services include hardware, bandwidth, application knowledge, upgrades, server configuration, and much more. So, while a community can collaborate to offer free software, a commercial entity is required to offer a complete SaaS offering. This means that a free open source SaaS solution is not possible, unless funded through donors or advertisers.
ERP software is very complex and tailored to the needs of businesses. The configuration, upgrades, reporting customizations, business process modifications, hosting, backups, and other complexities are often more expensive than the underlying software. For this reason, the cost benefits of open source ERP are smaller than they would be for simpler applications such as email or website creation software.
The question is: which SaaS ERP solution, open source or proprietary, is right for you? The answer depends on the size of your organization, the level of customization required, and the type of business you run. Below are some of the advantages to both types of ERP solutions.
Open Source versus Proprietary ERP for SaaS
Upfront Costs: Open source ERP solutions can have lower initial costs than proprietary ERP solutions because you do not pay licensing fees. With a SaaS solution, the cost of the software license is bundled into the cost of the monthly or annual service fee associated with delivering the service. Since ERP installations last for 7-10 years, the upfront cost of proprietary software can be buried in the ongoing service fees. The diagram below illustrates this with some sample data that is consistent with a small to mid-size business implementation.
Diagram: cost of delivering SaaS ERP under different models
In this diagram, costs associated with hardware depreciation, IT support, software environment, application support, bandwidth, and storage are included – even though they are paid by the provider. Customization, training, data migration, and configuration are considered to be equal across the models.
In addition to licensing fees, you need to consider the cost of customizations that adapt the software for your business. In many cases the customization, training, and implementation costs are significant – sometimes making up 80% of the total solution cost. The cost of these customizations depends on how well the solution you are purchasing can accommodate your requirements regardless of whether it is open source or proprietary.
Ongoing costs: Whether you use open source or proprietary software, you will be paying the SaaS provider for as long as your contract lasts. The ongoing costs of maintaining open source and proprietary software is virtually identical, although some proprietary vendors argue that open source costs more to maintain because you work with a community instead of a single vendor.
Proprietary software often requires maintenance payments … but in a SaaS model these payments are usually included with the monthly costs. The ongoing maintenance payments associated with proprietary software can be significant, but the extent to which these fees are passed along in a SaaS model is at the discretion of the provider.
Ease/Speed of Implementation: SaaS ERP solutions can be implemented in just a few hours; however, customizations, training, and data migration can take weeks or months. The complexities are the same whether your ERP software is commercial or open source. Thus, like the cost of customizations, the speed and ease of implementation is more a factor of the software you selected and less dependent on the choice of licensed or open source.
Deployment Flexibility: With open source ERP, you have access to the source code so you have the freedom to run the software wherever you would like. You can decide when to do upgrades and don’t need to worry that the solution will be discontinued if the supplying company goes bankrupt or merges with another company.
Proprietary systems offer very different options with regard to deployment flexibility. With some, you are locked in to a specific vendor and are subject to price increases and rigid data retrieval policies. Other ERP solutions offer a choice of deployments – SaaS, hosted, or on-premises – so you get the same flexibility as open source.
Running your ERP software as a service (SaaS) can reduce the amount of flexibility you have with regard to deployment. With SaaS, you purchase a solution from a provider, so open source and proprietary systems are identical. However, with open source (as well as some proprietary vendors), you have the ability to move your deployment on-premises or to a competitive service provider. The cost of making this migration will vary by ERP package.
Customization: Customization is often the biggest cost in an ERP solution. With open source you have the code itself, which gives you unlimited power to change the software. As long as a large community of developers exists, you will be able to get competitive consulting and customization services.
Proprietary systems offer very different capabilities with regard to customization. Some vendors (particularly SaaS vendors) limit access to source code and offer customizations through special hooks and meta-data that can be delivered by members of the vendor community. Other proprietary vendors provide access to source code so you can make changes as you would with open source. In some cases, vendors that offer source code written in common programming languages such as .NET and Java offer more competitively priced customizations than some open source solutions because of the large pool of available developers.
Whether you use open source or proprietary solutions, multi-tenant SaaS solutions will be less customizable than if you run the application on your own system. Multi-tenant SaaS solutions require plumbing that provides security and can therefore not be shared. That said, most SaaS providers also offer single tenant versions of their solution. This arrangement allows a customer to gain access to the source code associated with the business logic.
Support: With ERP software, support depends on both the vendor and the software partner community. With ERP delivered as SaaS, support requirements expand to include the service provider that delivers the SaaS. In cases where the proprietary vendor also delivers the service, the support process is simplified – although the support issues may still be complex. With open source, a separate SaaS provider is required who can understand both the software and the service delivery.
Proprietary ERP software vendors such as Oracle and SAP have documentation and developer communities that are larger than open source communities. However, the pure size of the community may not be the best measure of support for a SaaS solution. The size of the organization divided by the number of customers may serve as a better measure of responsiveness … unless the software vendor generates an excessive amount of support issues.
The dynamics described above result in support costs which are similar for open source and proprietary ERP solutions.
New Features and Updates: Many contributions made in an open source community are provided by developers, who often supply contributions deep in the program rather than to the solution’s business applications. Business people may be involved with open source solutions, but their job is to make money, so they are less likely to contribute to the community or the open source solution. So open source solutions based around ERP may not have a robust feature set unless the community is particularly large. On the other hand, providers of proprietary solutions have an incentive to supply the latest features to meet customers’ needs, and the cost of getting the features you want is included in the price. In addition, open source solutions don’t have a schedule of upgrades or bug fixes since work is usually done by freelancers.
Open Source Which Isn’t Open: As mentioned, SaaS requires somebody to pay for the operating facilities, support, and product training. So far, the advertising model has not been used, so SaaS ERP providers need to employ sales forces and utilize marketing to attract users who will pay for the facilities and expertise. Many open source providers rely upon venture capital and are nearly indistinguishable from proprietary versions. In many cases the same company markets both an open source and a proprietary solution. For many companies, open source is just a way to market their software as a loss leader, giving them access to markets for their ongoing services.
Security: The nature of an open source community suggests that users will contribute to the ongoing development of the solution. If you use open source solutions, you are basing your ERP solution on code that everyone has access to. Note that open source advocates claim that open source code is more secure than proprietary code because the community is more likely to catch security vulnerabilities.
When offered as SaaS, open source ERP needs to be managed carefully to ensure proper security access and process management. The same considerations for offering commercial code as SaaS need to be applied to open source.
The Hybrid Model Conclusion
A hybrid model offers the best SaaS option for ERP software. The goal of a hybrid solution is to maintain open source deployment flexibility and customization while offering the security, support, and features of a proprietary model.
A hybrid model can accomplish this by delivering a solution that is broken into two independent components. The first is a cloud/SaaS platform that delivers security, web-services, database access, reporting, and code management. The second component is the business logic which contains core accounting, distribution, CRM, and other capabilities. While the underlying SaaS platform is proprietary, the business logic can be exposed so that it can be customized using standard development tools.
This hybrid arrangement provides a solution where a large community of developers can customize and extend the software to meet specific business needs. Security, multi-tenancy, and cloud capabilities are provided by the underlying platform, while business-specific logic is provided by community experts.
Douglas Johnson has over 20 years of experience in the software industry and currently works as the VP of Marketing and Business Development at cloud ERP software provider Acumatica