Cloud ERP or on-premise: the strategic choice for German SMEs

The decision for a new Enterprise Resource Planning (ERP) system is one of the most critical strategic decisions a medium-sized company can make.

It has a fundamental impact on operational efficiency, agility and future competitiveness. In today's dynamic market landscape, this decision often comes down to one central question: do you opt for a modern cloud ERP or stick with the traditional on-premise model?

This choice is becoming even more explosive due to accelerated digitalization trends, the advance of AI-supported functions in ERP systems and pressing external factors. One prominent example of this is the imminent end of maintenance for widely used systems such as SAP ECC, which is forcing many companies to take action.3 This decision is particularly important for German SMEs, as factors such as limited resources, growth ambitions and the need for agility often play a greater role here.

This article provides a comprehensive comparison of cloud and on-premise ERP systems. It highlights the key factors that companies need to evaluate in order to make an informed, future-proof decision.

The aim is to provide clarity and guidance

What distinguishes cloud ERP from on-premise systems? A clear demarcation

In order to make an informed decision, it is first important to understand the fundamental differences between the two deployment models.

On-premise ERP: the traditional approach

The traditional on-premise model means that the ERP software is purchased - typically via a perpetual license - and installed on the company's own servers and hardware.¹⁴ This infrastructure is physically located on the company's premises.

The key feature is that the company owns the software license and is fully responsible for the management and maintenance of the entire infrastructure. This includes purchasing and maintaining the hardware, installing and configuring the software, carrying out updates and upgrades, ensuring security and creating backups.

Cloud ERP: the modern SaaS model

In contrast, cloud ERP software is obtained via the internet as a service, usually as part of a Software-as-a-Service (SaaS) model. The software itself and the company data are hosted on the ERP provider's servers in external, highly secure data centers. Access is usually via a web browser or special applications.

The key feature here is that the company typically pays a recurring usage fee, which is often based on the number of users or the range of functions used and is billed monthly or annually. The provider is responsible for providing and managing the infrastructure, maintenance, carrying out updates and often also for the basic security of the platform.

Hybrid ERP: the combination of both worlds

It should be briefly mentioned that hybrid models also exist. These combine elements of on-premise and cloud ERP. They are often used in transition phases or when there are specific requirements - for example, if particularly sensitive data is to remain in the company's own data center while other functionalities are used from the cloud.

The detailed comparison: decision factors for your company

The question of whether cloud ERP or on-premise is the "better" solution cannot be answered in general terms. The optimal choice depends largely on your company's individual business requirements, priorities, available resources and strategic goals. The critical factors that you should consider when making your decision are highlighted in detail below.

Focus on costs: investment vs. ongoing expenditure and TCO (total cost of ownership)

The cost structure is often one of the most decisive factors in ERP selection.

On-premise costs:

• High initial investment (CapEx): This model requires considerable investment at the start. This includes the cost of perpetual software licenses, high-performance server hardware, network infrastructure and, if necessary, the installation or modernization of server rooms, including cooling and power supply.

• Ongoing operating costs: In addition to the acquisition costs, there are ongoing expenses. These include salaries and training for IT staff responsible for maintenance, support and updates, energy costs for server operation, regular hardware replacements, expenses for security solutions (firewalls, antivirus, etc.), backup systems and potentially high costs for the implementation of major version upgrades.

• Total cost of ownership (TCO): Over a long period of time, the total cost of ownership can theoretically be lower than a cloud subscription, provided the system is managed efficiently and has a long lifespan. However, hidden costs are often overlooked, such as the internal time required for maintenance or the complexity of upgrades.

Cloud ERP costs:

• Low initial investment: As there is no need to purchase your own hardware infrastructure, the initial costs are significantly lower. Although implementation costs are still incurred, they are generally lower than for on-premise projects.

• Predictable ongoing costs (OpEx): The cost structure is based on recurring subscription fees (e.g. per user per month), which makes budgeting and cash flow management much easier.

• Included services: The provider covers the costs and effort for infrastructure, maintenance, security and often automatic updates as part of the subscription.

• Total cost of ownership (TCO): In the long term, the cumulative subscription fees can exceed the cost of an on-premise solution, especially with a large number of users over many years. Nevertheless, studies often show a significant TCO reduction through cloud ERP. For example, one study showed 50% lower total cost of ownership over four years for a company with 100 users compared to on-premise.

  Source: own research
  
  

For SMEs, it is not only the absolute level of costs that is decisive, but also the ability to plan and the impact on liquidity. The OpEx model of the cloud, with its lower initial hurdles and transparent, predictable running costs, is often better suited to financial planning in SMEs than the high, potentially budget-busting initial investments of the on-premise model.

The theoretical long-term savings of on-premise could be eaten up by the high internal administration overhead and unforeseen upgrade costs, whereas cloud solutions often bundle these aspects together, providing clearer cost transparency.

Flexibility and scalability: ready for future growth?

The ability to react to market changes and company growth is a key competitive factor.

• Cloud ERP: Offers high scalability. Companies can easily add or remove users, modules or functions depending on their current needs - be it due to growth, seasonal fluctuations or the development of new markets. The pay-as-you-go model directly supports this flexibility. This enables faster adaptation to changing market conditions.

• On-premise ERP: Scaling is often associated with considerable planning effort and further investment in hardware, licenses and IT working time. The system is less flexible when it comes to reacting quickly to changing requirements.

• Relevance for SMEs: This point is particularly critical for growth-oriented SMEs that need to adapt quickly without being slowed down by large, disruptive infrastructure projects.

Control and adaptation: customized or standard?

The question of the degree of customizability is often closely linked to control over the system.

• On-premise ERP: Provides maximum control over the system, data and underlying infrastructure. It allows in-depth customization up to the modification of the source code to map unique or very complex business processes.

• Cloud ERP: The provider has direct control over the infrastructure. The customization options are often more focused on configuration, the use of programming interfaces (APIs) or platform extensions than on in-depth code changes. This tends to promote the standardization of processes and orientation towards best practices. However, some cloud platforms offer extensive ecosystems for extensions.

However, the high level of customizability of on-premise systems can become a pitfall. In-depth, individual modifications are often tied to a specific software version. When upgrading, these customizations have to be laboriously re-implemented or rebuilt, which is complex, expensive and risky. For fear of jeopardizing functioning adaptations, many companies avoid upgrades and end up in a "version lock" situation.

They then work with outdated, potentially insecure software, miss out on innovations (such as AI functions) and face considerable risks when manufacturer support expires (e.g. SAP ECC EOL, SAP R3 or Microsoft or others). Cloud providers manage the upgrades centrally and often ensure that configurations and integrations created via standardized paths (APIs, platform tools) are automatically adopted.

Although direct code access is less common, this enforced standardization ensures continuous further development and avoids the "version lock" trap. The supposed advantage of on-premise customization can thus prove to be a considerable burden in the long term.

Data security and compliance: who do you trust with your data?

Especially in the DACH region, the security of company data is a top priority.

• On-premise ERP: The company retains full physical control over data storage. The responsibility for implementing and maintaining all security measures (firewalls, access controls, intrusion detection, security patches, etc.) lies entirely with the internal IT team. The system can be adapted very specifically to compliance requirements.

• Cloud ERP: The data is stored in the provider's data centers. Security responsibility is shared: The provider secures the infrastructure, platform and application base; the customer is responsible for managing user access and data configuration. Renowned cloud providers invest heavily in security expertise, state-of-the-art technologies and certifications (e.g. ISO 27001, SOC reports), often to an extent that would be almost impossible for individual SMEs to achieve. However, it must be ensured that the provider complies with relevant regulations such as the GDPR.
  
  
  

This is an important consideration for SMEs: Does the sense of control with on-premise actually offer greater security than using the specialized, certified security infrastructure and expertise of a large cloud provider? While on-premise keeps the data physically in-house, maintaining state-of-the-art security requires continuous investment and in-depth expertise, which can stretch the resources of SMEs.

Cloud providers pool this expertise and infrastructure. Even if the data is located off-site, the level of security provided could exceed what an average SME can provide in-house.20 The decision shifts from the pure question of data location to the question of trust in the provider's competence. Careful due diligence of the cloud provider, its security measures and certifications is therefore essential.18

Implementation and maintenance: time required and IT resources needed

The implementation process and ongoing operation differ considerably.

• On-premise ERP: Implementation times are often significantly longer (often over a year) due to the need to procure and configure hardware, set up the infrastructure, install software and make extensive adjustments. Operation requires significant involvement from the internal IT department for ongoing maintenance, installing updates and patches, troubleshooting and managing backups.

• Cloud ERP: Implementation is usually faster (often 4-9 months) as the infrastructure is already in place and the provider takes care of the server-side setup. This significantly reduces the burden on internal IT staff, as maintenance, updates and backups are managed by the provider.

From our experience in the context of implementation projects, it is important to note that the biggest challenge during an implementation is usually not the technology, but the willingness to accept new processes. Training and acceptance by employees is a key factor in the success of such a project.

If you have any questions on this point of implementation, please contact us, we may be able to give you valuable tips from our experience to help you implement your project smoothly and successfully.