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19.09.2015 - by  John Clough

Much has been written over the years, and continues to be written, about the benefits of cloud technology. Adoption of cloud services continues to grow with 79% of Small and Medium Enterprises considering the cloud as being part of their IT strategy [source: UK Cloud adoption trends for 2015].  And why wouldn't a Small and Medium Enterprise consider cloud services for it’s business? Cloud services are cheaper, more flexible, and more reliable. Except they're not, or rather they may be but don't make the assumption that by being in the cloud a service is any of those things.



Cloud technology has been with us in many forms over the years. Back in the mid-late 1990’s ASPs (Application Services Providers) took on-premise technology such as Microsoft Word, Excel, and Outlook and delivered it back to customers from their own hosted platforms, however take up was low. The difficulties of delivering a cheap and reliable service at that time were many; the large relative cost of data storage; broadband was still a new technology with limited bandwidth available; licencing costs were still based on purchase rather than rental, and SMEs were still deriving value from the purchased IT infrastructure they already owned.


Fast forward through the 2000s and SaaS (Software as a Service) providers became more prevalent, typically delivering their own software specifically written to run in an internet browser. Development costs still provide a barrier to entry but with investors prepared to part with money in the hope that their chosen cloud solution(s) will return a large multiple, SaaS providers are many and varied.


Latterly we have seen the emergence of private clouds, hosted applications that live within the businesses own network.


For the purpose of this article a cloud based solution is one that the core application resides on the internet and is managed by the author of that software. An on-premise solution is one that resides on the server of the client where the server is managed by the client or their nominated agent.


Characteristics On-premise and cloud solutions

With so many software variants, defining absolute characteristics of either a cloud or on-premise solution is difficult, however we can reasonably say that typically;


- An on premise solution requires an investment of capital with skilled/external installation services. If you purchase a server then you will need a network engineer to configure that, a hosted server also needs a network engineer to configure that but the time associated with configuration is often rolled in to the rental agreement.


- A cloud solution will typically function through a browser. tablet, or phone rather than through it's own purpose built application. This is a fundamental design change from the traditional desktop application. Some on-premise providers have developed their own tablet and phone applications to compliment their desktop applications but there is a fundamental difference in that the data for those applications is being served from the customer site rather than from the cloud.


- An on premise solution may offer additional future flexibility and configuration potential. The reason that this holds true is that cloud solutions offer benefits of scale by aggregating large number of users who all want a similar process. Email is a great example of this premise, where variations between clients such as domains and user names and email addresses can be segregated through an online portal, the business of dealing with the email transit can be dealt with using a single engine for all. An on premise solution is often more customisable because the code lives on each customer's network rather than all customer's relying on a single set of source code held centrally in the cloud. Because it is local to that installation, any customisation can often be achieved without affecting other customers.


How to select product

Selection criteria where cloud products are available should be no different for cloud than they already are for On-premise products. There may however be more at stake and additional nuances in that selection process. Criteria will include but not be limited to;


Does this solution deliver the functionality I require?

Different product sectors have seen varying penetration from SaaS providers, for example in 2013 the CRM (Customer Relationship Management) market consisted of 41% cloud providers with being the market leaders holding 16% of the market, and growing by 30% from the previous year, outstripping Microsoft, IBM, and SAP but some way [source: Forbes Worldwide CRM spend by vendor].


Cloud players in the ERP market (Enterprise Resource Planning which incorporates finance and operational software) held just 12% share in the same year [source: Forbes ERP Market share update]. One may note that CRM does not have the same diversity of functions as ERP software. We'll pick that up later in this article.


Does this solution offer stability within my business?

This is a more difficult question to answer. Talk to most businesses and ask them about their IT experience and the conversation will start with a rolling of the eyes and anecdotes of downtime and lost business. So presumably the cloud fixes this? It’s an interesting question. Our experience of business that have IT issues is that in many cases they have the wrong tool for the job. Servers which are under specified, with lower grade components, configured in an incorrect manner. IT can be done cheaply but it often results in considerably higher longer term cost both directly with the cost of continued maintenance and indirectly through lost productivity from downtime.


Cloud providers have had their own performance issues with many of the large providers having some outage over the last couple of years. The binary ‘is it up or not’ is not the whole story. For example in July 2014, Salesforce reported 0.01% downtime across all their locations, that’s 4 minutes in one month, however in the same month they reported a massive 7.2% of ‘service violation’, that is; while the service is still available the performance was poor enough that it would affect user productivity. That’s over 53 hours [source:]


Can I work with the supplier?

Supplier choice is key, for both for cloud and on-premise solutions. That supplier could be one in the same. Microsoft Office 365, or Microsoft Exchange? You decide.


One point to consider for cloud services is where the data is held. For example, the emergence of Amazon S3 as a hosting service brings highly available data centre services to cloud based providers to deliver their applications to you. Keep in mind however, that the region your data will be stored in will be the decision of the cloud provider, so while you may prefer the service to be delivered from the EMEA locations in Germany and Ireland, your provider may host the service in the Americas or Asia Pacific.


The Elephant in the cloud

There is of course one further consideration with cloud services; You’ve selected your brilliantly functional products, with data stored in Europe, and your suppliers are amazing  - however none of that means anything because your broadband service has been down for 3 days. Broadband outages are the exception and not the norm for most business, however standard broadband Service Level Agreements (SLAs) are based on ‘target fixes’. We’ll cover internet SLAs in a future article however broadband outages covering a number of days are not unusual – could your business operate without your cloud services for a number of days? Or at best operate by accessing them from mobile devices? With on-premise services your server and switches are the weakest link in your IT infrastructure, your internet connection now takes on that mantle. If your IT services are cloud based and critical then you should always invest in a higher grade internet line; eoFTTC (GEA), EFM, or Leased Line.


Cost effective?

And herein lies the pricing issue. Consider that you can purchase a copy of Office for £150, or rent it from Microsoft for £5 per month. That gives your rented copy a life of 30 months before it becomes more cost effective to purchase the software (not withstanding the opportunity cost of capital, inflation, interest rates etc). Most desktops have a life of 5 years and it’s still common in 2015 for businesses to be using Office 2007 and 2010. The total cost of renting is therefore more than the capital cost of a one off purchase.


Another factor that is often overlooked is your server. Don’t think that moving your services to the cloud means that you can remove that. For a business with anything more than a handful of users best practice dictates that you still need a server to control logins for desktops, manage print services, antivirus software, and other core services that can’t be managed in the cloud.


Add to that your upgraded internet line and the cost of cloud is often comparable to an on-premise solution albeit that you will likely have moved some capital cost to ongoing operational cost.


A special mention for ERP software

I mentioned earlier that cloud based ERP software only accounts for 12% of the market and rental of on-premise ERP software is unusual. In our opinion there are a number of reasons for the slow uptake;


- Businesses don’t change their ERP software very often, on average every 7-10 years, and change is time consuming and disruptive and only happens when there is a strong business case to do so. Most existing ERP systems were purchased when cloud was in its infancy.


- Larger businesses require more functional ERP software. The entry level end of the SaaS market is awash with successful cloud providers such as Xero, who boast hundreds of thousands of active subscribers but as soon as you require complex currency transactions, intercompany transactions, serial tracking of goods, shop floor routing and so on, these functions haven’t yet been written in to cloud applications. Products such as Sage 200, 500, 1000, Access Dimensions, Exchequer, Pegasus Opera 3 have taken years to get to their point of maturity. That’s not to say that some providers haven’t tried, Netsuite has been available for some years as a cloud based ERP solution, as has SAP Business by Design but uptake has been low due to the previous point.


- Established ERP providers have built their business model on continued large capital orders. To move to a rental model, either cloud or on-premise is a long and difficult and risky road to traverse and if you’re spending big ticket money you’re likely to want to have the software on your premises where there is surety of it’s continued operation. I mentioned 123Insight rent their manufacturing software earlier. How do they do it? Simple, they made losses in the early years as they built their business and they found a different route to market other than the traditional big ticket sale which requires a big ticket salesman to close it. Xero boasts 475,000 subscribers in their 2015 annual report, net loss after tax is NZ$69M. Going cloud as a provider needs deep pockets and a sea change in approach which most traditional providers don’t have.


In Summary

The cloud does offer tremendous opportunities to businesses. It offers flexibility both in delivery and pricing models for their IT infrastructure. A start up business can rent all the services they need for a handful of users for tens of pounds per user per month, but for larger or more established businesses the flexibility required will mean that, at this stage in cloud development, an on-premise solution is the only viable option available for anything other than basic or repeatable functions.


A cloud solution will likely cost more in the long run. And, given that cloud services are not without downtime, I would argue that a well specified, implemented, and maintained on-premise server solution is as cost effective and reliable as a cloud solution.


The reality is that your next network refresh is likely to be a hybrid solution where applications such as your ERP software, where the cloud providers don’t have mature and fully functional products, will reside on your own network, but where generic and repeatable processes like email and backup will be hosted in a cloud platform.


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