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Oracle CEO Mark Hurd on Cost Considerations for Cloud ERP

Switching enterprise software systems can be a massive undertaking. A company with thousands of employees is likely to have thousands of machines to update, with dozens or hundreds of different hardware configurations. An enterprise IT department would have to coordinate these upgrades with simultaneous upgrades to company servers, which would not only update the systems but also would likely need to manage company-wide access permissions and role authorities.

Attempting technology transitions at the enterprise scale is so daunting a challenge that it’s rarely initiated without a very clear understanding of the costs and benefits involved. The upside to a shift from on-premises to cloud ERP systems, however, can be so compelling that it often becomes a question of when to make the change, rather than why.

Oracle CEO Mark Hurd is one of the industry’s leading proponents of cloud-based systems. He’s spoken frequently on the high costs of maintaining on-premises ERP systems and other mission-critical systems, and has offered compelling data in support of his arguments.

At Recode Decodelast year, he mentioned that “IT in the enterprise can be 10, 12, 14, [or] 15 percent of all the expenses that our customers spend.” And in a LinkedIn Influencer article he published earlier this year, Hurd pointed out that “80 percent of IT spending goes to traditional IT activities—stuff like upgrading applications, integrating mismatched components that were never designed to work together into Rube Goldberg contraptions—and tuning, testing, monitoring, patching, and other maintenance. Let’s say another 5 percent is spent on cybersecurity applications and adapting to new compliance requirements.”

These are sobering numbers, and any CFO worth their salt would look to trim those expenses. Any CTO or CIO with an eye for innovation would want to deploy more of their organization’s IT budgets towards developing for the future rather than shoring up the past.

Maintaining yesterday’s technology can also be a major drag on enterprise productivity. In an interview with Forbes, Mark Hurd noted that, “Some of the applications themselves are twenty years old… think about that, applications built twenty years ago trying to deal with the problems of today.” Simply transitioning from one on-premises ERP system to another might not necessarily overcome the switching costs of abandoning software in which an enterprise’s IT staff has built up years of expertise, a range of customizations, and many unique add-on functionalities.

This is where a cloud ERP system’s advantages can quickly become apparent. A study conducted by Nucleus Research found that cloud deployments provided 3.2 times the return on investment as on-premises applications, and total costs of ownership were 52 percent lower.

Making the shift to cloud ERP can also incur significantly fewer switching costs than many enterprise executives might think. In one example, Blue Shield of California budgeted $600,000 to manage the transition from its legacy on-premises ERP system to a cloud-based ERP solution. It wound up spending almost nothing despite transitioning roughly 6,800 employees. A more distributed company (with locations in more than one state) that has several times as many employees would potentially save millions of dollars in transition management costs by switching to a cloud ERP solution.

Is your organization thinking of making the switch to cloud ERP? Beyond the cost and the learning curve, what other considerations might an enterprise have when it’s time to upgrade or switch an ERP system?

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