Hybrid ERP matures as companies develop better strategies

By: Michael Nadeau

Developing new strategies to ensure that cloud and on-premises ERP systems play nice together is just one part of the hybrid challenge.


It’s hard to find a company that does not have some form of a hybrid (cloud and on-premise) ERP system. For most, that happened by accident. Someone in the organization bypassed IT and bought a cloud service to fill a need more quickly than they could with an on-premise solution. Salesforce.com, for example, has often been the start of a company’s march to a hybrid environment.

Cloud applications can be relatively easy, low-cost solutions, but they do introduce new complexities when they need to be integrated with on-premise ERP systems and databases, or with each other. Ensuring that cloud and on-premise systems play nice together is just one part of the hybrid challenge. Making the right decisions about what will be in the cloud and what stays in-house is the other.To meet those challenges, organizations are now transitioning from an ad hoc approach to building a hybrid ERP system to a more strategic planning process. That process includes best practices for vetting, connecting, deploying, and testing solutions.

The growth of cloud in the enterprise

“Lines of business bought cloud applications without IT, and they soon ran into issues involving transaction volumes and integration back into the core ERP system,” says Mike Guay, research director for enterprise business applications and ERP at Gartner. This thrust IT into an unexpected support role as they struggled to connect cloud solutions to the core systems securely and reliably. And while cloud solution providers took care of updates, IT at customer sites still needed to ensure that those updated solutions worked properly with both on-premise and other cloud applications. “The more frequent the updates, the more frequent the testing required.”

Management was also surprised by unanticipated costs, according to Guay. For example, as sales teams became more dependent on cloud CRM systems like Salesforce, they wanted more up-to-date information on shipments and receivables in the cloud CRM system. This required more frequent integration with customer files and perhaps accounts receivable systems in the ERP system. This created additional activity within the cloud CRM system, in turn raising fees.

Organizations have climbed the learning curve for hybrid ERP, allowing for better planning. The hybrid approach is still not easy, however. “Large organizations are still figuring out how much of their applications to move to the cloud—where the cloud is a fit and how the manage the balance between cloud and on-premise,” Guay says. If an organization understands the value proposition of each part—cloud and on-premise—of the application suite, he added, it will be in a better position to successfully align its needs with the right solutions.

“The state of adoption of much of the new technology available in business applications today is similar to what TV was like in the 1960s. On TV in 1960, you saw someone reading a paper into a microphone – the process of communication hadn’t changed to take advantage of the new technology,” says Guay. New capabilities often available in the cloud can better enable digital transformation efforts, internet of things (IoT) applications, or embedded analytics and machine learning. For example, new technology cloud-based machine learning services are better able to analyze large volumes of data and make recommendations to users of local systems.

Sabre understood this, having used cloud products such as Salesforce and being a provider of cloud-based software for the travel industry. “One of the challenges with SaaS providers is that they are continuously updating their software. As a customer, you have to continuously improve your process to absorb those changes and be able to take advantage of any new value being generated,” says Steve Strout, vice president of corporate systems at Sabre. “For me, that was one of the strategic things we wanted to accomplish—how do we train our business to take new feature/functions on a regular basis? That changes the role of our IT organization. How do we make sure the business is actually going faster and getting to new data?”

“From a culture perspective, continuously looking to adopt new capabilities was a big change,” says Strout. “Looking at connected data in a different way gives you reporting and analytics that allow you to see things faster because it doesn’t take as long to assemble data from different providers. This has allowed us to change a lot of our financial constructs so we have customer- and product-level P&Ls that are more meaningful.”

ERP vendors report that the trend for new deployments is toward the cloud. About 70 percent of new Microsoft Dynamics CRM and ERP enterprise customers are choosing the cloud option, according to Umran Hasan, senior marketing manager, Microsoft Dynamics 365. “The cloud connection ensures data aggregation, financial reporting, intelligence, backup and disaster recovery, and more,” he adds.

“The question [for our customers] is, ‘How much of our workload do we put in the cloud?’” says Sven Denecken, senior vice president of product management, co-innovation, and packaging for SAP S/4HANA at SAP. “We see the trajectory [toward cloud] going up really, really fast.” He added that any consumer-facing application is almost always cloud-based, and that HR applications are also rapidly moving to the cloud. He believes that finance applications are next in line to go to the cloud on a large scale.

“We see growing interest in the classic two-tier ERP if you can support the semantic integrity. If the hub and spoke model is compatible, that not only saves cost when exchanging or recompiling data, it also helps in the long term because you are comparing apples to apples.” Denecken adds,“It isn’t about feature/function. It’s really this idea that [organizations] need to define how their approach to a hybrid model should be taken forward.” Integration should be at the core of that discussion, as is the ability to perform on a platform-as-a-service (PaaS) model.

Platform was top of mind for Sabre when it began the transformation of its SAP ERP system to a hybrid model. “We wanted to build a platform that allowed us to leverage not only the financial systems but also have the capability to plug in SaaS providers, because that allows us to speed up our ability to deliver new value back into the business,” says Strout.

That new platform would allow Sabre to get to new products and services faster and respond to product development group. “The ability to produce new products and services and get them to market was hampered by processes in our financial and billing systems, and what it took to get everything in alignment. The concept was to move to S/4HANA and use it as a digital core of our data where everything connects to it. We leverage SaaS from other parts of the company including our IT service management platform, customer care systems (Siebold and Salesforce), Ariba, and SuccessFactors. HANA becomes our centerpiece where we can get at data and connect it to Hadoop for big data for reporting analysis and data mediation.”

“One clear emerging pattern is that this [hybrid ERP] is very much a platform decision,” says Steve Cox, vice president of ERP and EPM GTM at Oracle. “Here’s our current infrastructure as it is, here’s how cloud technologies can transform our business, and this is the cloud platform that gets us to that future state.”

Hybrid considerations

Now that companies understand hybrid ERP, they are better able to set priorities for selecting and implementing solutions within the hybrid environment. Hasan sees these factors that motivate Microsoft’s customers toward a hybrid solution:

  • A conservative attitude toward a purely cloud environment
  • A desire for control of data, data residency and data isolation
  • Local network dependencies of the service for business continuity (speed and connectivity)
  • The ability to customize the configuration of the service infrastructure to meet specific business needs such as scalability
  • Recent investments in the company’s data center resources
  • Choice of separating the service operator from the service provider to avoid lock-in by a single provider.

“A true hybrid system, is pragmatic and combines the best of cloud and on-premises environment,” said Hasan. Driving that pragmatism is a need to run business processes and store data across the cloud and a company’s own data centers. “For example, customers with extensive analytics needs can’t and shouldn’t just rely on data that resides in their own data centers for intelligence,” says Hasan. “The cloud is now a rich and necessary source of information and to get the best analytics, businesses need to leverage all available data sources.”

There’s also the question of what type of cloud to use for a given application. “Customers have on-premise solutions that they have migrated to Oracle Cloud Infrastructure as a Service (IaaS) as an infrastructure provider to quickly increase business value and performance,” adds Cox. “That can be a mix of public cloud solutions or even include Oracle Cloud in their data center.”

Integration within the hybrid ERP system and with point solutions outside core ERP is another important consideration. “Businesses should consider business integration, how it will connect with their existing systems, scale – can the system they are deploying scale to their needs, both from a transaction and global availability perspective,” says Hasan.

Virtually all traditional and cloud ERP vendors and cloud solution providers offer API libraries to connect their offerings to other software. If an API is available from the solution provider, then you can find it in an open API repository. “The API economy will be there,” according to Denecken.

Managing APIs from multiple players is a big change for companies that had been used to a single platform. “From a technical system administration and operations perspective, you end up dealing more with making sure that the API structures don’t break, that the data made available in each new release works in ways that are consistent with the past,” says Strout. “You are doing continuous checks on what’s coming out next and making sure that orchestration is not breaking anything upstream or downstream. We believe that is a relatively small price to pay to get at things we’ve wanted to in the past.”

Even with strong APIs, integration presents another challenge in that updates from each cloud service provider work on their own schedule. “You have to do that orchestration.” Strout adds that “15 years ago the conversation was, ‘Do you want totally integrated solution or best of breed?’ With this model you end up with a little bit of everything. Because of the APIs and the way things are constructed, it is an easier orchestration model than it was 15 years ago.”

Integration allows for easier access to data from multiple sources, and that means companies should rethink how they do reporting and analytics within a hybrid ERP system. “We focus on making sure users have a single pane of glass that has data from a number of different systems,” says Strout. “It’s changed the end user experience from that perspective.” He added that because SaaS systems are typically easier to use than traditional ERP user interfaces, end users work faster because they don’t have to key in as much data or spend as much time looking for the right fields.

New technologies that fuel digital transformation such as machine learning, IoT, and cloud analytics are developing rapidly, and planning a hybrid ERP roadmap needs to take them into account. “[Cloud services] frees up IT to do more analysis of data and evaluate new tools like IoT,” says Guay.

Cox agrees. “The cloud changes the nature of the resources required to support a business. An IT team can shift from one that is focused on ‘keeping the lights on’ to one that is an entirely different value-add organization. Those same resources can use things like Oracle Cloud Platform as a Service (PaaS) to integrate applications and create consistent workflows across multiple systems — both on premise and in the cloud —while also maintaining security and performance.”

“One of the benefits of leveraging SaaS providers is that you are not patching systems, buying new hardware, doing capacity management, database structure changes and upgrades—you don’t have to manage the entire stack,” says Strout. “Operationally we spend significantly less time focused on infrastructure and instead are focused on how we drive value out of the application layer.” That value is done through configuration rather than custom code or user exits, which allows more time for value-added activities.

The planning process

Cox says that Oracle encourages its customers to begin its hybrid ERP planning by evaluating what it has and then doing an infrastructure assessment to learn what’s needed. “How does that assessment marry with their definition of their new business requirements? Then, what business functions does it make sense to move to the cloud and in what timeframe?,” he asks.

A company that’s seeing a lot of disruption in its industry will make different decisions about what to move to the cloud than one in a stable industry. “We’re seeing two primary patterns: complete transformation and then innovating at the edge,” says Cox.

“If business transformation is the immediate imperative, then organizations will be looking to make fundamental changes in their IT infrastructure, which includes moving to cloud ERP. But if you’re in an environment that recognizes there’s disruption coming your way in the future, then it’s possible to ‘innovate at the edge’ by beginning the transformation through the adoption of cloud applications for planning and budgeting or procurement. Then it’s a strategic question of what do we do next,” he says. “But it’s important to bear in mind that today’s ‘next’ is different: Many organizations adopting cloud by innovating at the edge will manage multiple parallel implementations to speed the transformations required.”

Denecken sees three distinct requirements that are essential to evaluating these hybrid ERP considerations and creating a roadmap. Most important, you need the people who run the business to actively participate. “Without those guys, you shouldn’t even start to define a hybrid strategy,” he says. Next are the enterprise architects because they understand the vendor and solution landscape. Third, you need to know the status of the preconfigured cloud-based approach in respect to functionality and integration scenarios.

“You shouldn’t go back to the drawing board and come up with waterfall approach and say ‘This is what we can do with a hybrid scenario,” says Denecken. “You should right away start with a pre-packaged cloud-based best practice approach.”

Flexibility vs. complexity

A hybrid environment provides a far greater amount of flexibility for companies when they need to scale up the business or move into new areas. That flexibility comes at a cost in terms of integration requirements and managing that integration through solution updates.

Denecken stresses the importance of balancing the agility and flexibility that hybrid ERP provides with the complexity. “In a pure on-premise environment, the solutions are considered along the status quo. On the opposite side, if you use a pre-configured cloud solution, you adopt your business processes to a standard because you want to simplify your approach.”

With a hybrid ERP, Denecken says you don’t have the extremes at both ends. The balance is in being able to use the cloud to redefine your processes to enable fast innovation while preserving the knowledge that depends on your in-house systems.

Cox sees greater use of the cloud simplifying ERP support and management overall. He cited four principles of transformation: simplify, standardize (so there’s one definition of a given process across the organization), centralize and automate. “All simplify the management of systems,” he says. “One of the prime reasons for adopting the cloud is to avoid infrastructure and the time and effort of on-premise upgrades.”

Looking ahead

While the end game for many companies could be a pure cloud solution, the industry consensus is that it will not happen on a large scale anytime soon. Where it’s happening now is with companies that are implementing an ERP system for the first time. In fact, Hasan says that most of its Dynamics 365 for Operations customers are opting for a cloud-only solution.

ERP vendors are taking a cloud-first approach to development, but expect to develop and maintain their on-premise options indefinitely. With Microsoft Dynamics 365 for Operations, for example, customers can run their entire business operations on-premise locally or through distributed systems.

“To give organizations a single view of the business and the ability to capitalize on synergies between the sites, it is essential to aggregate data in the Microsoft cloud to report and process financials and manage enterprise data centrally,” says Hasan. “The elastic compute power, artificial intelligence, and speed of innovation of the cloud enriches the on-premises systems in a way that would be very difficult to realize in a totally disconnected system.”

“I haven’t spoken to a single customer who doesn’t understand the need to embrace the cloud. There’s a new vision for organizations that’s come out of the environment that we’re in. Digital transformation, disruption in every industry, the global talent shortage, the rise of robots, the radical changes in many traditional professions [due to software-enabled automation], and ever increasing customer expectations produce volatility in the business model. And there’s a new vision for the IT infrastructure to support the new organization. You can only achieve the innovation required to meet changing customer expectations by leveraging the cloud,” says Cox.

Strout sees Sabre being able to react better to market conditions because of its hybrid system. “It’s about what we need to focus on in the future. What we need more information on. What skills do we match to a product,” he says.“We can do those things within the environment. Want to get to a place where we are continuously learning and adapting the platform.”