Cloud ERP Software's Hidden Costs

There is an overarching drive for businesses to transition to cloud-based Enterprise Resource Planning (ERP) systems in today's enterprise technology landscape. However, as the trend toward cloud solutions accelerates, the hidden costs and challenges associated with these systems demand a closer look. Contrary to the rosy picture often painted by cloud vendors, cloud ERP systems can come with significant, often underestimated long-term expenses, sometimes even exceeding those of traditional on-premise systems.

This article explores the overlooked costs and considerations in cloud ERP adoption, highlighting ways to manage these potential pitfalls and make informed decisions. You can also learn more by watching my recent YouTube video on the topic:

The Real Cost of Cloud ERP: A Shift to Perpetual Payments

In an on-premise ERP model, companies typically pay a significant initial capital expense and then a smaller annual maintenance fee. However, cloud ERP models have replaced this structure with perpetual costs, creating a lasting financial commitment similar to leasing a vehicle. Instead of a one-time investment, cloud ERP systems require annual subscription fees that tend to increase over time due to factors such as data storage, system usage, and incremental vendor price hikes.

Just as with a car lease, you don't truly "own" the cloud ERP system. Organizations continue to pay to keep the system running, with no option to depreciate the asset over time. Furthermore, subscription fees are likely to increase every year, affecting a company’s budget and making it challenging to forecast long-term financial implications accurately.

Shifting from Capital to Operating Expenses

A notable shift for organizations moving to the cloud is the transition from capital expenditures (CAPEX) to operating expenses (OPEX). With on-premise systems, ERP investment is depreciated over time, which allows companies to manage expenses predictably. Cloud ERP, on the other hand, shifts costs to an operating expense model, increasing a company’s OPEX and affecting its balance sheet differently.

For some, this shift might align with financial objectives, as it removes the initial large capital outlay and replaces it with smaller, ongoing payments. However, it can also lead to reduced financial flexibility. While cloud ERP systems are convenient, companies lose control over costs, making them vulnerable to price hikes that can be challenging to avoid due to high switching costs.

Dependency on Vendor Pricing and Policies

Cloud ERP contracts often include vendor-imposed price increases, leaving organizations subject to regular cost escalations. Vendors typically adjust prices annually, meaning that companies may face continuously rising costs without the ability to negotiate or halt payments, which is possible with on-premise systems.

In the on-premise model, companies could halt annual maintenance if the costs became prohibitive, while still retaining the right to use the software they had purchased. However, in the cloud, there is no ownership of the software. If a company disagrees with the vendor’s price increases, they must either comply or face the potential loss of access to the system and data, significantly limiting their control over ERP expenses.

Legacy System Decommissioning: An Often-Overlooked Cost

Switching to cloud ERP also incurs hidden costs related to decommissioning legacy systems. Many organizations have made substantial investments in these legacy systems over the years, and transitioning to a cloud environment involves not only the expense of setting up the new system but also the costs associated with phasing out the old one.

In some cases, legacy systems must be maintained in parallel for extended periods. This parallel run can be necessary due to difficulties in data migration or the inability of the new cloud ERP to replicate certain functionalities of the legacy system immediately. Consequently, companies may experience additional costs during this transitional phase, contributing to the overall cost of cloud ERP adoption.

Overstated Business Benefits of Cloud ERP

Cloud vendors often emphasize the potential cost savings of reduced in-house IT infrastructure and staffing. Theoretically, cloud ERP reduces the need for extensive IT support, as the vendor manages most system maintenance. However, this promise can be exaggerated. In reality, organizations often find that the expected reduction in internal IT support requirements takes longer than anticipated or fails to materialize entirely.

Frequently, the same IT resources needed to support the on-premise system are required to maintain the new cloud system. These ongoing support costs, combined with cloud subscription fees, often negate the expected savings, making it crucial for organizations to critically assess vendors’ ROI projections.

Long-Term Risks and Switching Costs of Cloud ERP

While the initial focus of many cloud ERP implementations is on short-term cost-benefit analyses, organizations must also consider long-term implications. Over time, companies may outgrow their cloud ERP systems or find that the evolving software no longer meets their needs. In some cases, the continuous price increases from vendors may lead to prohibitive costs.

Unlike on-premise systems, where companies have greater control over data and configurations, cloud ERP systems limit an organization’s flexibility in migrating to a new system. Because data and workflows are managed by the vendor, extracting data and transitioning to a different system can be complex and costly, creating a lock-in effect where companies may feel “stuck” in their current cloud environment. Preparing for this potential scenario is essential for any organization considering a cloud ERP solution.

Mitigating Cloud ERP Costs

Given these challenges, it’s essential for companies to adopt a proactive approach to manage the potential costs and risks associated with cloud ERP. Here are a few strategies that can help organizations make more informed cloud ERP decisions:

1. Diversify Your Vendor Portfolio: Avoid over-reliance on a single cloud vendor by adopting a multi-vendor strategy where appropriate. This approach helps mitigate risks, as it limits the impact of any one vendor’s price increases or performance issues.
2. Negotiate Contract Terms Diligently: Cloud ERP contracts are typically long-term agreements. Carefully negotiate terms with the vendor, ensuring there are caps on annual price increases and avoiding commitments to unnecessary modules or functionality. It’s easier to add components later than to remove them from a contract once they’ve been included.
3. Prioritize Incremental Investments: Start with a minimal feature set and expand as necessary. By focusing on essential modules and features initially, organizations can reduce their immediate costs and only invest in additional functionality if a clear business need arises.
4. Regularly Re-Evaluate Your System: Periodically assess the value provided by the cloud ERP against its cost. This ongoing evaluation ensures that the system continues to meet the organization’s needs without becoming an excessive financial burden.
5. Seek Independent Advice: An objective view of your ROI and long-term costs can be valuable in planning for a cloud ERP implementation. An independent advisor, not affiliated with any software vendors, can provide an unbiased perspective on potential costs and savings.

Navigating the Future of Cloud ERP

As cloud ERP becomes the standard, organizations face new challenges in controlling costs and adapting to the continuous evolution of cloud technology. Recognizing the hidden expenses and potential financial risks of cloud ERP can empower organizations to make informed decisions, whether that means negotiating better terms with vendors, diversifying technology stacks, or seeking independent guidance.

Ultimately, the cloud ERP model will likely continue to dominate the enterprise software landscape. However, by taking a strategic approach to cloud ERP adoption, companies can better navigate the risks and realize the benefits of cloud computing without compromising their long-term financial health. If your organization is considering a cloud ERP solution, take the time to fully understand the potential long-term impacts on your balance sheet, financial flexibility, and future IT strategy. Proper planning and informed decision-making are key to successfully leveraging cloud ERP in a cost-effective and sustainable way.

For those interested in further insights and industry trends, Third Stage Consulting’s 2025 Digital Transformation Report provides a comprehensive guide to digital transformation best practices and includes independent reviews and rankings to help organizations maximize the success of their projects. This report is available for free on Third Stage Consulting’s website, making it a valuable resource for those on a cloud ERP journey.