Here’s an interesting dilemma. An organization tries to decide whether to stay with an on-premise HCM solution or replace it with a cloud-based solution. Like many who have implemented HCM, they’ve implemented other major modules within SAP and have a mature support organization in place to support all of these modules – including HCM. The decision is important. Potentially hundreds of thousands of dollars of costs are at stake.

Cloud-Based HCM Solutions

There are many excellent reasons to consider cloud-based HCM solutions. They can quickly bring new and innovative solutions to the challenge of managing our Human Capital. But we also have to admit that most of us feel the disproportionate allure of new shiny objects.

Who hasn’t stepped out of their perfectly functional car and gawked at the perfect shine, the smooth lines, and the beautiful curves of the year’s latest automotive temptation? Likewise, there are plenty of reasons to feel the attraction of the newest cloud-based, shiny-object, HCM solution:

• It represents a fresh start, a chance to “do it right” this time.
• It is the possibility of discarding old compromises and solving nagging problems.

The old solution is, well… old, and the new solution is oh so shiny. Now “shiny objects” may indeed be just what we need to take our organization to the next level, but there’s a different curve we need to first consider.

The Cost Curve

We ought to look seriously at the cost curve over, let’s say, a five-year period:

• Cloud solutions are sold as a subscription-based service. Typically, you’ll pay some rate per employee per month.
• As employee headcount increases, so does cost. There’s a linear relationship.
• These costs continue every year that you use the solution.

Consider a solution that may cost an organization $350,000 in 2012. With a three percent headcount growth per year, this becomes $390,000 annually by the five-year point, assuming there are no increases in the cost per license (somewhat unlikely). Total cost of ownership over five years in our illustration is more than $1.8 million. That’s a bit more than loose change.

On-Premise Solutions

On the other hand, consider an on-premise solution that we’ll say costs $600,000 to implement in 2012. Again, the support organization is already in place to support other modules like FI, SD, MM, etc. We’ll allocate another $100,000 per year for years two through five in order to cover some of the ongoing maintenance costs, enhancement pack upgrades, etc. Still, the total cost over five years is about $1 million – just a mere 55% or so of the cloud-based solution.

But let’s not get too hung up on these particular numbers. These are just examples to illustrate a point: before we get too enamored with cloud-based shiny objects, let’s do the math over five years. And don’t forget that many organizations capitalize the cost of ERP projects over three or five years whereas the cost of cloud-based solutions may be treated as an expense. This also is sure to impact decision-making. Is there a cloud-based, shiny-object, HCM solution on your horizon? Be sure to check the curves first.