One of the biggest advantages of virtualizing your company’s IT system is cost optimization. Alstom, a company that mainly operates power and transportation businesses reported 40% savings in server and operational costs through virtualization. The International Truck and Engine Corporation has reported savings of close to $1.1 million mainly through cost avoidance thanks to virtualization. Virtualization helps businesses save money on physical servers since multiple applications and operations can be performed through a single server through virtualization. This helps in consolidation of the hardware infrastructure owned by the company. Not surprisingly, a recent Gartner study has predicted that close to 60% of x86 server workloads will be virtualized by 2014.

However, despite the general awareness about the benefits of virtualization, this technology is yet to make its way into the ERP implementation systems. Typically, ERP resources take up as much as 50-60 percent of the IT budget of large businesses. Consequently, virtualization, if done correctly can bring about massive savings to enterprises. The key word here is “correctly”. That’s because businesses have often delayed the virtualization of their ERP systems for need of better clarity on the risks involved. A system as crucial as ERP could make or break business. Incorrect implementatin of virtualization technologies can not only hamper the operations of businesses that depend on the system, but could also lead to potential financial losses that may arise out of a need to revert the changes.

The cost benefits are too massive to ignore though. According to a report by Abdi Goodarzi and Pavan Srivastava of Deloitte Consulting, businesses may see as much as 30% drop in infrastructure costs. Given these attractive cost optimization opportunities, it is also fair that CIOs conduct proper assessment of their infrastructure to understand the scope of virtualization that exists in their system.

Besides the inherent risks, one of the critical reasons why virtualization is yet to take off in the ERP segment is the proliferation of cloud ERP systems. Unlike traditional ERP systems, cloud-based ERP systems do not require extensive data management on the enterprises’ servers. This way, businesses do not pay for all the on-premise infrastructure. Also, cloud ERP solutions like NetSuite are available through private cloud servers hosted by NetSuite’s partners like ERPGuru. These solutions are provided as a monthly subscription service that make ERP extremely affordable even to smaller businesses.

The cloud based ERP solutions offer a great alternative to virtualized ERP systems on the affordability front. Beyond this, such systems are also less prone to data loss risks since such services are typically backed up with data stored in multiple datacenters that are secured through several layers of encryption. Consequently, enterprises have started seeing cloud ERP as a secure alternative to on-premise ERP solutions.

Given these obvious advantages that cloud ERP offers, the market for this segment is already growing within the ERP market. According to Gartner, the SaaS market share of ERP will more than double from 8% in 2011 to 17% by 2016. It is only a matter of time before enterprises with legacy on-premise ERP systems will decide to move to the cloud. Consequently, ERP virtualization appears to be a temporary cost optimization strategy that could soon be shadowed by the cloud. What are your thoughts?