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Closed Source ERP Vs. Open Source ERP: Which is Better?

open source ERP versus closed source ERP

Acquiring and operating an ERP system requires a considerable financial investment. A free open source ERP system can seem like an attractive option compared to paid-for solutions. But closed source ERP software boasts many advantages as well. This leads to the common question of which is better for your company - closed or open source ERP? Read on to learn more on the factors and key aspects of this decision:

What's the difference between closed source and open source ERP?

Let's start with a short definition of the most important terms. Open Source Software, or OSS for short, is open because its source code is publically available. Developers may study and change the code and redistribute new versions or branches of the code. There are no license fees associated with using the software, although in many cases, it's impractical to implement OSS without paying implementation or customization fees in order to make it work for your company. There are various types of open source licenses, but many allow an unlimited number of users. Don't confuse open source software with "freeware" – freeware generally refers to closed source software products that are available to users for free, such as Adobe Acrobat or Skype. 

The counterpart to open source software is closed source software, also called proprietary software. This is conventionally licensed, either through a perpetual license or by subscription pricing, and the source code is not accessible to users or developers to view or edit. Most of the leading ERP solutions are closed source ERP.

The advantages and disadvantages of open source ERP

In addition to the free and unlimited use, open source ERP offers several additional advantages. First of all, OSS offers a high degree of flexibility that results from the adaptability of the source code to individual requirements and processes. However, it must be noted that an open source ERP system is often "bare bones," requiring many features to be added or customized in order to meet company's minimum requirements. This is largely because many open source ERP vendors lack industry knowledge and project experience. The gap between business requirements and basic functions is often correspondingly large.

Open source ERP makes high IT effort inevitable

Although open source ERP does not require you to pay licensing costs, using it can still result in high IT costs. Customizations and adaptations either need to be made in house by your own developers, which many manufacturers don't have, or you need to pay a developer familiar with the open source product to make your changes. Either way, it's expensive. Plus, the community of qualified developers is proportionate to how popular and widely known the software product is, so if you're using an obscure open source ERP system, developers who can help you implement it will be hard to come by.  

Also, you need to consider the IT effort and costs of ongoing operation, maintenance, training and support. These costs can quickly add up and exceed the price of traditional ERP licenses or ERP licenses purchased on a subscription basis. 

Many risks and uncertainties accompany open source ERP software

In open source ERP systems, the company is not only responsible for the implementation, but also for the further development of the system. Here, the user community, which is constantly working on new features, plays an important role. If this process comes to a standstill, there is a risk that the open source project will be discontinued by the provider. In terms of investment and future security, open source ERP is therefore classified as somewhat risky. In the case of errors or system failures, which can cause significant damage, the provider is not liable for functionality issues.

Which is better? Closed source or open source ERP?

The pros and cons of closed source ERP software

The more traditional ERP environment is focused on closed source software, which can be purchased by renting (via SaaS or subscription pricing in the Cloud) or by buying perpetual licenses.

The scope of functions and users is limited in the license model. The running costs of closed source software might be thought of as the main disadvantage compared to open source systems. However, thanks to numerous Cloud offerings, i.e. the ability to use ERP online, the investment requirement is significantly reduced. Of course, costs must always be considered in the context of benefits. Let's take a closer look at the benefits of traditional, closed source ERP software below.

Sophisticated, field-tested ERP systems

In particular, established ERP providers have years of experience with projects in various industries. In many cases, even industry-specific solutions have been developed that already cover numerous corporate requirements as standard. In addition, interfaces and functions are technically mature. Modern ERP software can be operated intuitively despite the sometimes high complexity. If required, professional training is also available.

Costs of customizations are usually manageable

Closed source software also requires a certain amount of initial customizing. If necessary, however, the vendor or a certified service provider supports this customization. If adjustments to the source code are required, this may only be done by the software manufacturer or one of its authorized partners. This can be costly but is rarely required due to the high level of maturity of industry ERP solutions.

High operational reliability characterizes closed source software

Unlike open source ERP, the use of closed source ERP software entails much lower risks. Uptime and consistent functionality is the vendors responsibility. He is also responsible for maintaining, developing and updating the system, and takes care of data protection and data security. If the ERP system is used online, even the question of the hardware running the ERP system lies with the vendor.

Conclusion: which type of ERP software is better?

In comparing closed source and open source ERP, the conclusion is that open source solutions are only suitable in specific cases – smaller companies with very simple processes or organizations with robust development and IT staff. 

In many scenarios, open source ERP does not provide the required functionality, and the software can only be used meaningfully after extensive custom development. This greatly increases total costs. In addition, there is the risk of expensive outages and dependencies on individual knowledge carriers. For these reasons, companies prefer closed source ERP providers that can deliver support and service at a high level.

Overall, open source ERP software will therefore continue to be a niche phenomenon in the future. In particular, the hidden costs, which can quickly exceed the expenses for a purchase or rental ERP system, should be critically examined by small and medium-sized enterprises. Especially medium-sized companies with multiple locations as well as complex business and production processes are better advised to use closed source ERP software. Cloud ERP, in particular, significantly reduces entry barriers.

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