- Two-tiered ERP is a specific way of managing multiple ERP systems.
- This serves to explain how to apply two tier ERP in real terms.
The basic proposal that two-tiered ERP reduces costs can be true. According to research that is available at Software Decisions, the cost savings on the basis of total costs of ownership (TCO) can range from the a slightly negative cost savings (that is a cost increase) to roughly one fourth of costs when compared to the TCO of providing ERP functionality for users with a 100 percent tier 1 ERP strategy. However, it is not possible to ascribe a specific value to the cost savings estimate without knowing the following:
- The specific ERP systems to be used.
- How many ERP systems are in the mix.
- How many instances are to be modeled.
This is because the savings entirely depend upon factors such as the following:
- ERP TCO Variability: ERP applications have a high variability in their total cost of ownership. There is also a weak relationship between the cost of the ERP system and its capabilities—meaning some of the best ERP systems are the least expensive—but also most often not included in a software selection as they lack the brand name, marketing, and coverage of IT analysts and recommendations of consulting companies.
- The degree of Transition to the Tier 2 ERP Application(s): The more users are transitioned to the Tier 2 ERP application, the more money will be saved. If a company has a thousand total users and transitions seven hundred of them to a tier 2 ERP application, the predicted savings will be higher than if the same company were to transition only five hundred users to a tier 2 ERP application.
Of course, reduced costs are not the only benefits of two tier ERP strategy—one of the major benefits is having more diversity of functionality, and a better fit between the application and the business requirements. Too often this is lost in the story of cost reduction brought by two tier ERP. However, it bears emphasizing that following a two tier ERP strategy can lead to lower costs, but it is not automatic. It very much depends upon how the strategy is implemented. The benefits come down to the quality of the software selection and the depth of the analysis regarding the overall solution architecture of ERP systems. Something that is also open to debate is how the ERP systems would be integrated. I have already stated that the commonly presented practice of integrating ERP systems to one another is less cost-effective than integrating all the ERP systems to a common or master BI system. Therefore, choosing to follow a two tier ERP strategy is really just the starting point of a series of questions, each of which must be carefully analyzed and effectively decided. If errors are made along the way, it is actually exceedingly easy to end up with a two tier implementation that nets the company little benefit.
Proponents of Two Tier ERP
Proponents present two tier ERP oversimplify the actual outcomes of following the strategy as if those that follow it essentially can’t lose. Proponents of two-tiered ERP are correct when they state that the strategy can save companies money. However, in addition to exaggerating the cost savings, they are trying to have their cake and eat it too by proposing cost savings without explaining the actual reasons for the cost savings. Some of the proponents of two tiered ERP are silent on the underlying reason for the cost savings for political reasons. They want to sell their ERP software, but don’t want to offend their prospects who have sizable investments, often poorly performing investments into tier 1 ERP applications. Another reason that proponents don’t want to explain the underlying reason is that they do not want to offend their supporters, which is the case with NetSuite—which will bring up how much a two tiered ERP strategy can save SAP customers, but is mum on how much it can save Oracle customers— because of their business relationship with Oracle.
Additionally, two tier ERP proponents have a strong tendency to leave out the history of ERP in an effort to keep their audience focused on their final conclusion, a final conclusion that is an oversimplification of what we know about ERP systems. This serves to provide a misimpression as to important features of a two-tiered ERP strategy. These misimpressions are listed below:
- The Novelty of Two-Tiered ERP: Two-tiered ERP is not new. Most companies that use ERP already use different ERP applications for their various tiers.
- The Reason for the Cost Savings of Two-Tiered ERP: Many of the proponents of two-tiered ERP are quick to point out the cost savings that come from following the strategy, but are relatively silent on why this should be the case. The reason is very simple: Tier 1 ERP systems are expensive and furthermore do not provide companies with much of a return on investment (actually our research at Software Decisions concludes that most tier 1 ERP systems have a negative return on investment). That is, most companies would have been better off both financially and operationally if they had never purchased or implemented their tier 1 ERP system. Two tiered ERP is often presented as if it is some great innovative idea, when, in fact, an inefficient system is simply being replaced with slightly more efficient systems. Here’s an analogy. Let’s say a wealthy family purchased five Lamborghinis. A family friend points out that if they sold four of the Lamborghinis (keep one Lamborghini for social appearances) and instead bought four Hondas, the family’s automotive costs would decline by following a “two-tiered automobile strategy.” Quite naturally, a Lamborghini is a hugely expensive prestige item. It should not be considered some great intellectual breakthrough that one can reduce one’s automotive budget by replacing Lamborghinis with more practical automobiles. If the tier 1 systems are so cost inefficient a good question that many companies should consider asking themselves is who recommended purchasing the tier 1 ERP systems in the first place?
Two-tiered ERP will save companies money. Most proponents of two-tiered ERP would like the recipients of their message to stop the analysis at that point and to simply buy a Tier 2 ERP system (from them) and have that be the end of the discussion. However, it should definitely not be the end of the discussion. At Software Decisions, a comparison of multiple solution architecture strategies was performed, which are available at this link.
The findings are that, while two-tiered ERP is a cost savings strategy, it is not the strategy that saves companies the most money or provides the most functionality or the lowest long-term maintenance. ERP companies and consulting companies that are signed up to the two tiered approach can’t tell you what is the best overall strategy—because they have a particular offering to sell.
The strategy that does is a best-of-breed strategy that uses a best-of-breed application in every area, including a best-of-breed financial and accounting system. This strategy may also use an ERP system, but the highest-rated ERP systems are not the most well-known ERP systems; rather they are lesser known systems that provide much better value, and unlike the Tier 1 ERP applications and many of the Tier 2 ERP applications, the best-of-breed vendors “play nice” with other applications rather than using the ERP sale as a wedge to force in more applications (a strategy that is referred to as “penetrate and radiate”). Instead, the best ERP software values in the market come from specialized vendors who only provide ERP software—not from software conglomerates whose ERP applications are simply one of their many offerings and who are planning their next acquisition.
The best-of-breed strategy has the extra benefit of providing the best total functionality. Research available clearly shows that companies that follow this strategy will save between roughly one-third and one-half on their overall solution architecture TCO, and this is including all integration costs. This compares to a predicted cost savings of between an actual cost increase and one-quarter for a two-tiered ERP strategy. Furthermore, the best-of-breed strategy combines the largest possible cost savings with the best functionality of any other strategy, meaning it also provides the highest predicted return on investment. Two-tiered ERP does provide some additional variability in functionality, but the benefits are primarily on the cost side of the equation. Therefore, moving to a two-tiered strategy is an improvement over deploying single instance ERP, but it is not the best strategy that a company can follow.
Implementing the Two Tiered ERP Strategy
Therefore, for companies looking for the best overall solution architecture strategy, it’s neither employing a 100 percent tier 1 ERP strategy, nor a two-tiered ERP strategy (both of which would be augmented with what is often mediocre applications offered by the ERP vendor for “integration” along with other assorted best of breed applications.
However, executive decision makers most often don’t have the authority to review the overall corporate solution architecture, but instead must make decisions on incremental additions to their corporate solution architecture. For these decision makers, a the first question with respect to two tiered ERP is whether it is better than 100 percent tier 1 ERP strategy, and for this the answer is yes. The second question is “which tier 2 ERP system,” and fi nal question is “what is the best way to integrate all of the ERP systems.” The answer to the fi rst question is that it very much depends upon how the two tier strategy is implemented, as has already been discussed in this chapter. Now we will look at the second of these two questions.
Choosing a Two Tier ERP System
Many ERP software vendors present themselves to their prospects as if they have the best answer for how to choose a two tier ERP system, and the answer is unsurprisingly their software. ERP vendors have made the case that some ERP vendors have a leg up on others in terms of being the tier 2 or tier 3 ERP application. After analyzing this area, as well as their documentation and their statements, it’s difficult to see how any of this argument holds any water. The best reason not to believe something is if it has no evidence, but in this case there are two other reasons why it’s not a good idea to listen to ERP vendors on the topic of two tier ERP.
- Solution Architecture Role: ERP vendors are attempting to serve as solution architects for their clients when they propose why their software is part of a grand two tier ERP strategy. There is a long history of software vendors and consulting companies serving as solution architects for buyers, and it rarely works out well. Software vendors cannot look after the overall architecture because of their bias to insert their applications at every turn.
- Distraction: The advantages of a two tier ERP strategy are based upon a buyer gaining access to a lower cost and lower maintenance ERP system, it is not based upon integration. It is worth repeating this because many ERP vendors are combining several issues which will always lead to confusion on the part of buyers. The primary benefit of two tiered ERP is based upon getting access to a lower cost and lower maintenance ERP system as well as gaining access to more functionality, which can meet more business requirements without expensive customization. Let us remember, that if the main objective were an integrated system, and if one integrated system lead to lower costs, then we would simply stick with a 100 percent tier 1 ERP strategy. However, companies that have followed this strategy have experienced the highest possible costs of any possible ERP solution architecture. And in this vein, the most beneficial ERP system is the one that best meets the business requirements of the company.
Many ERP vendors are proposing the old integration argument, and the Tier 2 and Tier 3 ERP vendors will discuss how their systems integrate better to the teir 2 ERP system that is already in place. However, a tier 2 ERP strategy can be implemented with the ERP system—but this is not the way to implement this strategy—which leads into the final question.
How to Integrate the Tier 2 or Tier 3 ERP System
ERP systems must be integrated to other ERP systems for really two reasons—one is the two entities that run each ERP system do business with each other, and therefore it may be convenient if the two ERP systems are integrated—however it’s certainly a minor consideration. Unrelated companies have no problem doing business with each other when their ERP systems are not integrated through the standard business documents/transactions of purchase orders, sales orders, etc. Secondly, ERP systems were never designed to be integrated to other ERP systems. The second, and far more important reason for ERP systems that are within the same overall enterprise to be integrated, is reporting. However, ERP systems are not generally all that proficient at reporting—which is the primary capability of business intelligence systems. ERP systems can have data extracted from them and sent to business intelligence systems, and two or more ERP systems can be integrated to a single business intelligence system in the same way. In fact, this is the most logical way of implementing multiple ERP systems that result in integrated reporting.
Getting the Best ERP System……and Other Systems.
The fact that a company already uses one particular BI application should not promote that company to try to purchase an ERP system from the same vendor. This is because getting the best ERP system and best business intelligence system for the company’s requirements is far more important than getting the systems with some faux integration that comes from the same vendor. Just the analysis of long-term maintenance costs between the different ERP applications demonstrates this, but of course, the other side of the story is the functionality differences between the ERP applications that are often quite significant. For example, in the case of ProcessPro, an ERP system that is customized for process industry manufacturing (things like cheese, petroleum refining, mining, etc.) the applications come standard with a number of key areas of functionality that no other ERP system have in total, but many other ERP vendors partially have or pretend to have. Process industry manufacturing buyers that choose systems that have less of this specialized functionality, accepting the integration argument, or that the customization will be “not that big of a deal,” end up with problematic ERP implementations that cost a lot to maintain. Hopefully, this emphasizes the importance of mating the application to the requirements—although there are many other examples that could be given. Furthermore, there is no software vendor that offers both a leading ERP system and a leading business intelligence system. In fact, the software vendors that offer ERP systems offer some of the lowest productivity and highest cost business intelligence systems, and purchasing both from one vendor is a guarantee of ending up with at least one bad application.
In order to implement two-tier 2 strategy most effectively, it’s necessary to resist the arguments presented by two tier ERP proponents and also to dig a little deeper into under what circumstances and why following a two tier ERP strategy can save companies money. Many proponents of two tier ERP will make the argument that their systems are better suited to be the second or third tier, when in fact any ERP system can be equally placed in these tiers. The hyperbole on two tiered ERP should not distract buyers from attempting to find the best match between the ERP system and the business requirements. Secondly, it is in most cases unnecessary to integrate the multiple ERP systems that are part of a multi-tiered ERP solution architecture. Even when companies buy and sell from one another, all of this can, and is, easily managed with standard purchase order and sales order functionality that requires no integration. For consolidated reporting, it is necessary to have all of the ERP systems in the company’s ecosystem to have data extracted from them, but again, here the most important feature is the capabilities and the productivity of the business intelligence solution. The best software vendors in business intelligence do not offer ERP systems, but some of the lower quality and higher cost ERP vendors do. The best approach is to find the highest value applications in both ERP and business intelligence and combines them as on any other project, there are simply no “special rules” when it comes to two-tiered ERP.
Financial Bias Disclosure
Neither this article nor any other article on the Brightwork website is paid for by a software vendor, including Oracle, SAP or their competitors. As part of our commitment to publishing independent, unbiased research; no paid media placements, commissions or incentives of any nature are allowed.
The Real Story Behind Tier ERP
The Real Story Behind Two Tier ERP: Separating the Marketing from The Usable Strategy
If you need help determining your company’s overall enterprise software strategy and how two-tiered ERP fits in, this book is for you.
Two-tiered ERP is widely understood as the use of different ERP systems for different layers of an organization. Until this book, the effectiveness of a two-tiered ERP strategy could only be determined through anecdotal evidence, the marketing literature of ERP software vendors, and the advice of consulting companies. By understanding two-tiered ERP software within the context of ERP’s history, readers will see how two-tiered ERP may represent a crack in the façade of “big ERP,” and will know how to formulate a comprehensive and logical response to proposals about implementing a two-tiered strategy.
By reading this book you will:
- Eliminate confusion over definitions of two-tiered, multi-tiered, and single instance ERP.
- Review SAP and Oracle’s Tier 1 and Tier 2 ERP products.
- Understand why two-tiered and single instance ERP is not the best strategy.
- Appreciate that WHAT is written about two-tiered ERP depends greatly upon WHO is writing it.
- Recognize the logic used by vendors to sell two-tiered ERP and whose interests are being served by a two-tiered strategy.
- Learn an alternative strategy that provides functionality, cost savings, and the best return on investment.
If you are just beginning your research on ERP systems, read the companion book by the same author, The Real Story Behind ERP: Separating Fiction from Reality first, as it provides the most exhaustive history of ERP currently published.
This book is closely tied to the book Enterprise Software TCO, a lack of proper analysis in multiple dimensions (as well as TCO) explaining the uptake of solution categories which are not validated by any evidence. Once ERP systems could not demonstrate much in the way of financial benefits, the book explains how a new logic was developed — that ERP systems were simply “essential infrastructure.” This also turns out not to be true. Of course, the initially proposed argument that ERP software would be the only system that companies ever needed is now laughable three decades after the ERP trend began. Readers will learn that with respect to ERP software, old logics are never proven, simply new hypotheses proposed.
The book is also connected to the book Enterprise Software Selection, because the selection of so many poor quality ERP software solutions from big-name vendors demonstrates a clear inability on the part of many companies to perform a proper software selection.
This book provides a strong focus on SAP ERP as well as Oracle ERP. This gets into SAP ERP ECC/R/3 and Oracle JD Edwards EnterpriseOne and SAP Business One and Oracle JD Edwards World. SAP ERP software is both the author’s area of expertise as well as the most popular ERP software application. ERP software solutions are discussed from the perspective of Tier 1, Tier 2 and Tier 3.