How to Understand What is Two Tiered ERP

Executive Summary

  • Two tiered ERP is a specific way of managing multiple ERP systems.
  • This serves as an introduction to the concept.

Introduction

We begin with the word “tier,” which means a hierarchy. Interestingly if you type the word tier into an image search engine or stock photography site, the most commonly returned image is that of a wedding cake.

Other common images are steps, however, the image that I found to be the best analogy is the Kuang Si Falls in Laos—because it signifies integration between the different tiers. As we will see further on in the book, integration between the various ERP tiers is critical to the two tiered ERP method.

The term “two-tiered ERP” has two meanings. The more general definition, which I have taken from Wikipedia, is as follows:

“Two-tier ERP software and hardware lets companies run the equivalent of two ERP systems at once: one at the corporate level and one at the division or subsidiary level. For example, a manufacturing company uses an ERP system to manage across the organization. This company uses independent global or regional distribution, production or sales centers, and service providers to support the main company’s customers. Each independent center or subsidiary may have their own business model, workflows, and business processes.”

The second definition, which is attributed to Gartner, is very specific. It imposes certain requirements on how two-tiered ERP is employed and defines different types of two-tier ERP implementations.

“Two-tier ERP is the use of different ERP systems at two different layers of the organization: One system serves as the global backbone, often for administrative ERP processes such as financials, human resources, and procurement, which are able to be harmonized across all divisions as shared services [bold added]. In addition to the global backbone, one or more ERP solutions (or even reconfigured instances of the same system) are used in parts of the organization to support geographical subsidiary needs, usually for smaller operational requirements, such as sales, marketing, field services and local manufacturing.”

According to Gartner, if there is no master ERP system to which the other company’s ERP systems are integrated, it is a “zero-tier system.” Gartner proposes that, in order for a two-tiered solution to meet the definition, it must include an overseeing or master ERP system or some type of integration that connects up the ERP systems. Furthermore, Gartner has the following to say regarding zero- tiered ERP strategies:

“A zero-tier approach, where there is no integration between the core (Tier 1) solution and the solution(s) used by subsidiaries (each operating autonomously under its own profit and loss [P&L] rules), is not considered a tiered strategy—it’s also usually a mess waiting to happen. Only if some level of financial consolidation or information sharing among systems is present (subsidiary to core, or subsidiary to subsidiary) is it considered tiered.”

Gartner’s definition is a bit too rigid for general use; two-tiered ERP is often described simply as using different ERP systems from different software vendors for different parts of the business. Gartner goes on to propose that two-tiered ERP is not a best-of-breed approach where modules from the different ERP systems are mixed and matched.

“The term ‘two-tier ERP’ has been used for several years, although it is also referred to as ‘hub and spoke’ or ‘multi-tier ERP.’ It should not be confused with a best-in-class approach. The main difference is that best-of-breed combines modules from various vendors in an overall solution, whereas a two-tier strategy is the combination of full ERP suites on different layers.”

On this I agree; two-tiered ERP does not combine different modules from different ERP systems.

Two-tiered ERP with Integration to a Master ERP System Versus Business Intelligence Integration

Gartner proposes the following architecture to represent two-tiered ERP.

Getting ERP systems to integrate to one another is quite a lot of work. If the various companies do not require integration beyond buying and selling from one another, it’s unclear why Gartner sees this as preferable. There is little payoff for all the work. Certainly the following architecture is preferable.

Companies tend to desire this architecture more as it provides flexibility: different ERP software can be used depending upon the circumstances, but all the ERP systems can be integrated through the business intelligence layer. Gartner seems to consider this to be a two-tiered ERP strategy, as information is shared from the ERP systems.

Actually, a software vendor with some of the best material on the topic of integrating multiple ERP systems is Teradata, the well-respected business intelligence company. This is explained in one of their white papers.

“The Teradata approach centralizes all legacy data before mapping to the new ERP Environment. This allows significant portions of the migration effort to be reused across multiple source systems. Leveraging existing tools can significantly reduce the time required for data mapping and cleansing tasks.”

“The Teradata environment developed during the ERP conversion project provides an alternative to standardizing on a single ERP instance while still enabling a single view of the enterprise. Enterprise-level global visibility can be provided within the Teradata system at a fraction of the cost and time of extending an ERP instance into these regions. “Because the road to reducing ERP instances generally stretches across many years, a decision to collapse ERP instances is not taken lightly. Strategic business or cost considerations may dictate that a company looks for alternatives to get to a single view or reduced ERP instances, but never gets to a single ERP instance [bold added]. Whatever the case for the company in question, a data warehouse provides the platform that facilitates integration and eases ERP transitions.”

Notice the bolded statement, that while a single instance is often put forward as a goal, that it is often not reached. Teradata then provides the detail related that comes with moving to a single instance ERP.

However, Teradata’s applications can also be used to simply manage a two-tiered ERP solution architecture.

They are speaking here of migrating ERP systems, however, this experience can also be leveraged for integrating multiple ERP systems to a single business intelligence platform. That is with multiple ERP systems integrated to a single business intelligence platform the buyers can receive a comprehensive view of the multiple businesses that are controlled by different ERP systems.

Two-tiered Versus Multi-tiered ERP

These last two graphics represent what two-tiered ERP is not, which is the integration of different ERP systems. Notice that I included a Tier 3 ERP system in the graphic.

So while “two-tiered ERP” implies the use of two tiers of ERP systems, in fact, two-tiered ERP can also mean the use of a third tier ERP system. Essentially this is another dimension to the definition of two-tiered ERP: two-tiered ERP can mean more than two tiers as explained in the following quotation.

“To add to the confusion over terminology, even the second tier, as used in a two-tier strategy, can be misleading. Some companies require more than one additional tier effectively, a multi-tiered strategy. Some subsidiaries may require another tiered solution below the second tier, particularly in distribution and retail industries, where an even smaller system may be required to support, for example, franchisees. For the purposes of simplicity, our use of the term ‘two-tier ERP’ encompasses these multi-tiered solution scenarios, because the strategy determination, governance requirements and selection process are common. In other words, selecting a two-tier approach means that you accept the possibility of a multi-tiered deployment requirement. It’s all in the requirements definition.”

When one gives the topic some thought, two-tiered ERP is actually a rather strange shorthand for various divisions and subdivisions, as there is also a term called “multi-tier ERP.” Multi-tier ERP is where different tier ERP systems—Tier 1, Tier 2 and Tier 3—are deployed, with Tier 3 being used for the smallest of the entities within or associated with the purchasing company. One might propose that “multi-tier ERP” is the more accurate term as it applies more broadly. However, “two-tier” ERP is by far the most commonly used term. As “multi-tier” is used infrequently in practice, I will stick with “two-tier” for this book, and I will use the term “two-tiered ERP” to also mean multi-tier ERP.

How Two-tiered ERP Is New Two-tiered

ERP is the opposite of single instance ERP—the long-held logic originally used by ERP software vendors to sell the ERP concept. This logic held that the company should use a single integrated system for all of its subsidiaries. In fact, the reason for the use of the term “tier” is to present the company as a hierarchy of superior and subordinate subsidiaries. However, the term is actually not all that helpful, except to the degree that the higher tier ERP is used for bigger entities and vice versa. Single instance ERP, long held out as a goal by ERP vendors, never became the normal mode of operation. And this is a very important distinction: two-tiered ERP is different conceptually from single instance ERP, but is simply a reflection of what has come to be, and therefore does not differ from common practice. This very interesting feature of two-tiered ERP will be discussed in detail in this book and is central to understanding the concept as well as the reality of ERP.

As has been explained, two-tiered ERP normally means that different types of tiers of vendors are used for different subsidiaries of a company. These tiers correspond to how the ERP vendor is classified. As mentioned in the first chapter, SAP and Oracle are considered Tier 1 ERP vendors, while Microsoft, Infor and Epicor are considered Tier 2 ERP vendors. Generally, the systems from Tier 1 ERP vendors have more functionality, are more expensive, and are directed toward the largest companies, as explained by the following Gartner quotation.

“Tier 1 vendors that sell ERP systems are typically those that are used by global corporations with annual revenues in excess of $1 billion. Such systems are more complex, provide greater functionality, need higher numbers of trained personnel and have higher cost of ownership. Tier 1 vendors are likely to offer global support to their clients. SAP, Oracle and Microsoft are considered Tier 1 vendors in the ERP space. “Tier 2 ERP vendors mainly serve mid-market businesses, with revenues from $50 million to $1 billion. Their products are of medium complexity and functionality, and have lower ownership costs than their Tier 1 counterparts. Often they are focused on individual industry verticals, whereas Tier 1 products are broad-based. Fujitsu, Epicor, Ramco and Sage Software are some Tier 2 ERP vendors. “Tier 3 vendors sell ERP systems that are designed for small companies that have annual revenues from $10 million to $50 million. Such systems have the least complexity and costs of ownership; at the same time, their broader functionality is also much lower. However, they often have greater focus on individual industry verticals. Expandable, NetSuite and Syspro are some examples of Tier 3 vendors.”

However, this second general definition—or modality of the first definition—is two-tiered philosophy as it is generally implemented. This is expressed in the following quotation:

“A typical set-up is to have Oracle or SAP operating as the primary system while adding a different tool elsewhere, often using a software- as-a-service delivery model. Infor, Microsoft, Epicor, Plex, Ultimate Software, NetSuite, Workday, QAD and IFS are some of the more frequently used vendors for the secondary deployments, Wang noted.”Two-tier Strategy a Way to “Reinvigorate” ERP

However, because SAP offers both a Tier 1 and Tier 2 ERP application, a two-tiered strategy could consist of using two different applications from the same software vendor.

If all of this discussion of tiers and ERP applications have left your head spinning, you are not alone. The following graphic should help clarify which vendor is in what tier.

Some view the term “Tier 2 or 3” to be an indicator of software quality or value. It isn’t. The Tier 1 ERP vendors produce some of the worst-value ERP applications that are sold in the ERP software category. Two of the highest quality and highest value ERP applications that we have evaluated at Software Decisions are actually Tier 2 ERP software vendors.

To wrap up this chapter, the following features apply to two-tiered ERP:

  • Tier 2 ERP software vendors focus on the mid-market, and Tier 3 ERP software vendors focus on the mid-market and even the small market.
  • Two-tiered ERP is defined as using applications from different software vendors from each tier. Most often the top tier would use a Tier 1 ERP application (often an on-premises version of the software) while the subsidiaries may use a Tier 2 or Tier 3 ERP application.
  • Some Tier 1 ERP vendors recommend using their Tier 1 software for all the various companies. However, this is not a two-tiered strategy; it is a multi-instance strategy—that is a multi-instance of the same application.

Conclusion

The term two-tier ERP means applying different ERP systems to different “tiers” of the business. In a nutshell, the larger and more prominent parent companies tend to receive the tier 1 applications, while the subsidiaries receive ERP systems that are considered tier 2. IT analysts and software vendors present a model where multiple ERP systems are connected to a master ERP system. There is no real evidence provided as to why this is a good thing, and it is also contradictory to ERP systems, as ERP systems are designed to represent the “enterprise.” Furthermore, attempting to integrate multiple ERP systems increases the expense of following a multi-ERP system strategy. There is also no strong delineation between the use of the term two-tier ERP versus multi-tier ERP strategy. Both refer to the use of multiple ERP systems for various tiers of entities within one business. However, both of these terms are clearly the opposite of the term “single instance ERP,” which was an unrealized goal of many buyers that implemented ERP systems, but upon closer examination, there is real justification for the goal of using a single instance ERP system. Certainly using one system can save money as it provides economies of scale—and the more users a single instance of an application has, the lower its costs tend to be per user. However, this relationship cannot be generalized to it being a universally applicable strategy as one must give up flexibility, functionality and must perform more customization to the application as it grows in scope. Complexities in mating one monolithic system to variable requirements was a major reason that the single instance concept, while appealing if one only considered an overly simplistic set of assumptions, never became a commonly implemented approach.

Financial Disclosure

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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.

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References

The Real Story Behind Tier ERP

Two Tiered ERP 2

The Real Story Behind Two Tier ERP: Separating the Marketing from The Usable Strategy

What the Book Covers

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:

  1. Eliminate confusion over definitions of two-tiered, multi-tiered, and single instance ERP.
  2. Review SAP and Oracle’s Tier 1 and Tier 2 ERP products.
  3. Understand why two-tiered and single instance ERP is not the best strategy.
  4. Appreciate that WHAT is written about two-tiered ERP depends greatly upon WHO is writing it.
  5. Recognize the logic used by vendors to sell two-tiered ERP and whose interests are being served by a two-tiered strategy.
  6. 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.

Related Books

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.

See the Book Page