- Two-tiered ERP is a specific way of managing multiple ERP systems and presented as if it is new.
- This serves why two-tiered ERP is not new.
The first thing to consider when understanding what to do with two-tiered ERP is that two-tiered ERP is not new. Two-tiered or multiple- tiered ERP has been used since ERP systems were initially sold. What is new is the marketing of the concept: the use of multiple ERP systems from different vendors is a way of improving the value returned from ERP implementations.
The Unstated Assumption of Two-tiered ERP
What is unsaid regarding two-tiered ERP may be even more interesting. The story that is being told regarding two-tiered ERP is not the full story; instead, it is an engineering/marketing construct that only tells part of the story. Tier 2 and Tier 3 ERP vendors don’t dare contradict the established viewpoint that Tier 1 ERP software is necessary, even though it isn’t. Software vendors don’t want a lot of controversy or “trouble”—they just want to sell software. Thus the Tier 2 and Tier 3 vendors have developed the two-tiered concept as an adjunct to a centralized ERP system. The vendors have presented this digestible new strategy without undermining the sacred cow of Tier 1 ERP, which would be off-putting to companies that have spent so much money on tier 1 ERP systems and have so little to show for it. The two-tiered ERP concept allows Tier 2 and Tier 3 ERP vendors to tiptoe around what makes the two-tiered strategy work—unlike other ERP “savior concepts” that have come before it such as rapid big ERP implementation methodologies (an oxymoron if there ever was one) or service oriented architecture (i.e. SOA—a philosophy that Tier 1 vendors had zero interest in supporting).
Hopefully, this book has provided enough information to convince you that two-tiered ERP both a) makes sense and b) is nothing new. However, if one accepts the premise that two-tiered ERP is worthwhile, the question becomes what to do about it. A big part of this decision is determining who to listen to; so many entities in the market claim theirs is the right course to follow with respect to two-tiered ERP. However, very few of these vendors could be considered financially unbiased, and none provide any evidence to support these claims.
Let’s start off by listening to what the Tier 1 vendors have to say on the topic.
The Tier 1 ERP Software Vendors Tier 1
ERP software vendors have attempted to co-opt and change how two-tiered ERP is implemented. Let’s remember that the original idea behind two-tiered ERP was to implement below Tier 1 ERP applications into subsidiaries and sub-companies that had lower functionality demands than the parent company. Two-tiered ERP was initially presented as a way to reduce cost and complexity, to which the Tier 1 ERP companies say:
“Great, we are on board. Just implement multiple instances of our Tier 1 software.”
However, that is not a two-tiered ERP strategy: that is a multi-instance ERP strategy using the same software. Tier 1 ERP vendors counter this argument with their second proposal:
“We offer mid-market ERP systems also, so use our mid-market solutions for the other tiers.”
Depending upon whether the vendor is SAP or Oracle, the cost savings can be lower or about the same as other well- known Tier 2 ERP applications. However, adjusting for more than costs, the argument is actually better for SAP, as they have a far more capable Tier 2 ERP application in SAP Business One than does Oracle in Oracle JD Edwards World. Both software vendors propose that they offer a better value versus alternatives that do not offer both a tier 1 and tier 2 ERP application, as their respective tier 1 and tier 2 ERP systems are integrated to one another or share a common heritage. However, a close examination of each software vendor’s system calls this assertion into question. SAP’s Tier 1 offering (called ECC or R/3) has nothing at all to do with SAP Business One, their Tier 2 offering. SAP Business One was not developed by SAP but was renamed after SAP acquired TopManage Financial Systems, along with TopManage’s sister company TopTier. As such SAP Business One has a completely different technical heritage than SAP ECC. And while SAP will no doubt advise that it has some adapters that connect SAP ECC to SAP Business One, the connection benefits between these systems should be viewed with great skepticism if previous experience with SAP’s integration claims is any indication.
How Acquisitions Play into Two Tier ERP
Both of Oracle’s main ERP systems—Oracle JD Edwards EnterpriseOne and Oracle JD Edwards World—were the result of acquisitions and were not developed by Oracle. Regardless of any integration that exists between the systems, Oracle JD Edwards World is an application that should be retired as it is not a viable option for future purchases.
SAP and Oracle—knowing they have limited ability to stop a customer set on the concept from moving to a two-tiered ERP strategy—would like to steer customers in a direction that benefits SAP and Oracle. Rather than performing a proper software selection, SAP and Oracle would like their customers to simply choose the solutions that SAP and Oracle want them to choose. Once again they will argue that their systems will integrate better with their tier 1 ERP systems, an argument that we discredited in the previous section. Even if integration were not an issue, their solution may not be a good decision as it’s unlikely the proposed application is the best fit for the company’s business requirement. Secondly, integrating the lower-tier ERP systems into a master ERP system is only one way of implementing two-tiered ERP. Another, less costly, approach is simply to integrate all the ERP systems to a master business intelligence system. Many ERP vendors leave this alternative out when discussing two tier ERP with potential clients. However, integrating to the master business intelligence system is, in my view, a preferable solution architecture.
Biased “Advice” from Tier 1 ERP Vendors
It’s unclear why anyone would listen to Tier 1 ERP software vendors on the topic of two-tiered ERP. Their only interest is to redirect purchases back to their applications, and so any of their opinions or recommendations are based simply on their marketing and sales function. They are countering a movement in the marketplace with the tools they have available. Furthermore, nothing that either SAP or Oracle has predicted on the topic of ERP has ever turned out to be true. Bill Maher lampooned those who promoted the Iraq War.
“If you’re someone from one of the think tanks that dreamed up the Iraq War, who predicted that we would be greeted as liberators, and that we would not need a lot of troops, and that the Iraqi oil would pay for the war, that the WMDs would be found, that the looting was not problematic, that the mission was accomplished, that the insurgency was in its last throws, that things would get better after the people voted, after the government was formed, after we got Saddam, after we got his kids, after we got Zarqawi, and that the whole bloody mess would not turn into a civil war…you have to stop making predictions.”
The same could be said for Tier 1 ERP software vendors. Buyers that have followed the advice of SAP or Oracle in setting up their solution architecture have resulted in the highest cost, and lowest functionality corporate IT infrastructures, as is explained in the Brightwork Research & Analysis TCO studies.
SAP routinely spins false marketing constructs that have little to do with reality, such as NetWeaver and HANA. Oracle’s internal culture of lying runs so deep that other software vendors point to it as a reason to increase their own lying. Many marketing departments have put effort into developing literature regarding their position on two-tiered ERP, with the single intent of getting you to think they have the best approach to two-tiered ERP. Much of the information provided by Tier 2 and Tier 3 ERP software vendors is of a dubious nature, as demonstrated by the following quotation from Sage, a Tier 2 ERP software vendor:
“Well-run, global organizations are increasingly adopting a two-tier enterprise resource planning (ERP) strategy.”
If one were to read through the source paper of this quote, one would note that this bold pronouncement is never supported by any evidence. The statement is not, “Increasingly a few well-run, global organizations are adopting…”; the statement is categorical. In fact, the only evidence presented throughout the paper is that two-tier ERP is becoming a topic of greater interest among corporate buyers. This is a problem, because the paper implies that it has evidence that two-tiered ERP is what good companies implement as will be demonstrated at some point in the paper (but never is).
High Cost of Tier 1 ERP
Two-tiered ERP does make sense due to the high cost and poor performance of Tier 1 ERP. However, there is a difference between something appearing logical and stating that better companies are employing the strategy.
“Organizations in the market for ERP solutions are increasingly considering a two-tier ERP strategy. A recent study by Constellation Research found that forty-eight percent of buyers in 2011 were considering a two-tier strategy, up sharply from thirty-two percent in 2010 and twenty-seven percent in 2009”
The above statement is a standard way to begin a promotional paper of this type. However, the statement does not demonstrate whether a two-tier strategy has actually worked in practice. Instead, it merely provides evidence that more companies are focused on the question. This increased interest could be due to any number of reasons, such as the enormous quantity of marketing literature produced by software vendors and the prevalence of conference sessions on the topic. The article goes on to trace the supposed roots of two-tiered ERP.
“Two-tier ERP systems began their rise in popularity during the economic recession that began in late 2008. As IT budgets were slashed, IT departments were forced to make do with less. In many cases, large-scale ERP migration plans were delayed or eliminated entirely. Instead of moving to new systems, companies focused on improving existing systems, including legacy ERP applications. As a result, many organizations decided to retain functionality in their existing systems that were still working while migrating to Tier 2 systems where existing solutions were not meeting their requirements.”
This paragraph is not true. The popularity of two-tiered EPR did not rise during the economic recession of 2008. Two-tiered ERP has always been used for one reason: generally, Tier 1 ERP is too expensive for subdivisions, and companies never moved to single instance Tier 1 ERP.22 This entire paragraph is confusing and apparently, the author does not know the history of ERP. Instead of being based in the history of ERP, this paragraph attempts to develop a narrative where Tier 2 ERP is a significant trend and to give the impression that two-tier ERP is entirely new. The paper goes on to say:
“At the same time, organizations began realizing that big-bang, corporatewide ERP installations are often ineffective. When a system becomes very large, it becomes costly to customize, maintain, and upgrade.”
Porblematic ERP Implementations
For some time we have proposed that an incremental implementation strategy be used even within one application—rolling out less complex functionality earlier. Generally, this approach is not followed. Implementation methods tend to change little over the years, in that they rarely reflect what has worked or not worked historically. Since I began working on IT implementations in 1997, I have seen little adjustment to implementation methodologies. No evidence is presented in the paper that companies are moving away from big bang implementations. I could find no research that even studied the movement of companies away from big bang IT implementations to incremental IT implementations. The Sage paper goes on to say that two-tiered ERP is being driven by changes in corporate structures.
“For example, many organizations have undergone multiple mergers and acquisitions that leave them with multiple ERP solutions—and unacceptable support costs.”
There is nothing at all new about this, except for the fact that support costs from the Tier 1 ERP vendors have been increasing steadily. However, multiple companies being part of another company, all with different ERP systems, is why two-tiered or multi-tiered ERP has become a popular “strategy” since ERP systems first began being used in the mid-1980s—although calling it a “strategy” may be giving it too much credit for forethought. Rather, the strategy resulted from circumstances.
“Seventy percent of respondents to a recent Software Insider survey remarked that existing, Tier 1 systems are too expensive. An estimate published by CIO magazine in 2009 placed the cost of the average Tier 1 ERP system deployment at between $13 million and $17 million. ROI calculation on Tier 1 ERP systems show that high costs are due to overruns in implementation, customization, maintenance fees, and staff costs. Upgrade costs are also high—45 percent of respondents said that upgrades are too costly.”
Yes, the survey results reflect reality but are presented in the article as if they represent new information. In fact, the only new part to this is that support fees have increased. Tier 1 ERP systems have been known to be quite expensive for decades.
The Sage paper goes on to report that many respondents to a survey believe that Tier 1 ERP systems are expensive.
“When all of the implementation, ongoing maintenance fees, upgrades, and modifications are considered, a two-tiered system can offer significant financial savings. For example, Gartner Research found that companies see a thirty-three percent reduction in implementation costs when a two-tier system is deployed.”
Firstly, our research is quite a bit more thorough than Gartner’s because we estimate the cost savings for the entire TCO of a two-tiered ERP strategy—and we have tested a number of scenarios. Our research shows that a thirty-three percent reduction in TCO costs is the upper end of the cost savings continuum, while a predicted TCO cost savings in the twelve percent to seventeen percent range is a more reasonable expectation. However, it depends upon the size of the Tier 1 ERP system as compared to the Tier 2 ERP system.
Obviously, Tier 1 ERP systems are bad values. Any other strategy, such as using a best-of-breed application (even a best-of-breed finance application), will yield far better financial outcomes. All this seems to beg the following question: If Tier 1 ERP systems are so expensive, why have they been recommended by Gartner and the major consulting companies for more than three decades? (Hint: It’s not because Tier 1 ERP provides good value to customers. No research has ever produced a positive return on investment for Tier 1 ERP.) So, whose interests are these entities looking out for, if not the customer’s?
The Answer is Two Tier ERP?
Sage presents a lot of information, but seems interested in drawing only one conclusion: the answer is two-tiered ERP. In doing so, they leave out other conclusions that are just as interesting and important to analyze. The Sage paper goes on to highlight a well-known issue regarding Tier 1 ERP systems and innovation.
“Yet thirty-five percent of Software Insider survey participants found that enterprise-class ERP vendors have not innovated quickly enough. Subsidiaries are finding that they can customize Tier 2 applications more quickly than they can convince corporate to change the global ERP system to meet their local needs.”
This is also true. Tier 1 ERP software vendors have been using their ERP applications as cash cows for more than a decade and a half. They use the high profits from their ERP systems to acquire or develop non-ERP applications, which they then sell into their customer bases, acquiring a higher and higher percentage of their customers’ IT budgets. Again, who are the culprits for this end result? Those who recommended Tier 1 ERP systems as necessary: the major consulting companies and Gartner (who is used repeatedly as a source in the Sage article), as well as other analysts who told companies that Tier 1 ERP would lead to great things.
The Sage article goes on to praise the speed with which Tier 2 ERP applications can be implemented.
“A two-tiered infrastructure can be deployed quickly and cost effectively. The time to implement and modify or upgrade is likely to be shorter, which means that deploying such a system will deliver a shorter timeto- benefit, and these systems can be modified more quickly and easily than a Tier 1 ERP solution.”
This could be filed under the category of “self-evident.” This quotation again states that Tier 1 ERP software is inefficient and expensive to operate. Of course, anything— with the possible exception of lagging business intelligence applications (i.e., IBM Cognos, SAP BI, Oracle BI)—are going to seem efficient compared to Tier 1 ERP, which brings up again the question of why Tier 1 ERP is used in the first place. Marketing Does not Equal Reality Just because a vendor has invested in marketing literature about two-tiered ERP, does not mean they are a good choice for your two-tiered or multi-tiered ERP strategy. In fact, an ERP vendor’s position or marketing material on two-tiered ERP is immaterial to any purchasing decision. Different ERP systems are fundamentally separate. We have evaluated thirteen ERP systems, and none of these ERP systems were designed to be integrated to other ERP systems. Gartner states this, albeit more delicately.
“Do not assume that integration between systems will be plug-and-play, even if provided by the same vendor.”
The vendors of some of the better ERP systems that we have reviewed have not written any marketing literature on two-tiered ERP. Conversely, some of the lowest-scoring ERP on systems include the most literature on two-tiered ERP. Any company that intends to use a variety of ERP software vendors can simply use the same software selection approach that tends to result in the best software being selected. No review of the various literature on two-tiered ERP is necessary.
Major Consulting Companies
The major consulting companies don’t have much interest in promoting two-tiered ERP because their main interest is in billing for tier 1 ERP resources; resources for lower tier ERP bill out at a lower rate. Furthermore, there are more software vendor options, and major consulting companies are not interested in retraining or hiring new resources so that they can bill hours. So the “recommendation” of major consulting companies on two-tiered ERP will be that it is “too early to jump in,” and that two-tiered ERP will take resources away from the really important work of “improving the tier 1 ERP system and moving toward a single instance.” Not surprisingly Accenture published a document entitled “Why Big Systems Are Here to Stay,” which perhaps should have been called “Why Big Systems Are Here to Stay: Because We Make Tons of Money That Way.” In this document, Accenture makes the following contentions:
“And a third advantage of an ERP environment has to do with how data is managed, integrated and secured. If not properly integrated, cloud and software-as-a-service solutions can create a more chaotic, less reliable and less secure data environment.”
This is an interesting assertion because ERP environments have zero advantage over non-ERP environments with respect to data management, integration or security. ERP systems that I evaluated often had the lowest data quality of any software category—particularly for the Tier 1 ERP vendors as the applications have such dated data management tools. As for integration, ERP systems may be integrated to themselves, but the Tier 1 ERP vendors are some of the most difficult systems to integrate with other applications. As for the security argument, ERP systems are not more secure than other software categories.
The above Accenture statement also confuses the topic of ERP systems versus SaaS systems. SaaS is a delivery method for software; ERP is a category of enterprise software. SaaS can deliver as an on-premises solution for any application, including ERP. ERP systems that are on-premises are more secure than cloud or SaaS applications, but that is a different issue.
The Evidence Presented by Accenture?
Overall, the evidence to support the statement made in the Accenture paper is severely lacking, and it should qualify as FUD (fear, uncertainty and doubt). Accenture has a financial incentive to slow the movement away from Tier 1 ERP and toward SaaS solutions because it’s how they make a lot of money: they have far less control once the application is delivered via SaaS. With SaaS, the software vendor tends to take over consulting and support. Interestingly, nowhere in the paper does Accenture mention how it makes money (which is with on-premises consulting and support) and how this may influence its “recommendations.”
Accenture goes on to say that the best approach is a hybrid: some on-premises and some SaaS. They then proceed to make another self-serving proposal, that this IT ecology must be managed by using a trusted “broker.”
“So, who’s in charge of managing this complex hybrid system? The answer lies in the rising trend of using an integrator or trusted broker. This brokerage can act as either a consultant or as a managed services provider. This holistic or managed services approach enables companies to treat their IT resources as just that and also provides a new level of fl exibility for companies and CIOs.”
And who would be this trusted broker? That’s right—Accenture! After spending decades overcharging and misdirecting their clients to all the wrong software in the on-premises environment, Accenture would like to be handed the keys to managing their clients’ IT solution architecture in the new on-premises/SaaS “hybrid” environment.
The major consulting companies don’t really have “opinions” on topics; all they see is whatever maximizes their revenues. It’s very simple: two-tiered ERP along with SaaS-delivered software reduces their revenues—therefore, they are against it. Now, if what I am saying is true, why would Accenture develop a partnership with NetSuite, as the links below describe?
Generally, partnership statements of this kind are not reliable indicators regarding a policy within the consulting companies. Companies develop partnerships all the time, and many of them do not extend beyond the marketing press release and the insertion of company logos on one another’s websites.
Both software vendors and consulting companies love having partnership logos on one another’s websites. However, in most cases, these partnerships are much less than meets the eye. I cover this topic in the following article about the overused and often meaningless integration certifications that many smaller software vendors have on their websites that show some integration to a major ERP software vendor.
A far better indicator of how dedicated a company is to a particular strategy or line of business is whether they put out marketing collateral on the topic. And the major consulting companies have not done this—at least at the time this book was published. If their clients demand that they provide Tier 2 and Tier 3 resources, the major consulting companies will do it; after all, they prefer to have the business rather than to lose the business, but they would prefer not to do this.
Having read the reports of several analysts on two-tiered ERP, it was interesting to see their take on the topic. IT analysts have not spent space in print explaining the history of ERP to their subscribers. Some of them use phrases such as, “two-tiered ERP can be effective if implemented properly,” which sounds authoritative. As there are no studies on the effectiveness of two-tiered ERP, this statement sounds quite fabricated unless they can provide the evidence to back it up. Statements like this provide a nice escape hatch for IT analysts. If the trend does well, the analyst can say, “I predicted it,” and if two-tiered ERP does not work well, the analyst can say, “It was not implemented properly.” This approach is copied from economists and allows one to sound authoritative without doing any research and without committing either way.
I was very surprised that none of the analysis on two-tiered ERP brought up the fact that the analysis was contradictory to the original logic of ERP, something that I consider to be one of the biggest stories related to two-tiered ERP. Another letdown was that not a single IT analyst asked the question: If two-tiered ERP is so advantageous and saves so much money, what does this mean regarding Tier 1 ERP?
An Algorithm for Starting Trends Without Evidence This is how trends get started in enterprise software; the process seems to have the following stages:
- The Marketing Machine: Software vendors with a financial bias propose something is a good idea and rev up the marketing machine.
- Stoking the Fire: IT analysts write reports on the idea, without declaring the source of the new idea—the financially biased software vendors. They do not evaluate the merits of the proposal but instead write articles—perhaps with a few anecdotes of why “it could be” a good idea.
- The Conference Circuit: Vendors and consultants start presenting on the topic at conferences, and articles are written about the idea in IT publications.
- The Conference Aftermath: Purchasing company executives attend these conferences, and come back saying, “We need to take a look at two-tiered ERP.”
- The Surveys: Surveys are performed that show that X percent of executives are thinking about whether or not to implement the new idea.
Enterprise software buyers are thus primed for the marketing materials and sales pitches from the software vendors that started the trend in the first place. This is very reminiscent of how topics become popular in national politics. Often an event will occur, prompting a number of stories on the topic. Then a survey is taken and the survey shows that this topic (not without coincidence) is on people’s minds. Another person was able to control public opinion in the same manner. His name was William Randolph Hearst and here is his famous cable:
“When Hearst Artist Frederic Remington, cabled from Cuba in 1897 that ‘there will be no war,’ William Randolph Hearst cabled back: ‘You furnish the pictures and I’ll furnish the war.’”
The above essentially describes how historically media outlets have been used to manipulate what people think and what they feel. The history of media, in general, goes back much further than the history of media for enterprise software. In fact, the history of enterprise software only goes back to roughly 1970 (most software applications prior to this period were shrouded in secrecy as they were military in nature). However, many of the same outcomes are consistent to the point of repetitiveness and are easy to catch if one studies the topic. Knowledgeable entities can influence media systems. In fact, a major impetus of marketing is to influence storylines in a way that makes them seem entirely authentic.
SAP and Oracle have attempted to control the two-tier ERP story and to co-opt the trend so that their customers buy lower tier ERP systems from them. Neither of these software vendors has proven to provide good information to their customers, and, in fact, both gouge their customers to a ridiculous degree on support costs. They should have zero credibility with buyers, especially if one actually evaluates their history of being right with their previous predictions and advice. Of course, the bad quality information on this topic is not limited to SAP and Oracle. This chapter provided numerous examples of evidence-free statements made by those that often have a substantial influence on the information technology media and also what buyers think.
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.
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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.