The Reasons for the Rise of Two Tiered ERP

Executive Summary

  • Two-tiered ERP is a specific way of managing multiple ERP systems.
  • This serves to explain the reason for two-tiered ERP’s popularity.

Introduction

It is important to understand who initially proposed two-tiered ERP, because this tells us a great deal about whose interests it serves. Two-tiered ERP arose as a marketing strategy specifically by the Tier 2 and Tier 3 ERP software vendors. Its most notable and vocal proponent is the software vendor NetSuite, but now pretty much all ERP vendors, regardless of their tier, have position documents to let prospects and current customers know their preferred strategy. This is the case even though two-tiered ERP is a direct contradiction to the single instance logic that Tier 1 vendors have been promoting since the initial development of the ERP software market.

It takes living through the initial ERP sales period in the mid-80s, reviewing the old documentation, or performing interviews to find out that not only was a single instance the official proposal of ERP vendors but that a single instance ERP system would be the only system that any ERP customer would ever need to implement. You can now pick yourself up off the floor after falling down laughing, but I kid you not: this was the pitch.

The Background on the Development of the Term “Two-tiered ERP”

Two-tiered ERP was originally conceived of as a philosophical wedge designed to crack open the lucrative Tier 1 ERP market to Tier 2 ERP vendors. The intent of proposing two-tiered ERP was not to present something that was necessarily true, but to sell specific ERP software—and for consulting companies to sell ERP services.

At some point, Tier 1 will be vulnerable to some type of challenge. As is described in part by this book (and in far more detail in, The Real Story Behind ERP: Separating Fiction from Reality), ERP has not achieved the objectives that it was predicted to achieve and many of the ERP systems have aged quite badly. ERP is on its way to being “just another system” instead of the centerpiece of the solution architecture. Overpaying for ERP is now one of the least effective uses of IT budgets. Many large consulting companies misrepresent this fact to their clients. They provide the impression that ERP is so transformational, so important and has such a high ROI that the company should not be concerned with how much they pay for ERP (in particular, how much they pay for their consulting). Nothing could be further from the truth. ERP’s often generic functionality, will not improve a business very much, and in order for ERP to have a positive ROI, it must be procured and implemented and maintained at a reasonable cost. Two-tiered ERP is an important concept, but not for the reason many people think. It is an important concept because two-tiered ERP represents one of the first cracks in the façade of single instance ERP.

Now, three decades after companies began purchasing ERP systems and preparing themselves for a brave new world of system efficiency, many companies have aging ERP systems as ERP vendors (particularly Tier 1 vendors) are using their ERP systems as cash cows. Rather than improving their systems to at least keep them up to date, vendors have used this money to develop new non-ERP applications, which they then attempt to sell into their existing ERP accounts. The applications are not sold on the basis of functionality, usability, or other application-specific factors, but on the idea that the applications will integrate better to their ERP system.

I consult with clients that rely primarily upon ERP systems for supply chain planning, and using these systems is like stepping into a time machine. I was recently working in SAP R/3-ECC-ERP (its name changes depending upon who you are talking to at the time) and was struck by how dated and of poor quality this “flagship” application was in 2013. It has changed very little from the application that I began working with in 1997. And yet, all of that time SAP has been banking support charges that average 20 percent of the initial purchase price while putting close to nothing back into the product.

Tier 1 vendors simply have little incentive to continue to develop their ERP systems. Most Tier 1 vendors have saddled their customers with aging and low functionality ERP systems, but with high costs. This is the “ERP trap.” Companies that bought big ERP never saw much of a financial benefit, and are now paying an even bigger price as they are stuck with dated systems of low capability that eat up large portions of their IT budget. Every year that I spend time in SAP or Oracle ERP, the more out of date their applications seem.

Is Two-tiered ERP the Savior of ERP?

Generally speaking, the dissatisfaction with ERP systems—and Tier 1 ERP systems in particular—is high. Those that have proposed the concept of two-tiered ERP know this, and have, in part, based their strategy around this dissatisfaction. However, two-tiered ERP is just the latest in a number of popular philosophies that have been proposed to improve and rectify the problems with ERP. The narrative of all these philosophies has never been to question the foundations of ERP (although there is ample evidence to justify doing so), but to suggest a way of adjusting or improving ERP. What has not been recognized is that many of the criticisms leveled against ERP, and particularly big ERP, are inherent to features of big ERP systems—and therefore not amenable to improvement.

Possibly the most ridiculous of these philosophies was service-oriented architecture (SOA), which was the philosophy prior to two-tiered ERP. Supposedly SOA was going to stoke up the value of ERP systems. At one point all of the Tier 1 and Tier 2 ERP software vendors produced some trumped-up white paper that described their “vision” for SOA. All of the major consulting companies proposed not only that SOA was logical, but predicted that SOA was going to be a huge trend that was going to help clients reclaim value from their stogy old ERP systems. Many books were written about this new concept, and many presentations were given at conferences. However, SOA, while proposed with great confidence, has now faded with essentially zero effect on ERP. Interestingly, none of the companies that promised so much from SOA have suffered in the marketplace, and none have had their credibility reduced. Intriguingly, those who pumped up the SOA message are now hoping that recipients of the message have short memories and have by now forgotten about all those SOA promises. It should be stated that the concept of SOA was ludicrous from the beginning, as I explained in the following article that I wrote back in 2010 when SOA was somewhat in vogue.

Why Did SOA Not Take Hold?

The reason SOA was never going to take hold in ERP systems (aside from its technical features; a programmer is better qualified to offer an opinion on that than am I) was because Tier 1 and Tier 2 ERP vendors base their competitive strategy on closing off options for their customers—not on publishing their functionality to be used by all. SOA was about breaking down barriers and allowing any application to call upon the functionality of any other application. All Tier 1 and most Tier 2 ERP software is based upon the opposite philosophy: a philosophy of closed-off systems. The ERP system is used as a “wedge” to get into a customer. Once in, the ERP system is used to justify the purchase of uncompetitive applications from the same ERP vendor on the basis of these systems being easier to integrate back to the ERP system. Why would big ERP vendors support an approach based on open standards, which would allow their applications’ functionality to work flexibly with other applications? That is exactly the opposite of their business model. No real technical knowledge was required to predict that SOA would not happen in the ERP space—only knowledge of how big ERP software vendors operate.

Clearly, two-tiered ERP is yet another trend to get behind, to write articles about, and to base conference presentations upon. Unlike SOA, it is based upon a number of truths. I want to be clear that the proponents of two-tiered ERP are not objective sources of information; they are marketers whose primary motivation is to help sell more software. Two-tiered ERP is a marketing construct based upon a truth (although generally the specific truth is not articulated) that Tier 1 ERP systems are not good values for medium-sized companies. In fact, the evidence, which is compiled in, The Real Story Behind ERP: Separating Fiction from Reality, is that Tier 1 ERP applications are poor values, even for the largest companies.

A Dangerous Idea Two-tiered ERP is a threat to Tier 1

ERP vendors because once more diversity is allowed in enterprise software purchases, it will soon be apparent that Tier 1 ERP vendors offer some of the worst value of all applications purchased by the enterprise software market. We estimated the total cost of ownership (TCO) of purchasing both ERP and non-ERP software from an ERP vendor (a one-hundred-percent ERP vendor software strategy) and the TCO of buying mostly from a Tier 1 ERP vendor. Both strategies are the most expensive purchasing strategies that one can follow, and result in the lowest attainable functionality, implement-ability, and usability. Even so, it is still the dominant approach followed by most large and mid-sized companies in the developed countries.

Two-Tiered ERP and SaaS It is widely assumed that “software as a service” (SaaS) is a necessary part of a two-tiered ERP strategy. Two-tiered ERP is about speeding implementation timelines and reducing costs, and both of these objectives are accomplished when using SaaS-delivered solutions.

Matching the ERP System to the Environment Tier 1

ERP vendors essentially own the Fortune 1000 in the US. Large companies have complex requirements and the IT budgets to match. However, Tier 1 ERP also has a high total cost of ownership, long implementation durations, and a degree of complexity that is a poor match for smaller companies. In fact, a major mistake has been for mid-sized companies to “stretch” to implement Tier 1 ERP. Many of these companies ended up with ERP systems that fell to a low level of capability because the companies lack the funding to support the systems. This is partially because of the software, and partially because ERP software has been parasitized by major consulting companies whose business model is to greatly increase the costs of ERP implementations as well as any other enterprise software they implement.10 I would know because I have clients that are in this exact predicament. This is truly the worst-case scenario: an expensive system delivering weak functionality and no real way out. The ERP system cannot be removed because the company spends so much of its IT budget maintaining the Tier 1 ERP system that they cannot afford to pull out. This is the ERP trap and a vicious cycle. It is a phenomenon that was never considered and never predicted but is now entirely commonplace.

In these companies, Excel becomes the predominant system for almost all analysis. Everything becomes about extracting data from the ERP system, making changes in Excel, and uploading the output of the processing back to ERP.

Example

Here is an example. One of my clients used a Tier 1 ERP system for forecasting. The forecasting functionality within the ERP system was extremely difficult to use, and was essentially a black box system. The forecast accuracy was abysmal; first, they could not run the forecasting models appropriately, and second, they could not figure out how to interpret the output because the application had no real user interface—data was uploaded and data was downloaded. In truth, it was barely an application at all—at least not in terms of how we think of a modern application. Just as big of a problem as the poor output was the time wasted by the employees who had to constantly perform gymnastics to adjust for the poor forecast. For this particular client, I used an inexpensive, but modern, forecasting application to create my own forecasts for the company and to do things they never could have done using the functionality in their ERP system. This is the heavy price that is paid if one relies upon ERP systems for planning functions.

Many companies operate as I have just described, and they are operating in a way that is decades behind what is possible. When clients use predominantly Tier 1 ERP systems to get their work done, it saddens me to think of how much human potential is wasted within these companies by working with (and often around) bad software. Poor software selection saddles companies with poor quality applications for many years and employees are put under pressure to meet objectives that often they cannot meet because the tools they are given are of such low quality. It seems like a bad deal for everyone but a lucky few who benefit from either selling or implementing the software from the major ERP vendors.

The Truth To Two-Tiered ERP

As was discussed previously, two-tiered ERP is based upon an interesting kernel of truth about ERP systems. The actual usage of ERP is explained below:

“Our research finds that one-third of companies with more than 1,000 employees use an ERP application supplied by a single vendor while two-thirds use software from two or more vendors; one-third have software from four or more vendors. There are largely two reasons why companies have heterogeneous ERP environments. One is purely historical: Automating back office functions began decades ago, and companies initially did not roll out or upgrade the systems across the entire enterprise. Moreover, some parts of the organization may have been built through acquisitions. If the acquired entity was relatively large, it often made sense to leave the existing systems in place.

A second reason is that, when it comes to ERP, one size simply does not always fit all; lines of business can be different enough that a single vendor’s offering is not well suited to the needs of all. A two- tier approach recognizes that a big ERP system generally, and the headquarters ERP system specifically, often is a bad fit for the needs of a small offsite division or a remote manufacturing unit in, say, Recife, Brazil that is part of a mostly services-oriented corporation. Using the headquarters ERP vendor’s manufacturing application capabilities may well be overkill for this single-site operation. 

Global firms have a long legacy of ERP heterogeneity, with Forrester noting as long ago as 2004 that a third of firms were already running 10 or more instances.”A Strategic Approach to Establishing Two- Tier ERP

Tier 1 ERP vendors would like you to forget that the vast majority of companies that use ERP systems have multiple ERP systems—sometimes multiple ERP instances in one company—due to things such as each country having its own ERP instance, or a subsidiary in the same country having a separate ERP instance. That is important to consider.

Therefore, part of the two-tiered philosophy is really just “business as usual,” although with the rise of the two-tiered philosophy, this is the first time, at least that I could find, that ERP companies diverged from their primary philosophy of a single instance. Tier 1 vendors developed marketing literature on two-tiered ERP after Tier 2 and Tier 3 ERP vendors released their own marketing literature, promoting the use of their applications for all the tiers. This might make for nice marketing literature, and may help muddy the waters, but it makes little sense to simply use a tier 1 ERP system for all business units/subsidiaries, at least if different instances are required (which would be if the different business units/ subsidiaries have different configuration and customization needs). Using tier 1 ERP software for all of the tiers undermines the advantages of two-tiered ERP, in that a) the buyer would not receive a diversity of functionality as provided by multiple ERP systems and b) the buyer would not receive any benefits of lowered costs and TCO from lower cost ERP tier 2 and tier 3 ERP systems.

Marketing Literature for Multi-Tier ERP

Tier 1 vendors clearly released this marketing literature as a defensive measure— to prevent the Tier 2 and Tier 3 vendors from making much headway with the concept of two-tiered ERP. Customers were reading the two-tiered documentation from smaller ERP software vendors and wanted to know the position of Tier 1 ERP software vendors (one could have guessed their position before reading their documentation). SAP and Oracle have countered with a second proposal: Continue to use their applications for the second tiers, but use their Tier 2 solutions (SAP Business One and Oracle JD Edwards World). Because these are much less expensive applications. This approach is at least cost-effective, but it reduces the

competitiveness and diversity of functionality available to the buyer. If a buyer, through a competitive software selection decides to include SAP Business One or Oracle JD Edwards World as their tier 2 ERP system, then that is perfectly fine, but to simply reward these applications with the selection on the basis of the fact that the buyer already owns the vendor’s Tier 1 offering makes no sense at all, as there are few technological advantages to doing this.

competitiveness and diversity of functionality available to the buyer. If a buyer, through a competitive software selection decides to include SAP Business One or Oracle JD Edwards World as their tier 2 ERP system, then that is perfectly fine, but to simply reward these applications with the selection on the basis of the fact that the buyer already owns the vendor’s Tier 1 offering makes no sense at all, as there are few technological advantages to doing this.

The Supporting Logic Versus Marketing Hyperbole

Most often two-tiered ERP is presented as something new, but, in fact, it is a very common practice. The real difference is in the acknowledgment that a foundational characteristic—single instance ERP—is giving way to a standard approach of multiple ERP systems, not merely as part of a short-term approach, but as part of a long-term strategy. In the past, it was considered more appealing to state that, while one had multiple ERP instances, eventually the company would move to a single instance.

The multi-ERP strategy has been around for as long as there have been ERP systems. Yet IT analysts, consulting firms, and IT trade periodicals that discuss the “new trend” of two-tiered ERP strategies, most often fail to bring up the rather important fact that a big part of the ERP value proposition was supposed to be a single instance of ERP, as explained in the following quote from an article in the Sloan Management Review:

“The concept of a single monolithic system failed for many companies. Different divisions or facilities often made independent purchases, and other systems were inherited through mergers and acquisitions. Thus many companies ended up having several instances of the same ERP system or a variety of different ERP systems altogether, further complicating their IT landscape. In the end, ERP systems became just another subset of the legacy systems they were supposed to replace.”

How can so many entities actively promote the concept of two-tiered ERP without even mentioning that it is in complete opposition to one of the original value propositions of buying ERP systems in the first place? This is a good time to analyze just a few of the logics that were used to sell ERP.

Conclusion

At this point two-tier ERP comes across to many as a thoughtful enterprise software strategy, however, an analysis of the origins of two-tier ERP point to it being nothing more than a marketing construct that was first proposed, or at least popularized by NetSuite. Marketing constructs can be true or false, but it’s important to identify the source of any concept in order to understand why it was proposed in the first place. In this case, this construct was designed to open up the clients that were primarily tier 1 ERP customers to tier two and three ERP products. There is really nothing more than anecdotal evidence quoted that is used to demonstrate that two tier ERP systems reduce costs/provide benefits over a 100 percent tier 1 strategy, however, given the high expense and low value of tier 1 ERP systems, it would be surprising if a two-tier strategy, if properly configured, did not improve outcomes for buyers. I will explain various two-tier ERP strategies and their impact on costs and value in Chapter 6: “Applying the Concept of Two-tiered ERP to Your Company.” Two-tier ERP has been co-opted as much as possible by Oracle and SAP, however, at its heart, it is essentially a thinly disguised indictment of tier 1 ERP systems generally, and single instance tier 1 ERP systems in particular. In fact, two-tier ERP is one of the first cracks in the façade of tier 1 ERP systems, something that, if enterprise software decisions were primarily based upon research and historical analysis, rather than based upon trends and “what other people are doing,” would have occurred some time ago. Another interesting and strange thing about two-tier ERP is that while it sounds or seems novel, in fact, it has been the predominant way that companies implement ERP systems—it is only that two-tier ERP is explicit in its statement of ERP diversity as a laudable goal—something that was often considered or accepted as simply a transitory state to the “Holy Grail” of a single instance ERP system.

Financial Disclosure

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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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