What Are the True Benefits of Two Tiered ERP?
Executive Summary
- Two-tiered ERP is sold as a highly beneficial strategy.
- Learn how beneficial two-tiered ERP is to customers that follow this advice.
Introduction
Two-tiered ERP systems are a trend in ERP, but there is little research on the impacts of two-tiered ERP strategies and how they differ from what companies are doing anyway with multiple ERP systems. Once again, the marketing is far ahead of the evidence. Remember that a previous concept—service-oriented architecture (SOA), which has now flamed out concerning ERP systems—was also supposed to be a “savior” for ERP. I work on projects where ERP is omnipresent, yet after so many SOA books published and so many ERP vendor marketing documents written, SOA has yet to show its face on any of my projects. Major ERP vendors made a lot of noise about supporting SOA, but SOA never fit their business model because it reduces their account control; there was no reason for them to support it. On the other hand, there was a large incentive to say that they supported the concept, as is explained in the following article.
See our references for this article and related articles at this link.
Accept the Marketing Message
So before we go forth and accept a new marketing message (i.e., two-tiered ERP), let’s analyze whether it makes any logical sense. It is not clear how two-tiered ERP is much different from the current practice, where most companies have several instances of ERP. Let’s look at a few quotations that define two-tiered ERP.
“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. With two-tier ERP, the regional distribution, production, or sales centers and service providers continue operating under their own business model—separate from the main company, using their own ERP systems. Since these smaller companies’ processes and workfl ows are not tied to the main company’s processes and workfl ows, they can respond to local business requirements in multiple locations.” — Wikipedia
Companies are already doing this. 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. I would not have guessed that ERP systems had diverged so far from their original intent in this regard, as I tend to work for just one subset of enterprise software that is connected perpetually to ERP systems.
Multi ERP Strategy
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, 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. This is 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? Put, it is ignorance, amnesia, or a desire not to disrupt various forms of funding that they receive from ERP vendors.
The Logic of Cost Reduction for ERP
All of the above factors undermine a primary argument used to sell ERP systems: they reduce costs. After the ERP market had become saturated, the cost reduction logic “declined as a point of emphasis,” because the vendors were now motivated to sell different types of software. I have noticed other previous changes in SAP’s storyline as well. Back in the late 1990s, before they had a supply chain planning system, SAP essentially told companies that supply chain-planning systems were unnecessary. Advanced supply chain planning systems were designed to replace some of the supply chain functionality in SAP R/3. They offered supply chain functionality not available in ERP systems, in addition to more advanced functionality. The argument used by SAP at the time was that this software was only of interest to a minimal number of companies. However, after SAP developed its own external supply chain planning system, they changed their message, proposing that it was now quite necessary.
Business Cost Reduction
ERP systems were supposed to save companies money through the standardization of business processes. ERP customers generally accepted this without question. The quotation below provides an example of the pitch.
“It is also one of the most worthwhile initiatives for securing your place in a competitive market. A successful, enterprise-wide implementation will move your company from one with piecemeal business procedures and no overall plan, to a re-engineered organization that is poised to take growth and profi tability to a whole new level.” — Why ERP is Vital to Productivity and Profitability
This is an example of a generic argument that proposes that businesses were somehow lost in the wilderness, lacking direction until—POOF! ERP came to save them from themselves. The next quotation is a more sophisticated explanation for what is still a flawed appraisal of the situation.
“Many organizations have several different legacy systems that have developed over the years to meet their information needs for planning and decision making. Often there is little or no integration among departments and applications used by separate departments do not communicate with each other. This means that data has to be entered into each separate department of the organization resulting in data redundancy and at times inaccuracy. ERP systems can virtually eliminate the redundancies that occur from these outdated and separate systems. ERP systems integrate various systems into one and data is entered into the system only once.” — What Managers Should Know About ERP and ERP II
It’s hard to fathom why these companies had not already created interfaces between their applications. ERP has not “virtually eliminated the redundancies that occur from separate systems.” We have the same redundancies and the same issues, except we have newer systems. The previous quote seems to have been written by someone who does not spend any time on actual projects, because those who have work experience in this area have come to the opposite conclusion.
Legacy Systems?
As far as systems being outdated, one of the major complaints of ERP clients is that their ERP vendors have stabilized the functionality within their ERP systems and are no longer innovating. This was the same complaint regarding legacy systems and the reasons they were called outdated! Here is another quotation that contains more unexamined assumptions.
“ERP systems are based on a value chain view of the business where functional departments coordinate their work, focus on value-adding activities and eliminate redundancy. ERP can be a valuable tool for managers to improve operational as well as financial performance of the firm.” — What Managers Should Know About ERP and ERP II
This sounds great; however, how would the author know this?
A lot of things “could be,” but I have searched through all of the research on this topic, and there is no evidence of this. The ROI is so low that companies have had to change their stories as to why they implemented ERP, often turning to the equally fallacious argument that ERP improved integration in their companies (as highlighted in the quote below).
“ERP systems replace complex and sometimes manual interfaces between different systems with standardized, cross-functional transaction automation.” — The Impact of Enterprise Systems on Corporate Performance
I have to ask how current this observation is and whether it still applies, or whether it was ever real. This paper was written in 2005, but interfaces between systems do the same thing that ERP does and have for many years.
Conclusion
This chapter covered the other logics—in addition to best practices and integration benefits that were used to sell ERP systems. All of these logics are similar in that they were oversimplifications of reality, and none of them were ever actually proven true. They were never hypotheses that were formulated to be tested. They were proposals that were designed to help pave the way for software and consulting purchases. The evidence is clear that none of the logics were proven to be correct, and yet there is almost a total blackout of this fact. Academic research shows this, but exceedingly few have addressed the discrepancy between the official storyline on ERP and the research. Instead, the logic presented in this chapter continues to be used to sell more software and consulting. This displays a concerning inability of corporate buyers to differentiate between evidence-based statements and marketing propaganda. In the next chapter, we will explain the total cost of ownership of ERP systems—which is directly related to the logic of whether ERP systems reduce costs.