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.

See our references for this article and related articles at this link.

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 into 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 manage a two-tiered ERP solution architecture simply.

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 into 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” also to 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 Brightwork Research & Analysis 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.

Why Two Tier 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 had 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 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 might 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 into a master business intelligence system. Many ERP vendors leave this alternative out when discussing two-tier ERP with potential clients. However, integrating into 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 many 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 are 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 the two-tiered ERP 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 on 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.”

Problematic 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 of 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.

Fast Implementations?

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 into 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 advantages 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?

https://www.netsuite.com/portal/landing/accenture.shtml

https://www.oracle.com/us/corporate/press/1966087

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.

IT Analysts

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 analyses 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:

1. The Marketing Machine: Software vendors with a financial bias propose something is a good idea and rev up the marketing machine.
2. 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.
3. The Conference Circuit: Vendors and consultants start presenting on the topic at conferences, and articles are written about the idea in IT publications.
4. The Conference Aftermath: Purchasing company executives attend these conferences, and come back saying, “We need to take a look at two-tiered ERP.”
5. 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.

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 the 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 were 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.

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 of 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.