Introduction

A two-tiered ERP strategy is where multiple ERP systems are used – most often one tier 1 ERP system is combined with tier 2 and tier 3 ERP systems. The ERP vendors and applications are typically categorized into the following “tiers.” The concept is that different ERP systems are to be used for various “tiers” of the business. Gartner has the following definition of two-tiered ERP.

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.

Gartner’s definition is a bit too rigid to describe how the term two-tiered ERP tends to be used, and it also does not explain how the strategy differs from single-instance ERP. This is where the entire entity is migrated to an individual – typically tier 1 ERP system. This is rarely discussed in print because most of the entities that write on ERP have for years been proposing that companies follow a single instance ERP strategy. Two-tiered ERP is the first public admission by ERP companies that a multi-ERP environment can be beneficial. Since the beginning of ERP in the 1980s, the consistent approach by large ERP software vendors has been to nudge their customers in the direction of centralizing their businesses to a single ERP system. However a broad scale transition to single instance ERP never occurred except for exceptions and smaller companies, and there are several reasons, why, which are explained in detail in the Brightwork Research & Analysis Press book The Real Story Behind Two Tiered ERP. Two-tiered ERP is an important concept, but not for the reason that many people exposed to the concept realize. It is essential because two-tiered ERP represents one of the first cracks in the façade of single-instance ERP. ERP has nowhere near achieved the objectives that it was predicted to reach, and many of the ERP systems have aged quite badly. ERP is on its way to being “just another system,” instead of the centrepiece of the solution architecture and overpaying for ERP is now one of the least productive uses of IT budgets. Important points regarding two-tiered ERP are the following:

1. Financial Bias: Most of the entities that propose the two-tiered ERP have a financial bias. They tend to be tier 2 or tier ERP vendors that are trying to sell their software by any means necessary. Tier 1 vendors that are attempting to answer the logic for two-tiered ERP by recommending that their ERP applications (either tier 1 or tier 2, as both SAP and Oracle, have tier 2 ERP applications in addition to tier 1 ERP applications) by proposing that two-tiered ERP is a “fine idea,” as long as it means using their applications.
2. No Attempt to Provide Evidence: There is some anecdotal evidence that this or that company saved money using a two-tiered ERP strategy, but no real research into the area. Academics have not researched the topic.
3. No Reliability to Research: No entity that would be traditionally relied upon to perform research on this topic would be able to complete the research without financial bias affecting their research results. This is because they are all in some way financially dependent upon the large software vendors. For instance, even IT publications receive a disproportionate percentage of their advertising from either large software vendors or large consulting companies – both of which would push against any research which showed that two-tiered ERP was effective. Entities do not publish research, which contradicts their financial model.

The Comparisons

Our first comparison shows all using one single instance SAP ERP system (ECC/R/3) to support 600 users. This is compared against a two-tiered ERP strategy, which uses SAP ERP (ECC/R/3) for 200 users, and then four other ERP systems (Epicor, Infor Lawson, Sage X3 and NetSuite OneWorld). This is a very realistic scenario, as the average company that uses ERP systems has five ERP systems within the company. This statistic combines with the statistic that the average ERP system has 60% of its modules operational.

This analysis compares the use of five ERP systems versus the use of one ERP system, each serving the same number of users. The cost savings are significant at 24%.

The next example shows a larger number of users, at 800. It also cuts down the number of ERP systems in the two-tiered ERP strategy to just two ERP systems – SAP ERP/ECC/R/3 and Sage X3. This scenario provides no cost savings.  However, it must be remembered that this is only a cost analysis. Having only two ERP systems also cuts down on the flexibility of the company as there is much more variety in four ERP applications than one. When companies allow different divisions to choose their ERP systems – that follows a decentralized approach – they rarely settle on the same ERP system. This is logical because different companies and sub-companies have different requirements that are optimally met by different applications. 

SAP and Oracle have responded to the tier 2 ERP vendors that are making more sense to use their tier 2 ERP offerings rather than move to a different ERP vendor for the 2^nd tier. This scenario above tests that hypothesis. In this scenario, there are an average cost savings of 4%. 

Conclusion

According to our research, one can save money by following a two-tiered ERP strategy, and we predict that the savings would be significant. Still, it greatly depends upon which tier 2 ERP systems are used, and if the company deploys multiple or a single tier 2 ERP system. There are scenarios where following a two-tier ERP strategy will save no money. This only covers the cost or TCO side of the equation. A major benefit of tier 2 ERP is to gain more diversity in functionality that can be attained by using just one ERP system. It should be apparent from each of the examples provided above that the primary reason for this cost savings is that tier 1 ERP applications are considerably more expensive than lower-tiered ERP systems. Of course, tier 1 ERP systems tend to be better fitted for larger companies. However, this generality should be questioned more now than ever as both SAP and Oracle have essentially “stabilized” their tier 1 ERP systems – which means little future development — and other ERP applications have closed some of the gaps in functionality. Our Software Selection Package for Finance/Accounting explains this point in detail. Both SAP and Oracle tier 1 ERP systems come with a great deal of implementation complexity and maintenance, and it is well understood that their tier 1 offerings tend to be overkill for smaller companies/divisions etc. Therefore, the claims made by proponents of two-tier ERP strategies regarding costs savings are correct. With SAP, the cost savings are higher if non-SAP or Oracle tier 2 ERP applications are purchased versus most another tier 2 ERP applications. However, we have several less known tier 2 ERP applications that have lower costs than SAP Business One. As is most often the case, each application should be selected based on its functionality fit with the business requirements. No other consideration is even close to as important.

References

Montgomery, Nigel. Ganly, Denise. How to Determine If a Two-Tier ERP Suite Strategy Is Right for You. Gartner. October 24 2012