Two-tier Strategy a Way to 'Reinvigorate' ERP
Why would a company want to use a two-tier ERP strategy? There are plenty of reasons, say the experts, including increased business agility and lower costs.
Running two ERP solutions seems counter to ERP's ostensible aim of consolidating a company's internal and external data, including financial, sales and marketing information. Yet using a so-called two-tier ERP strategy offers benefits, say experts.
Why a Two-tier ERP Strategy?
A two-tier ERP strategy can provide opportunities to improve business agility and increase long-term cost of ownership, said Ray Wang, principal analyst and CEO at Constellation Research. It has emerged as a way to enable legacy optimization as well as a way to reinvigorate the organization's existing ERP systems.
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.
A number of NetSuite customers employ this two-tier ERP strategy, often using the company's OneWorld software, said Jim McGeever, the company's chief operating officer. Client companies typically have 10 to 50 subsidiaries and may be running hundreds of separate instances of ERP.
I've not come across a single enterprise running globally on a single instance of SAP. It does not exist, McGeever said. It's never in the single digits, the instances running. The best case scenario, it's in the dozens. More often than not it's in the hundreds. We are the solution to the consolidation problem If a company has 100 subsidiaries running 30 different systems, we can help them run just one.
It isn't just software-as-a-service (SaaS) players like NetSuite that promote two-tier ERP deployments. The major ERP vendors are also jumping on the bandwagon. For example, SAP may recommend SAP BusinessOne (either on-premises or hosted) for the main system with its SAP Business ByDesign (SaaS) for subsidiaries with links into its enterprise Business Suite, said China Martens, an analyst at Forrester Research.
"At Convergence, we also heard Microsoft talk more about two-tier, not only for on-premises versions of its Dynamics ERP app families but also as it rolls out the SaaS or SaaS-enabled versions of Dynamics AX, GL, and NAV," Martens said.
Growth in Two-tier ERP Strategy
The degree to which this phenomenon is occurring is a matter of opinion. Wang considers it a major trend. "Two-tier ERP deployments continue to gain favor as organizations must struggle to optimize legacy systems while delivering on business value," he said.
A recent survey by Constellation Research found 48 percent of respondents were considering a two-tier ERP strategy, a big jump from earlier surveys. Their reasons included expense, the need for heavy customization, industry vertical requirements, hefty price tags for legacy ERP upgrades, innovation demands, government regulation and geography.
"ERP systems don't always come with the language or tax requirements, for instance, so a separate instance may well prove cheaper than customizing a monolithic ERP solution," Wang explained.
Aberdeen Group surveys, on the other hand, place the frequency of two-tier ERP at around 25 percent. Aberdeen analyst Nick Castellina does expect that number to rise, however, based on increased interest he’s noted during end-user interviews.
"It appears that organizations that are using multi-tiered strategies are often in growth phases and are attempting to get new sites up and running as quickly as possible," Castellina said. "Thus they are deploying an ERP that includes only the functionality that site needs to speed up the implementation process. This is why the corporate standard is often called the administrative ERP, with the lower tiered model being called operational."
NetSuite client Groupon rolled out 49 countries in less than 10 months on his company's ERP software, said McGeever. "We'd literally be going live with five countries in a single day. You cannot do that with an on-premise ERP model."
While two-tier ERP strategies used to be mainly a small business and mid-market activity, Martens sees it moving up the food chain. "We've definitely been seeing more interest in this model among enterprise clients recently," she said. "At the same time, more ERP vendors are positioning their apps as part of a two-tier approach."
She lists the primary drivers as lower costs and speedy deployment times. Companies are looking for ERP software that doesn't require heavy investment and commitment to IT infrastructure, as well as support personnel.
"It's all about the lower costs associated with the apps and their suitability for use by a subsidiary with limited or no IT support," Martens said. "And if the second-tier ERP is for a start-up, the whole venture may be an experimental one, so speed and low cost are a concern."
ERP vendors are responding to customer interest in hybrid deployments with a wider selection of deployment choices, including SaaS -- and a two-tier ERP strategy fits nicely into that message. For vendors with a mix of SMB and enterprise ERP, offering two separate tiers is a way to expand the use of their software within large organizations by catering to divisional and subsidiary needs as well as to corporate HQ.
Two-tier ERP Strategy Challenges
While two-tier ERP is employed to simplify and speed deployments, it is not without its own challenges. "You have to be careful to ensure that the products involved can integrate effectively so that data isn't lost or redundant and that everything is secure," Castellina cautioned.
Wang noted, though, that integration issues were significant a few years ago but are not so much of a hurdle today.
"When you look at existing businesses and how their operations are being run, they are all using tools like Hyperion to consolidate. None of their own internal systems are typically integrated with each other," McGeever said. "We can integrate with Hyperion as well as anyone else."
It's also important to pay attention to master data management; ensuring consistency as data is rolled up from the second-tier ERP into the corporate first-tier ERP to achieve a single source of information for financials, orders and other business.
"There should be no duplication of effort between the two ERP systems," Martens said. "The linkages between the ERP tiers may be provided by the ERP vendor as packaged adapters or by a third party such as an integration specialist or a systems integrator."
Eight key features are important when evaluating two-tier ERP software. Among them are common ERP data structures.
According to the experts, the following scenarios make the most sense for using a two-tier ERP strategy:
A business with a very specific local focus -- single-site or multi-site within a single country or region -- so there is less need for multi-currency or multilingual support.
A business with operations geared strongly toward a specific industry, perhaps a vertical that doesn't feature strongly at corporate headquarters or elsewhere within the organization.
A newly-acquired operation with a mismatch of multiple outdated, unsupported ERPs in need of a single SMB or mid-market ERP.
A startup or small subsidiary with no formal ERP in place where the enterprise is eager to use a second-tier ERP strategy to impose business rigor.
A small operation at the second-tier which doesn't warrant the use of enterprise ERP software -- but down the road as the operation grows, it may be brought more into the corporate fold.
Organizations with diverse lines of business, localization needs or who want to take a phased approach to legacy system modernization will find a two-tier ERP strategy one that can reduce costs and provide better business value, said Wang.
Drew Robb is a freelance writer specializing in technology and engineering. Currently living in Florida, he is originally from Scotland, where he received a degree in geology and geography from the University of Strathclyde. He is the author of Server Disk Management in a Windows Environment (CRC Press).