Tuesday’s Tip: When To Go With A Two-Tier ERP Strategy

by R 'Ray' Wang on March 2, 2010

Single Instance ERP Harder And Harder To Justify

The holy grail of an ERP implementation used to be the single instance deployment.  However, market forces, a move to adopt new disruptive technologies, slow pace of innovation from incumbent vendors, and high maintenance fees have changed many organization’s perspectives.  Add a slew of rapidly changing business requirements battling rigid legacy infrastructures and next gen CIO’s have been forced to depart from the standard apps strategies.  In fact, improved integration, web services, and SaaS deployments have now improved the success rates and ROI for Two-Tier ERP apps strategies.

Purpose Built Capabilities And Cost Savings Drive Push For Two-Tier Apps Strategies

Recent Software Insider data surveys of next gen IT leaders in Q3 2009 and Q1 2010 show a 10% increase among organizations considering a Two-Tier ERP apps strategy (see Figure 1).  Key drivers behind moving to a Two-Tier ERP approach stem from:

  • Purpose built or industry requirements (89.61%). Next gen IT leaders remain frustrated by the lack of innovation and progress in completing out promised functional footprints.  As market competition intensifies, industry specific, purpose built solutions provide the competitive advantage needed for survival and success.
  • Existing systems too expensive (70.13%). ROI calculations on existing ERP systems often show high cost factors.  The culprits – overruns in implementation, customization of reports, maintenance payments on shelfware, increasing costs to staff, and rigidity of system.
  • Upgrade too expensive (45.45%). Many customers face upgrade costs equivalent to reimplementation.  Cost factors could equal up to 85% of the original implementation cost.
  • Need to innovate (35.06%). Some organizations find that their vendors have not innovated fast enough. Social channels have not been accounted for.  User experiences seem dated.  Reporting and analytics require experts to deliver.  Paucity in mobile solutions hinder productivity.
  • Regulatory compliance (24.68%). The need to meet industry specific regulatory compliance drive organizations to choose purpose built solutions.  Many choose SaaS to mitigate the costs of legislative and regulatory updates.
  • Geographic requirements (19.48%). Country or region specific requirements may require two-tier strategies based on geography.  Some ERP systems lack the language or tax requirements and a separate instance will prove cheaper to run than customizing a monolithic large ERP solution.
  • Existing systems too rigid (15.58%). Rigidity may lead to the inability to integrate and work with other systems, new channels, and emerging stakeholders.  Integration solutions can assist, but long term, next gen IT leaders will begin to surround legacy solutions with newer technologies.

Figure 1. Two Tier ERP Strategies Gain Favor In Next Gen IT Leader Apps Strategies

screen-shot-2010-03-02-at-53732-pm

Figure 2.  Industry Requirements And Cost Drive Push To Two-Tier Apps Strategies

screen-shot-2010-03-02-at-53724-pm

The Bottom Line – Users Should Consider Scenarios Based On Business Models And Geographic Needs

Detailed apps strategy conversations highlight 3 scenarios where Two-Tier ERP strategies make sense.  A number of vendors have proven to be strong partners in enabling Two-Tier ERP (see Figure 3).

  1. Different business models. Organizations with very different lines of businesses often consider hub and spoke implementations.  The drive to standardize on a single ERP system makes little sense when one subsidiary delivers services and the other manufactures goods.  Several large multi-national conglomerates leverage more than two-tiers of ERP to handle a warranty business, financial services, and power generation manufacturing.
  2. Country specific deployments. Deploying a full scale ERP solution makes little sense for new subsidiaries when options exist at lower operating costs and higher ROI.  One large Japanese manufacturer found cost savings with local based systems in North America and EMEA.
  3. Phased modernization efforts. Organizations looking to upgrade and modernize their systems may keep some legacy systems in place as they upgrade to more modern systems.  One large entertainment concern has kept their financials systems and updated their retail systems with a more modern, web services based, SOA architected product.

Figure 3. Vendors To Watch In Two-Tier ERP Apps Strategies

screen-shot-2010-03-02-at-71143-pm

Your POV.

Have you deployed a Two-Tier ERP strategy? How has it gone?  What’s worked? What’s not?  You can post or send on to rwang0 at gmail dot com or r at softwaresinsider dot org and we’ll keep your anonymity.

Please let us know if you need help with your enterprise apps strategy by:

  • Developing your enterprise apps strategy?
  • Addressing disruptive technologies like Social CRM, Cloud Computing, SaaS deployment, and Two-Tier ERP?
  • Assessing the ROI of a Two-Tier ERP strategy?

* Not responsible for any factual errors or omissions.  However, happy to correct any errors upon email receipt.

Copyright © 2010 R Wang and Insider Associates, LLC. All rights reserved.

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  • ERP implementation and customization without expert help for large and transnational companies can be very expensive and complicated. There are companies that specialized in ERP implementation. They start with project planning, architectural design, data conversion and integration of ERP modules, e-business applications and legacy systems. They can speed up the process and accomplish the job in less than 6 months with solid pilot testing.

  • Opentaps Analytics allows in-depth look at customer and sales data.

     

  • Which stands for Enterprise Resource Planning software is a systems
    management solution which helps in improving the performance of an
    organization’s resources; namely men, material, money and equipments. 

  • An Extension Development Kit (EDK) allows customer organizations to build their own unique set of extended functionalities (screens or modules) and integrate with the core ERP on the cloud.

  • Anil

    Ray, thanks for your insights. I wanted to add to it based on what I have observed that companies which have grown through acquisition or were decentralized at one time. They typically end up with multiple legacy ERP solutions at regional subsidiaries. Many of these solutions are either old or no longer fully meet the business requirements. Since these systems are old, the cost of keeping these solutions running is high – not only from IT perspective but also from ensuring that these solutions continue to enable compliance with increasing number of regulations. In addition, many of these legacy solutions are difficult to change, creating an opportunity cost for the company who wants to change business processes at these subsidiaries in an increasing competitive world. As a result, these solutions need to be replaced. However replacing these solutions with the corporate ERP system can be overwhelming at these small subsidiaries from process overload and implementation cost perspective.

    Deploying a two-tier ERP approach, where the regional solution comes from a different vendor is also not ideal, since it will lead to high integration costs - both at initial implementation, as well as on an ongoing basis in the future. Any out-of-the-box integration offered by the vendor of subsidiary system is almost always very limited (only certain information is passed between them), point-to-point (so it is certified to work across only certain combination of versions, thereby driving forced upgrade of corporate system if you upgrade a subsidiary system and vice versa) and only at the data level (not at the process level, since there is no contextual understanding between the two systems as to what aspect of the business process is completed in corporate system and what is completed at subsidiary level). As a result, additional integration projects (and costs) are almost always required, creating hidden costs and additional work for your already constrained IT organization. So how can organizations replace their legacy solutions without overwhelming the regional subsidiaries with a corporate solution and without having to incur ongoing integration costs?

    There is a third option, if you have SAP ERP as your corporate system. I would recommend you check out SAP’s offerings for small and mid-sized organizations - SAP All-in-One or SAP Business One or SAP Business ByDesign as a potential system for your subsidiary. They connect with SAP Business Suite (corporate system) in a hub/spoke model. These systems are priced very competitively, have fast deployment packages, rich functionality and lots of industry-specific extensions. These solutions are also designed to co-exist with corporate SAP solution (SAP Business Suite) and support sliding degrees of centralization/decentralization models – so both data and process level integration is out-of-the-box. Backward compatibility requirements for a new release enable a new version of subsidiary application to work with current and previous versions of SAP Business Suite and vice versa, thereby preventing a forced upgrade. By choosing these solutions, you will not only get a subsidiary solution that is specific to your business needs, industry requirements and budget, but you will also get out-of-the-box process AND data integration that is supported across newer versions. Check out these products at http://www.sap.com/usa/sme/sol...

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