Research Summary: Best Practices – The Case For Two-Tier ERP

Published on March 1, 2011 by R "Ray" Wang

Forward And Commentary

Legacy optimization remains a key component for funding future innovation.  Two-tier ERP emerges as one strategy to optimize existing systems while adding innovation.  The report capitalizes on the recent Software Insider survey of 235 companies looking at future strategies.

A. Introduction

Organizations continue to face an onslaught of business requirements that their existing ERP systems can no longer address.  Stuck in the past century, these ERP systems are expensive to run, difficult to upgrade, and impossible to modify for today’s fast changing requirements.  Two-tier ERP has emerged as a strategy to enable legacy optimization while reinvigorating the organization’s existing ERP systems.

B. Research Findings

Two-tier ERP refers to a business and technology strategy that enables organizations to keep existing ERP systems at the corporate level while empowering divisions or business units to innovate with a second ERP system.  Consequently, two-tier ERP deployments continue to gain favor.  Why? Organizations must optimize legacy systems while delivering on business value.  In fact, in a recent Constellation Research survey, 48% of respondents indicated that they are considering at two-tier ERP strategy (see Figure 1).  These results reflect a 27-point increase from 2009.

Figure 1.  Two-Tier ERP Growing In Popularity As A Key Strategy

While today’s two-tier strategies mostly involve on-premises solutions, cloud based solutions will gain favor over the next 18 to 24 months because of their rapid deployment capabilities, constant innovation qualities, and subscription pricing.  Organizations challenged by diverse lines of business, multiple localization requirements, or needs to phase in legacy system modernization will find a two-tier ERP strategy one that can reduce costs and provide better business value than a one-size-fits-all solution.  Whether SaaS, on-premises, or hybrid, a two-tier ERP strategy will reduce costs, meet new business requirements, and provide better business value.

The Bottom Line: Start With A Few Key Two-Tier ERP Requirements

Organizations embarking on a two-tier ERP strategy should consider a few key requirements during the vendor selection process:

  • Multi-multi-multi. Organizations in global environments require multi-lingual, multi-currency, and multi-org capabilities. Last-mile solutions should be delivered at the local level.
  • Single instance support. Subsidiary support for a single instance mitigates consolidation nightmares. Minimize the number of two-tier instances.
  • Local accounting standards support at the sub level. Sub-level support should include roll-up to the appropriate currency at a global level to reduce the number of country specific instances.
  • Industry specific and last-mile solutions. Consider the cost of configuration in the Tier 1 system versus the Tier 2 system to meet business requirements. Many Tier 2 systems enable cost effective two-tier deployments.
  • Legacy optimization. Compare the cost of an upgrade with the deployment of a Tier 2 system. Consider the overall integration costs and change management requirements to support multiple instances.

C. Report Links

Find out the top reasons why organizations are adopting a Two-Tier ERP strategy.  See the 4 case studies for Two-Tier ERP. Buy the full research report on the Constellation Research website.
Contact the Sales team to purchase this report on a a la carte basis or join the Constellation Customer Experience!

Your POV

Have you deployed a Two-Tier ERP strategy? What’s your key driver? How has it gone?  What’s worked? What’s not?  Add your comments to the blog or send us a comment at R (at) SoftwareInsider (dot) org or R (at) ConstellationRG (dot) com

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?
  • Working on legacy optimization projects!

Resources and Related Research*

20100302 Tuesday’s Tip: When To Go With A Two-Tier ERP Strategy

20091203  Strategy: 5 Lessons Learned From A Decade Of Naught

20091222 Tuesday’s Tip: 10 Cloud And SaaS Apps Strategies For 2010

20091208 Tuesday’s Tip: 2010 Apps Strategies Should Start With Business Value

20091102 Best Practices: Lessons Learned In What SMB’s Want From Their ERP Provider

20091006 Tuesday’s Tip: Why Free Software Ain’t Really Free

Reprints

Reprints can be purchased through Constellation Research, Inc. To request official reprints in PDF format, please contact Sales .

Disclosure

Although we work closely with many mega software vendors, we want you to trust us. For the full disclosure policy, stay tuned for the full client list on the Constellation Research website.

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

Copyright © 2011 R Wang and Insider Associates, LLC All rights reserved.

  • Lise – MDM plays a major role in these deployments. A federated approach is the most popular from what we’ve seen to date. What are others seeing? – Ray

  • Hi Ray; always interesting to read your insights on ERP. Surprisingly, you did not mention the role of Master Data Management in two-tier ERP deployments. Since the two ERP tiers are interconnected, they’d need some level of MDM to communicate consistently around key elements like customer, account, and so forth. Among the surveyed companies, how many have incorporated MDM into the two-tier deployment? In your experience, what style of MDM implementation best serves a two-tier ERP approach?

    With best regards from Lise Neely

  • Steve – yes. ERP can’t keep up today. Hence SaaS, Two-Tier, etc. You make a good point on should we add to another ERP. I would only add a new ERP that’s innovative and flexible enough. That means modern architecture and new focus on user experience and service design thinking. Solutions like BabbleApps also provide another approach. Look forward to more discussions. Has anyone used Babble Apps? – Ray

  • Doug – love it. the painful descent to oblivion!!! We are entering a phase of commoditization. Vendors who dont’ get this will become extinct. Many were slow to the game but the high profits in maintenance revenue have given them room to reinvest and innovate. Let’s see who makes it in the next decade. What do you think? – Ray

  • Ray,

    Have you ever thought that the famous Gartner hype cycle was missing the last stage of “slow painful descent to oblivion?” This study may be another milestone in the obsolescence of the ERP model.

    ERP is predicated on the notion of one solution to do all things regards of industry, business domain, geography, company size etc. Your report points out many of the signs that the ERP value proposition is waning:

    – Rapid adoption of the cloud because of cost and agility reasons. It should be noted that most first and second tier ERP are built on legacy code. It is very difficult for ERP to migrate to SaaS without rewriting.

    – Industry-specific and last mile concerns have become increasingly important. Many industries can become less efficient through homogenized ERP. Despite the “portfolio management” argument, it turns out that less expensive industry-friendly solutions are more effective and cost less even when integrated with different systems.

    – Acceptance of so many companies of using Tier 2 solutions shows that the once-dominant notion that biggest is best is on the descent. Organizations realize that big ERP is not materially less risky than other solutions.

    – Upgrade costs including the maintenance of customized code has become more visible to CIOs. The ERP market seems to be a diminishing returns for upgrades era. Each new version adds risk to what is actually working.

    There are some other signs of the descent:

    – Recognition that the entire software stack has commoditized. Proprietary stacks are holding customers hostage.

    – The end of technology proprietary “economies of scale.” Many in the ERP business suggest that smaller firms can no longer compete with the top tier. Not enough people, not enough customers. Nothing is further from the truth. While the top tier is struggling to maintain legacy code and integrate among consolidated company products, more agile vendors are building extensible net-native applications on the open source or Microsoft stacks.

    – General resistance to high-cost maintenance with little value. This recently created some backlash. And, the emergence of 3rd party service providers are digging into ERP company maintenance revenue. That’s with maintenance representing the majority of ERP vendor revenue.

    Where are we on the descent? Tier 1 ERP companies might be in the same position Tier 1 networking companies (Novell, Banyan) were in 1994.

  • Ray,

    Business has always moved faster than ERP’s could keep pace. They just weren’t made to keep up…they were made to consolidate and control vast empires of process, data and technology.

    The Two-Tier strategy, while actively being considered, seems to have ginormous draw back: it uses another ERP to innovate changes in process, data and technology.

    Doesn’t this seem like doubling down on the initial problem? It didn’t work the first time so lets try it again. Except this time, let’s integrate two disparate systems and create more support, upgrade, compatibility and change management issues. Pushing two of these complex, rigid systems together seems short sighted.

    A new category of enterprise software exists that offers a different strategy: one that achieves the agility and constant innovation required without any of the “risks” associated with the two-tier strategy. We call our version of this new category BabbleApps.

    BabbleApps de-couple the needs of business for employees, vendors and customers from the existing ERP. Companies are able to rapidly deploy on-going, simple, powerful, grass-roots innovation.

    BabbleApps are designed, executed and measured for results BEFORE investment is required in as little as one week. Those resources that know your business and opportunity the best define exactly how the BabbleApp needs to work. Every company is unique and BabbleApps fit your Great Idea like a glove.

    BabbleApps live on any network, are accessible via any browser capable device, are purchased on a subscription basis (even for “on-premise” deployment) and they consume and generate corporate and desktop level data without any hesitation.

    BabbleApps are scalable down to a single user in a single function. Only those employees who need to be impacted are impacted; reducing change management. You can start with just one employee with the new BabbleApp before interrupting any others.

    Full Disclosure: BabbleWare created this next generation of software and has delivered dozens of BabbleApps to its customers.

  • John – appreciate it. keep up the fight on open source ERP! Open source plays a key role in more and more as the primary tier, especially in academics and emea companies. Are others using Open Source ERP? Please share your experiences! – Ray

  • Ray,

    Re:

    “Organizations continue to face an onslaught of business requirements that their existing ERP systems can no longer address. Stuck in the past century, these ERP systems are expensive to run, difficult to upgrade, and impossible to modify for today’s fast changing requirements.”

    This is spot on–and a new breed of “Agile ERP” can supplement the existing corporate standard legacy ERP, to deliver the business agility required to capture opportunities and respond to change. At Openbravo, the main thrust of our new Openbravo 3release is toward SMBs, but we think it could make a lot of sense for the larger enterprise as well. What is your take on web-based open source ERP in the two-tier context? I notice you mention cloud, but not open source, which is why I ask.

    Thanks for your consistent insights and solid writing!

  • Clive – it’s a good point. the fortune 500 and the global 2000 are more likely to go with Two-Tier ERP. Mid-sized and Small businesses are focused on on one-size fits all. The issue is more than just cloud based ETL, it’s about information governance and managing the integration. What do others think? – Ray

  • Hi Ray,

    Two-tier ERP, to optimize while gaining innovation, seems to be a hallmark of large cap companies. Examples I’ve experienced

    Berkshire Hathaway, doesn’t toss out existing systems, for the corporate boiler plate system.

    Another case is the largest Nasdaq high tech companies (under NDA here), who rapidly ramp up new product lines, especially in green field locations (can be overseas without Cloud broadband infrastructure).

    It seems the CIO’s at mid-size companies get drawn into one-size fits all ERP…

    And what seems to tip mid-sized CIO’s hands is the absence of proper Cloud based ETL services to roll up Two-Tier figures for reporting figures to HQ. Consolidating MRP for central purchasing, being another missing service…

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