Is a Two-tier ERP Strategy Right for You?

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A two-tier ERP strategy is one where an organization chooses to have more than one enterprise resource planning (ERP) solution to support its business needs. The moniker “two tier” emerged, as one tier will often consist of one tier-one ERP solution—SAP, Oracle, or Microsoft Dynamics AX, along with one or more of tier-two or tier-three solutions.

In this post, we’ll look into the reasons why a company might consider a two-tier solution, give an overview of two-tier implementation options, and provide some factors to consider when looking at two-tier solutions. Of course, acres of articles have been written on why a single, homogeneous ERP solution is most beneficial to an organization. The beauty of a two-tier ERP strategy is that the organization can realize all the benefits of both the tier-one and tier-two/three solutions at the same time!

Why would you consider a two-tier ERP solution?

There are a number of reasons why organizations would consider implementing a two-tier ERP strategy. Here are some examples of cases where companies have adopted two-tier ERP solutions:

  • A company acquires another company that is running a different ERP solution. Instead of merging all the operations and business practices of the acquired company into the tier-one solution, the acquiring company decides to keep the tier-two solution running at the acquired company.

  • A company reviews its general and administrative (G&A) costs and decides to push the costs of the central ERP solution down to the individual business units—the business units are stunned with the amount of money they are expected to pony up for the central ERP solution. The business unit decides that it’s best to just pick up a tier-three solution for its needs at a quarter of its share of the costs of the tier-one solution.

  •  A company is expanding into a new line of business such as moving into an engineer-to-order (ETO) environment for one of its product lines. The total cost and time required to upgrade and implement changes to its tier-one solution may be more than those for a full tier-two, cloud-based implementation.

  • A company wishes to exploit best-of-breed system capabilities to support an unmet need in the organization. The company is not satisfied with the offerings of its tier-one provider and wishes to leverage the capabilities one of the smaller, more nimble tier-three providers on the market.

As R “Ray” Wang wrote in the introduction to a research report developed for NetSuite and included in its two-tier ERP strategy kit, “Two-tier ERP has emerged as a strategy to enable legacy optimization while reinvigorating the organization’s existing ERP systems.”

What are the options for a two-tier strategy?

There are a many different ways an organization could choose to implement a two-tier ERP strategy. The most common high-level view is that the tier-one solution resides at the corporate headquarters and acts as the hub ERP system. The tier-two or -three ERP solutions are then spoke ERP systems connected to the hub ERP system. A typical two-tier approach is to have the corporate sales and financials managed in the hub system and then satellite offices for sales or manufacturing managed within the spoke system(s).

Another method of implementing a two-tier ERP strategy might also be to use separate instances (and installations) of a tier-one ERP solution. In this case, the hub-and-spoke ERP installations are the same solution, e.g., SAP. However, the hub instance contains all the global or corporate business processes and then the spoke solutions support only the spoke business unit requirements (custom manufacturing operations, regional sales, and customer service support, etc.).

Is a two-tier ERP solution right for you? 

There are some potential benefits to moving toward a two-tier ERP strategy:

  • The organization might want to be nimble when spinning up additional divisions during global expansion.

  • The company can take advantage of best-of-breed functionality to support a new line of business.

  • The company can increase its negotiating position with the individual vendors by seeking price breaks. 

There are, of course, potentially serious downsides to the two-tier ERP strategy. Undertaking a two-tier ERP strategy without thorough research and planning could be even more disastrous than the problems the organization was trying to solve with it in the first place. An organization looking to move to a two-tier ERP strategy must not only be capable of handling data complexities, but also need to have strong corporate governance policies and procedures developed to manage everything from master data management (MDM), to financial consolidation, to HR policies and controls, just to name a few.

Here are key high-level issues that need to be looked at when your organization is considering a two-tier ERP strategy:

  • ERP software licensing fees

  • ERP platform and infrastructure maintenance costs

  • Personnel costs for maintaining multiple ERP solutions

  • Costs of integration between tier-one and tier-two/-three systems

  • Current and future business plans, e.g., growth, acquisitions, globalization

  • Business productivity or opportunity costs of tier-one–only solution

Though a two-tier ERP strategy needs to be thoughtfully undertaken, in the end, it may the best transformational IT decision that a company makes. The sheer volume of strong tier-two and tier-three ERP solutions available on the market, which are purpose built for specific lines of business, modes of manufacturing, services industry needs, etc., are nearly impossible to ignore. By implementing a two-tier ERP architecture, a company can realize both the benefits of a central hub ERP solution and those of line of business–specific ERP solutions.

Further Reading

NetSuite has a two-tiered ERP strategy kit that is available online. Though the kit was last updated in December of 2010, the information is still relevant.

Another interesting article is posted on the Cincom Manufacturing site, and gives lessons learned from the Gartner Supply Chain conference.
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