Tier 1 vs. Tier 2 vs. Tier 3 ERP: What’s the Difference, Anyway?

In the software industry, at least in the enterprise resource planning (ERP) segment, there is an implicit understanding of what is meant by tier 1, 2, and 3 vendors. Though the distinction may seem obvious, definitions of software vendor tiers are sparse. Those that exist vary from source to source and are mainly based on the vendor’s clients’ company size, the number of the vendor’s remote business units, and the vendor’s annual revenue. Nonetheless, it seems that the very short list of tier 1 ERP vendors is always easy enough to identify. Or is it?

Indeed, the most straightforward and useful way to distinguish different software vendor tiers is by the type of company they serve:

  • Tier 1 vendors serve large global businesses.

  • Tier 2 vendors serve mainly mid-market businesses.

  • Tier 3 vendors serve smaller-than-medium businesses.

Although some folks have alluded to the presence of a tier 4 software vendor, I don’t think this applies to the ERP space.

How to Distinguish the Different Tiers?

The distinction between tier 1 ERP products and vendors and their tier 2 and 3 competitors appears to be obvious.

  • Functional differences exist in scalability and related functionality of the software. Tier 1 solutions can scale up better that most tier 2 solutions. Similarly, tier 1 solutions provide a level of functionality that tier 2 and 3 solutions still don’t possess.

  • Tier 1 products were originally designed to address all possible requirements of large multinational corporations. In addition, the complexity of such software and required hardware are beyond the scope of an average mid-size and smaller business. In general, tier 1 solutions are more complex, and require more complicated hardware and high skilled information technology (IT) professionals.

  • As an inevitable consequence of the two previous points, differences in software pricing exist. Tier 1 solutions are more expensive than tier 2 solutions, and tier 2 solutions are more expensive than tier 3 solutions.

  • There are also “Business Differences” among the tiers:

    • Global presence versus regional or local presence: tier 1 vendors are more likely to offer support anywhere in the world, while tier 2 vendors are usually present in a limited number of countries or regions and tier 3 vendors are generally local and operate within one country.

    • Financial stability: tier 1 vendors have deep pockets, well-known brand names, and public images, which can be important for satisfying shareholders, or ensuring your customers and vendors that you are serious about your own business.

It’s Not So Clear Cut in Real Life

But in reality, the situation is much more complex. It turns out that the lines between tiers are getting blurred for reasons that have to do with the history and natural development of ERP systems. As tier 1 vendors got into business by addressing the needs of large organizations, ERP applications initially were prohibitively expensive and therefore affordable only to large businesses that were able to spend millions of dollars for such tools. But now, tier 1 vendors have been making a serious downmarket push toward significantly smaller clients: they offer simplified versions of larger products and versions for narrow market niches; they develop lower-level functionality packages; they offer more flexibility in pricing, maintenance, and support fees; and they offer new and more affordable ways for software delivery and principles of its utilization.

Meanwhile, the much more crowded tier 2 vendor segment has started to serve mid-market companies as well as push upmarket with ERP products that are increasingly powerful, scalable, and suitable for larger companies. This has made it even more difficult to distinguish between tier 1 and 2 vendors. While these solutions have a bit less functionality, they are way more flexible, affordable, easier to implement, and more user friendly—and have thus become a solid alternative to tier 1 solutions, even for larger enterprises. Recently emerged and quickly evolving, software-as-a-service (SaaS) and cloud computing initiatives are blurring the lines even more so. In addition, a large number of tier 2 and 3 vendors remain privately held and therefore less dependent on quarter share price results, which may allow for rapid software development and modifications, as well as for closer interaction with customers and direct interaction of the vendor’s software development team with customers.

Adding to the confusion is the fact that even global companies often provide a mix of tier 1, tier 2, and tier 3 solutions owing to a number of reasons:

  • Business processes: it’s often more cost-effective to have an enterprise level tier 1 system that consolidates data from, for example, regional tier 2 or 3 point solutions.

  • Legacy issues: as big companies acquire smaller companies, it's sometimes not feasible to move the acquired companies onto the parent company’s ERP system.

  • Return on investment (ROI) gains: sometimes it’s prohibitively expensive to run a global business on a single system.

  • Compliance issues: legal requirements at local and regional levels often make it impossible or too expensive to have one system to support all possible varieties of local markets.

And finally, at the small- and mid-market levels, it’s not an uncommon situation for companies that are expanding quickly or expecting explosive market growth in the near future to start small (i.e., with respect to implementation—few licenses, simplified functionality, etc.) with a tier 1 system than start with a tier 3 or tier 2 system and try to scale it. Such situations also contravene generally accepted tier clarity and introduce more uncertainty into the conventional understanding of software tiers and their clients.

So Is “Tiers” Still Useful?

Certainly. Tiers, real or perceived, provide a useful measure of a vendor’s scale and the capabilities of its software. But they’re only a starting point in the software selection process. Looking closely at a solution may reveal benefits you didn’t know were there, no matter what tier the solution is in.
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