Two-Tier ERP Suite Strategy: Considering Your
Options
Gartner RAS Core Research Note G00205287, Nigel Montgomery, 28 July 2010, RA1 01302011
Increasing numbers of companies are evaluating a two-tier ERP
strategy; running separate lower-cost regional solutions for
small-to-midsize subsidiaries, despite, in many cases, already
rolling out a global ERP system. Before deciding for or against a
tiered implementation, organizations must first consider the risks
and advantages.
Key Findings
These drivers stand out as reasons for considering a two-tier approach to ERP:
• Business change at the subsidiary level requiring formal systems ahead of expected global
ERP model rollout
• The need to consolidate numerous disparate ERP systems where one system is not
considered viable
• High cost and poor fit of the chosen global ERP system at the subsidiary level
• A 33%-plus reduction in implementation and support costs, and a 50%-plus increase in
implementation time is achievable, but most often with an in-house implementation team
• Companies that have adopted a two-tier strategy say they wish they had spent twice as
much time scoping the project and resolving master data issues
Recommendations
• If you are only considering a two-tier approach in the hopes of just saving on costs, stop
here. If you are basing your interest on finding an appropriate solution for your regional
subsidiaries, read on.
• A two-tier strategy is neither a business-led nor IT-led program. Successful companies
create a cross-functional, cross-business, inclusive project team to drive consistency and
acceptance; composed of their most respected, least dispensable employees.
• Second tier does not mean second- class. Two-tiers require as much executive support
as one-tier, plus continuity of support is critical.
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• As the number of systems increases, so do the costs. If
choosing a tiered approach, start from a premise of a single
second-tier enterprise-wide system. Resist multiple versions,
but accept the potential for multiple instances.
ANALYSIS
Accepted practice among companies with a large number of
international business units is to aim for a single global business
system configuration (often SAP or Oracle) in the smallest number
of instances – providing as many shared-services opportunities
across all business units as possible and the potential for a high
degree of governance. It is believed that this is the most costeffective, most reliable approach; boosted by “one throat to choke”
vendor control. As discussed in “A Tiered ERP Suite Strategy: Is It
Right for You?,” roughly 70% of companies surveyed in a recent
Gartner/AMR Research study, each with over 1,000 employees,
stated a desire to operate a single global ERP system.
Despite this preference, a number of factors are challenging this
position, driving increasing numbers of companies to consider
adopting a two-tier ERP strategy, where separate lower-cost
regional solutions are introduced for small-to-midsize subsidiaries in
addition to global ERP. The three most common factors are:
• In companies where the culture is to centralize IT, it takes so
long to achieve an international rollout that smaller operations
simply have to wait their turn. This can form a bottleneck as
these smaller operations often include subsidiaries in emerging
markets and in high-growth sectors that are growing fast and
need formal systems. An interim second-tier solution might be
an acceptable interim approach.
• When unacceptable support costs have arisen through
successive mergers and, acquisitions, and through historic
home-grown application development, resulting in the
accumulation of multiple-part or whole ERP suites.
• When the company is culturally or organizationally unable to
consolidate to a single system, but must consolidate to reduce
costs or increase information visibility,
Regardless of your reasoning, if you choose to pursue a two-tier
strategy, then you will be on a unique and risky, but potentially
rewarding, journey. No two companies have exactly the same
predicament or end up with the same two-tier scenario. The
information in this research cannot make the decision for you, but
can act as a guide to help you decide if a two-tier strategy is right
for your company, and can keep you on the path to success.
1.0 What Is a Two-Tier ERP Strategy?
Two-tier ERP is the use of different ERP systems at two different
layers of the organization: One system serves as the global
backbone, often for processes such as financials, human resources
and procurement, which can be harmonized across all divisions.
(This is often referred to as administrative ERP.) In addition to the
global backbone, one or more ERP solutions (or even reconfigured
instances of the same system) are used in parts of the organization
to support geographical subsidiary needs, usually for smaller
operational requirements, such as sales, marketing, field services or
local manufacturing.
The term “two-tier ERP” has been used for a number of years,
but is also referred to as “hub and spoke” or” multitier ERP.” It
should not be confused with a best-of-breed approach. The main
difference is that best of breed combines modules from various
vendors in an overall solution, where a two-tier strategy is the
combination of full ERP suites on different layers.
At one time, it was necessary to source the tiered solutions from
different vendors, but as the vendor market has developed,
consolidated and evolved over recent years, the same vendor
as the enterprise-level system is also a potential provider of the
second- tier solution. However, be mindful of integration challenges.
Do not assume that integration between systems will be “plug and
play,” even if provided by the same vendor.
2.0 ERP Deployment Options
To make the definition clearer, let’s look at potential ERP
deployment options. Regardless of whether the solutions are
on-premises, hosted or provided under a software-as-a-service
(SaaS) license, your deployment option is one of the most
important factors that can affect success and overall total cost of
ownership.
There are six common global deployment options for ERP where a
central administrative ERP system exists (see Figure 1).
2.1 Zero Tiers
The deployment Options 1 through 6 shown in Figure 1 denote
scenarios where a central core ERP system exists. However this
isn’t always the case. Very often, organizations will deploy regional
instances of SAP or Oracle, or sometimes both, without a central
ERP system and never plan to include one. An example might
be a large professional services company that uses corporate
performance management for central financial and management
reporting, but has a completely laissez-faire approach to all ERP. In
essence, this a no-tier approach and, while it is multi-instance, it is
not covered within the confines of this research.
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Figure 1. ERP Deployment Options
Zero Tier
Single Tier
Two Tiers
0
1
2
3
4
5
6
Subsidiary/
Regionally
independent
One core
centralized ERP
system; single
instance
One core ERP
system; multiple
instances,
including
regional
localization
One core ERP,
but another
solution from
same vendor
for subsidiaries
Allows single-tier
Option 2
solution from
another vendor
Creates limited
number of
solutions
approved
(2 to 3
alternatives)
Laissez-faire,
open-market
choice;
dependent on
reporting criteria
Source: Gartner (July 2010)
2.2 Single Tier – Options 1 and 2
These options are versions of a single-tier model. Option 1 denotes
a single instance of an enterprise solution with regional users
connected. Option 2 denotes two or more instances based around
a core administrative ERP (headquarters) solution. These separate
instances might, for example, be placed in the U.S., Europe and
Asia, and serve their respective markets. The main point is that
this is the same ERP suite, although different instances can have
variations for regional requirements and can be sized to meet
subsidiary needs. It’s effectively two tiers with one product and is a
popular approach to satisfy the regional requirements because of
the opportunity to create shared-services. An example of this is a
large U.S.-based process management and industrial automation
company that has two separate instances of Oracle Enterprise
Business Suite (EBS) – a large single instance and a separate one
it calls “Oracle in a box,” with slimmed-down processes for small
sales/distribution offices.
2.3 Two Tiers, Different Suites, Same Vendor – Option 3
This is the first deployment option comprising more than one
product – in this case, using a second solution for smaller
subsidiaries, but from the same vendor as the enterprise system.
An example might be using SAP Business Suite and SAP Business
One, or Oracle EBS and Oracle/JD Edwards EnterpriseOne, albeit
that customers with this configuration rarely come to light.
2.4 Two Tiers, Different Suite/Vendor, One Second-Tier
Version – Option No. 4
Where it is felt that the provider of the enterprise-level solution is
unable to satisfy the requirements for smaller subsidiaries, even
with its secondary solutions, the deployment option recognized as
the most effective two-tier approach is a single additional solution
from a different vendor to the enterprise solution, configured
for deployment to all subsidiaries that are unable to take the
enterprise-level global solution. In this configuration the enterprise
level system becomes the 1st tier, while the additional solution from
the new provider becomes the 2nd tier. The 2nd tier solution can
be deployed as one instance, or in multiple instances. An example
is Wuerth Group, which uses SAP Business Suite as its first- tier
solution and Microsoft Dynamics as its second tier. In this scenario,
Wuerth has configured its own version of Dynamics AX to satisfy
all of its subsidiaries, including the addition of some functionality to
enhance inventory control and business intelligence. It deploys this
version to each subsidiary requiring the second-tier solution.
2.5 Two Tiers, Different Suite/Vendor, Second-Tier
Shortlist – Option No. 5
In companies with a decentralized management structure, it
can be difficult to impose a single second-tier solution. In this
situation, many companies opt for creating a shortlist of two or
three acceptable solutions, where assessment has determined that
corporate governance rules can be upheld and integration costs
held down, while providing an element of choice to local regional
management (see Section 3.6).
2.6 Two Tiers, Laissez-Faire – Option 6
This scenario is what leads many companies to seek either a
single-system or two-tier ERP strategy in the first place. This
laissez-faire approach is not so much a strategy as it is a
predicament. It’s where many companies find themselves at the
outcome of numerous merger and acquisition exercises; inheriting
a wide array of different ERP solutions. Despite a corporate solution
at headquarters, regional subsidiaries are given no guidance or
control and simply deploy often localized or homegrown ERP
solutions based on local requirements. As with Option 5, this
approach often includes discrete second-tier solutions, but often
these are old versions that have been heavily modified. Information
transfer to the enterprise level is usually by file transfer, re-keying,
or there is no transfer. Needless to say, this option should not be
adopted without clear understanding of the implications, but you
may recognize it.
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3.0 Why Are Two Tiers Considered an Option?
It’s worth remembering that many companies are already in a
tiered situation where they have multiple ERP solutions through
mergers, legacy, etc. So, the issue is about getting to a clean twotier strategy by intent, rather than the random state companies
have found themselves in by default. As we’ve discussed, most
companies aim for as few instances as possible, and to become
as standardized as possible. Yet, in many cases, a single
instance may not be the right approach, despite the attraction of
centralization. Let’s examine some of the reasons why companies
consider a two-tier approach.
3.1 Cost Imperative
While conducting our research, one SAP customer cited dramatic
savings through adopting SAP Business One as its second tier
under SAP Business Suite. The smaller solution, which satisfies
135 users in its larger instances, costs each business unit 10%
of the support costs when compared to the first tier and can be
implemented in one-twentieth of the time of its enterprise-level
solution. This company’s operation in China is even more costeffective, at 22 times less cost, in part due to reduced service
costs.
This is attractive to CIOs who are under pressure to provide a
solution for smaller business units, but are already conscious of the
inappropriate size of the global ERP system for such small business
units. However, remember that one of the key drivers for singleinstance systems is cost reduction. You can’t have it both ways. If
you are approaching two tiers simply in the hopes of saving money,
then it’s unlikely to be the right move for you. While individual
business unit costs might look more attractive, adding additional
solutions increases the overall cost of future upgrades and adds to
potential governance risks. Upgrade efforts and associated costs
can run an additional 50% to 100% of the initial instance effort/
cost for each instance, depending on the amount of variation in
configuration and customization.
3.2 Manufacturing Plant Agility
Today’s multitier supply networks need real-time information to
profitably capitalize on market opportunities and mitigate risk. This
means shifting the definition of agility from flexibility in a centrally
engineered architecture to a configurable, model-based deployment
of distributed business processes for sites that are consistent
with a core enterprise model. At the plant level, incumbent ERP
and MRP II systems are challenged to live up to these new
expectations. Solutions tailored to the size of the business unit
can be seen to provide the agility required. But be careful what
you wish for. A tiered model might deliver more plant-level control
and agility, but at what expense? Synchronizing across the supply
network is complicated enough. Adding more complexity may
make things worse. You might be better reviewing the structure
of your current solution before embarking on adding additional
systems.
smaller business units, and there is excessive processing overhead
for smaller units. This creates resistance and ill-feeling against the
enterprise system, hence a view that a two-tier approach might be
a better fit.
3.4 Sledgehammer to Crack a Nut
Many companies rolling out a single global ERP solution configure
that solution to meet the needs of the vast majority of business
units – generally, the larger units, which account for the bulk of the
company’s revenue. They subsequently discover that this system is
too cumbersome for smaller business units, which often consist of
fewer than 50 users. Furthermore, a global template, once thought
to be the only way for companies to achieve consistency across
the business, often takes three to five years longer to roll out than
originally predicted. This means that smaller, but growing, units
(such as those in Asia and South America) are forced to implement
a different system ahead of any global rollout.
While certainly a reason why CIOs and CFOs look to a two-tier
strategy, this is really a poor design and change management
issue, and suggests greater underlying issues. It’s also part of the
decision process when considering a single instance. Companies in
this situation either made the wrong decision or don’t have the right
change management systems in place. Before deciding on two
tiers, it is wise to first fix this issue.
3.5 Connecting the Enterprise
The same fallacy lies in the belief that by adding additional tiered
ERP solutions, the enterprise can somehow be connected and able
to gain visibility across the business.
According to a recent Gartner survey, the percentage of employees
licensed and using the ERP system among companies that have
deployed “so-called” global solutions is still less than 50%, so
there is some merit to the notion that the rest need connecting
(see Figure 2). Yet, few subsidiaries have nothing at all. Most have
some sort of system to control the business. Adopting two tiers
and replacing the system with something more robust will not, in
itself, solve the visibility issue and will not “connect” the business.
On the contrary, it creates greater master data alignment issues
and presents increased business intelligence and financial reporting
issues (see Section 4.8).
3.6 Business Transformation Opportunity
3.3 Fully Loaded
Everyone in the business is acutely aware that times are tough
and that there is a need for prudence. Now is the perfect time to
push transformational change, particularly where it involves groups
that ordinarily have their own IT budgets and choices. One of the
common motivations for a single-vendor/single-instance strategy
is a desire by senior management to undermine the power and
autonomy of country managers, division managers or brand
managers. But where this isn’t possible, then a controlled two-tier
ERP strategy can deliver some of the benefits of centralized control
and governance. It might even form the platform for a later singlesystem consolidation.
Companies seek to fully load each division that uses its
corporate systems with the cost of shared services and licenses/
maintenance, etc. However, this can prove too expensive for some
The problem with a two-tier approach is that it tends to perpetuate
the “every man for himself” culture, unless it is formalized at a
5
Figure 2. ERP License Deployment
U.S.
Number of Employees
Germany
Brazil
China
< 1,000
1,000+
< 1,000
1,000+
< 1,000
1,000+
< 1,000
1,000+
Percentage of employees
licensed for ERP
54%
43%
48%
39%
48%
54%
35%
33%
Percentage of ERP seats
unused
5%
10%
16%
24%
34%
24%
19%
23%
Number of respondents
40
37
57
16
41
39
41
38
Source: Gartner (February 2010)
corporate level as an official “managed” strategy. This is the reason
that companies choose the smallest digit achievable when selecting
between Options 1 through 6. Plus, all the companies we spoke
with during our research cited the importance of executive-level
support for a two-tier strategy. Without it, none of the options will
prove successful.
The perceived reduced costs to the subsidiary of the secondtier solution certainly adds weight to the argument for change
when talking to local management, but it doesn’t solve the
underlying issue of “fiefdom centricity,” which may have been
why the company has not solved the issue before. Besides, the
same argument of cost savings stands for Options 1 and 2, and
economic prudence is probably a stronger argument for a more
centralized approach.
While providing choice, satisfying criticisms from local business
units and speeding deployment, a two-tier option can reduce the
benefits of joint development, and can make upgrade version
control challenging,
Two tiers can work well when a company has several different
franchise-based regional entities, where control is not dictated from
the center.
3.7 Mergers, Acquisitions and Growth
At a time when many companies are suffering and company
valuations are low, it’s a good time for aggressive companies to
expand into new market segments and/or regions, or to acquire
weaker opposition to increase market share. Having done so, many
companies find that their global ERP solution is not configured to
easily accommodate the new business requirements. Two tiers
can be a way to quickly integrate new business units, whether
permanently or as an interim measure.
3.8 Value Perception
According to studies by Gartner, just 37% of companies actually
measure the business value from their ERP projects. This lack of
value definition leads the business to poorly value ERP; prompting
a reduction in commitment and pressure to reduce running costs.
Some companies take the view that a two-tier approach not only
satisfies the need to keep subsidiary costs down, but also provides
a basis from which to measure key performance indicators at
the subsidiary level. In reality, this has little to do with two-tier. A
single-instance deployment could achieve the same result. The
value perception issue is very real for many companies. The fact
that any strategy is being sought is a positive sign. What is key is
ensuring that key performance indicators are monitored, regardless
of deployment option. Without tangible value recognition, it will
become increasingly hard to further develop any global strategy,
regardless of which option you select.
3.9 The Lure of SaaS
An acceleration factor in the exploration of a two-tier strategy as
a deployment option is the enticement of potential cost savings
offered by SaaS-delivered solutions that challenge existing
licensing, delivery and payment structures. SaaS lowers the entry
barrier for smaller units to buy and deploy ERP without huge
upfront investment in licenses or hardware. There are a number of
major attractions to SaaS as a two-tier solution:
• Negotiation pressure – Including a SaaS-delivered solution in a
selection list puts enormous pressure on traditional on-premises
providers and can have an advantageous effect on pricing
negotiation.
• Low upfront cost and budgetable monthly fees – Because
SaaS is a service, licenses are structured on a pay-per-use
basis, with a reduced upfront cost and monthly fees. This
means that payments are not held in the accounts in the same
way, which can be advantageous if there is limited capital
available. It is also favored by the CFO because monthly fees
can be budgeted. On-premises implementations tend to incur
upgrade surprises every now and then.
• Reduced in-house resource requirement – Because the
solution is hosted by the vendor, there is a smaller impact on
local IT resources – attractive to regional subsidiaries which may
have limited resources or skills.
• Reduced downtime due to upgrades – With SaaS, upgrades
are performed by the vendor. Although there is some potential
service impact for users, most of the upgrades are done out of
sight and out of most users’ minds.
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• Scalable processing and storage capability – As a hosted
service, the solution is not governed by in-house storage or
processing constraints.
• Greatly reduced hardware/infrastructure requirements – In
the same way, hardware requirements are greatly reduced,
although some desktop upgrading may be required to make the
most of the system features.
So, what’s the problem? For one thing, most pure-play SaaS
ERP solutions have yet to reach maturity for global deployment.
Most have yet to deploy sufficient resources to meet global
needs, and have yet to incorporate localized requirements. In
addition, some countries do not have a stable communications
infrastructure, which either increases costs to provide connectivity
to the hosted system through satellite connection, etc., or means
that deployment is restricted to countries where connection is
satisfactory.
3.10 Divestiture
SaaS within ERP remains a relatively small proportion of the overall
ERP market, at approximately 6% of the total market in 2009,
according to “Forecast Analysis: Software as a Service, Worldwide,
2009-2014.” But its availability has prompted most of the traditional
ERP vendors to offer a choice of deployment options between
on-premises or hosted, with licensing structured on a service basis.
Many companies like the fact that they can change course and
insource the solution, should they wish to do so. It’s particularly
important in divesting parts of the company. In reality, not many
companies make the switch from SaaS to on-premises, but until
SaaS ERP has been operating for a number of years, benchmark
costs are hard to come by so keeping your options open makes
sense. That said, pure-play (multi—tenant) SaaS offers the newly
divested company a near-instant-on solution at a time when
implementing on-premises might not be favored. In future research,
we will look at the growth of SaaS ERP and the vendor landscape
it attracts.
4.0 Considering Your Options
Assuming you choose to evaluate a two-tier strategy, there are
a number of factors to take into account when considering your
deployment approach. Each factor should be considered against
the preferred deployment options to minimize risk to your business.
Figure 3 provides guidance collected from client interviews during
the past 12 months related to a number of key factors, and
assesses the potential for risk based on each factor, across the
potential vendor community.
4.1 Availability of Resources
While there is no suggestion that resources will be a challenge
across all but the laissez-faire local option – where you would
expect local resources to be in evidence – there are varying risks
across all options. In single-tier scenarios, the biggest risk is local
industry-level expertise and the potential need to engage the
vendor’s partner community in order for the vendor to provide
regional coverage. The risk here is continuity and guidance. You
want to guard against training the very people that are supposed to
be guiding you. You also don’t want a “blame culture” to develop,
in which different parties hand off fault. It’s difficult (costly) for
vendors to maintain strong industry depth in all regions. Pockets of
strength are often dependent on the history of the ERP products
concerned.
Guidance: A number of customers estimated it took two to three
times the amount of people to support their SAP implementations
compared with their second-tier solutions. A customer using SAP
as its core system and Microsoft Dynamics as its singular secondtier solution is rolling out Dynamics AX to 65 countries with just 15
people on the implementation team. However, this is only because
it kept customizations to a minimum so as to not stray too far from
“the upgrade path.” So, if you decide for two tiers, keep the scope
very tight.
The same customer advised others following this approach to keep
close to the Microsoft development team as an invaluable source of
knowledge. Additionally, the depth of system understanding (knowhow) required was much greater with SAP.
As an aside, the customer did advocate licensing relevant add-ons,
rather than building custom apps, as these are generally wellintegrated into the AX core infrastructure.
Further Guidance on Resources – At the beginning of the project,
identify and meet the project manager to ensure a cultural fit and
build a picture of where the vendor will be sourcing expertise for
your project. You might also want to think about penalties if project
team members leave before the end of the project.
4.2 Duplication of Effort/Process Overhead at
Subsidiaries
One of the strengths of the single-tier approach is that the
company can implement shared services throughout the
organization, removing duplicate effort, process and the risk to
quality. This is harder to replicate in a two-tier model, and gets
worse the more systems you have.
Guidance: Unless you can identify and reduce these two issues,
two tiers is unlikely to be a valid approach for your business
because costs and performance will be negatively impacted.
Regardless of the deployment option, a cross-business project
team should be convened to drive consistency and to look for
shared-services opportunities or, at worst, shared process/
workflow, to leverage best practices wherever possible. The people
on this team need to be given proper support and time to devote to
this task, rather than just having it added to their list of other things
to do. Otherwise, there’s a danger of them dropping the ball or not
paying close enough attention. This team becomes your business
application competence Center or center of excellence(COE),
depending on your terminology, postimplementation.
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Figure 3. Risks and Advantages of Two-Tier ERP Deployment Options
Source: Gartner (July 2010)
4.3 Partner Involvement
Partner involvement should not be considered a negative. In some
situations, it is preferable because partners are often focused on
specific industries or regions, and can provide additional solutions
to expand the core by reducing or removing customization. But
partner involvement may not be a choice. Many Tier 1 vendors
work directly in core geographic regions or above certain customer
revenue or employee thresholds, but also work through partners in
other regions or when dealing with smaller companies. You can see
the challenge – for large organizations seeking a two-tier approach,
the relationship is likely to be with the enterprise vendor, yet the
skills and solutions for the second tier lie with the partners. Marrying
the two can be challenging. It is also worthy to note that even
where partners are assigned for the enterprise solution, they may
not have expertise in the second-tier solution, even if it is from the
same authoring vendor. Thus, you may have to work with a new
partner. This can increase risk unless it is coordinated. An example
is SAP Business Suite and SAP Business One. In most cases,
Business One is provided through a different partner channel, and
while many partners work together, it is still a different skills base
that does not know your specific circumstance.
Guidance: If you only want to work with one vendor, then a twotier strategy may not be for you. Partner involvement is unlikely to
prevent a successful two-tier implementation, quite the contrary,
so don’t be put off two tiers by the inclusion of partners. Find out
early who will be your implementation partner, and if the partner
is different from that of your enterprise solution, evaluate carefully
to ensure that the skills are deep enough. Also, remarkably,
many of the larger vendors may not have extensive visibility into
partner solutions available for your specific industry or process
requirements. Taking time to learn what is available through the
partner community, and how these solutions integrate to the core,
can save you money and time, and often reduces customization
requirements to less than 5% of the overall functional fit.
4.4 Need For External Services
At a recent Gartner SAP Peer Forum, 20% of members said that
a two-tier strategy was either important or very important to their
business. Although a minority, it is a significant number among
such large companies. Interestingly, when asked about their
experience with two tiers, most of the members said they were
relatively inexperienced. This could suggest that, with guidance,
more companies would take a two-tier approach, but it also
highlights the importance of experienced external services.
As you extend across the deployment options, it can often mean
working with smaller providers, many of which do not have
business transformation expertise; they simply implement products.
Finding external management consultants that also understand the
intricacies of the local solution can also be a challenge. The higher
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the option number, the more likely that the vendor relies heavily on
direct services and the less likely you are to find third-party service
providers with product knowledge.
inventory or demand is also hindered, and there is likely a latency of
financial information and an inability to coordinate service to global
customers, etc.
Guidance: If you do not want to use external resources, then a
two-tier approach is unlikely to be right for your company. Finding
external resources with a deep understanding of two-tier strategy
is not easy. Regardless of whether you will keep them in reserve
for emergency coverage or to help you transform your business
processes, before you select the system, it is worthwhile identifying
two to three larger system integrators covering your regional
requirements, business solutions and industry, and to clearly
understand what experience the vendor brings. In other words, ask
for details from each team member.
A cost that is often overlooked and underfunded is training. An
SAP Business One customer (running SAP Business Suite as its
core ERP) commented that the benefit of using SAP Business One
at the second tier was that, as its global model rolled out, and
they replaced Business One, the migration of users from one to
another was more of a delta than a retraining exercise. However,
this customer also commented that it takes its business units two
to three years running Business One before they have matured to
a point where they can accept the complexity of the SAP Business
Suite system.
4.5 Purchasing Power
This same customer, commenting on costs, said that the running
costs for its Business One implementations were one-half to onethird that of its enterprise system, and took half the man-days
to implement. As for implementation time, the enterprise system
takes nine to 12 months to implement in each subsidiary, but its
Business One solution could be rolled out in three to six months.
The customer had considered an “ERP lite” approach, using SAP
All-In-One or a cut-down version of its corporate system, but the
effort was deemed too great. SAP Business ByDesign had also
been evaluated, but it was considered as little value because the
organization already has its own data center.
It’s a known fact that the more you put in the pot, the stronger
your buying power. But that all depends on with whom you are
negotiating on the pots contents. Negotiating with your enterprise
vendor for small subsidiaries may not provide much bargaining
power, not least because the implementation services may go
to a partner. You may be better off negotiating with the partner.
Additionally, Options 4 through 6 are likely to present a handsome
opportunity to the vendors of solutions for the second tier.
Guidance: If selecting Option 3, ensure you match any negotiation
with the enterprise vendor with that of a leading reseller to see
which provides a better deal. For Options 4 through 6, ensure
that you understand where the vendor will recognize its revenue. It
may be best to negotiate in the region where most of the vendors
revenue will be recognized.
4.6 Cost to Subsidiaries
Many companies with one ERP solution seek to fully load each
business unit with a share of underlying technology infrastructure
from an accounting perspective. This can sometimes put
disproportional costs on smaller units for the value derived. This
increases the attractiveness of a two-tier approach.
A customer using Epicor’s iScala solution as its multiple-instance
second-tier solution globally (with SAP Business Suite at the core)
commented that its slightly modified iScala solution is providing
up to 95% of the functionality delivered by the enterprise system,
but at one-third the cost. Another customer using Microsoft
Dynamics AX solution at the second tier, again with SAP at the
core, estimated that 80% of the functionality that would have been
delivered by its enterprise system was provided out of the box by
AX.
Guidance: Beware of diminishing returns through Options 4 through
6, as central developments can no longer be applied to disparate
systems. It’s important to focus on these costs to the corporation,
not just the subsidiaries. While subsidiaries may have lower costs,
often the corporate system budget has to absorb the integration
costs to the subsidiary’s systems – it’s a cost-shifting issue. If
corporations had a more reasonable cost allocation strategy,
then this would not be an issue, but most large companies are
quite rigid. The corporation is also losing the benefit of integrated
systems, which themselves are a cost. Information visibility to
When comparing support costs, a company using Microsoft
Dynamics AX as a second-tier solution commented that while
SAP’s support was considered better value than that delivered by
Microsoft and its partner, there was a premium of approximately
5% higher cost to obtain that support.
Guidance: Work with the vendors to build a cost model of each
deployment option before proceeding, and highlight, through the
COE, where savings can be made through sharing solutions. This
can often sway stubborn business unit leaders into a common
second-tier solution or even Option 1 or 2. Also, don’t assume
that the two-tier solution will have all the localization required. One
customer, which chose to deploy a popular second-tier solution for
its subsidiary company’s (with SAP as the core ERP), found only
one in 18 subsidiary systems was delivered localized out of the
box. The rest required additional localization. That said, this was
before the vendor in question updated its solution. Regardless,
inbuilt localization should not be assumed.
4.7 Vendor Stability/Ongoing Support
End-user organizations often agonize over the future viability of a
vendor. But the actual product is what impacts your business, and,
while they can be intertwined, measuring the viability of a product is
a different matter.
Guidance: There are different risks with each vendor. It’s fairly
obvious that Option 6 exposes you to a higher risk of the failure
of smaller vendors. The more centralized approach generally
means dealing with a bigger, more viable vendor. Yet history has
taught that even the largest vendors can be susceptible to failure.
Therefore, carry out due diligence on each vendor in your proposed
solution. Do not proceed with a two-tier approach without this due
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diligence. Do not assume that because the vendor is well-known
that it doesn’t have any problems. Conversely, don’t look at each
smaller provider as a time bomb waiting to fail. You are at just as
much risk from a small vendor growing ahead of its ability to service
its clients as you are of it failing. The greatest likelihood of change is
that of ownership.
4.8 Governance and Ability to Achieve Master Data
Management Goals
One of the most challenging aspects of a tiered-ERP model is the
ability to ensure that governance structures are maintained across
the business. This challenge is one of the reasons many companies
opt to develop a global second-tier solution (Option 3 or 4), as
this provides the strongest governance centralization in a two-tier
model.
Guidance: If you choose a two-tier approach, then this is your
most critical consideration and is your biggest risk of failure. Unless
you have the competence to align your master data and maintain
governance control, do not pursue two tiers. You may also find
that this is where you will need external resources. Use the COE
to identify, implement and maintain governance controls. When
we ask companies to pass along guidance for others, governance
and master data management (MDM) are the two areas most
highlighted. Companies express that, if doing it again, they would
spend twice the allotted time on the scoping and design phase to
ensure that they entered the implementation with these two issues
resolved.
Right to Reputation – Also consider data protection issues
related to multiple system/instance deployment and your corporate
governance. An example is China’s right to reputation.
1 July 2010 was an important day for international companies
operating in China, although they may not have noticed. It was
the date the new Tort Liability Law came into effect. Prior to that
date, there was little countrywide legislation, and what there was
caused more confusion than clarity. Now, the law has recognized
an individual’s right to privacy as a civil liberty to add to the “right
to reputation” that had already been established through its courts.
All the implications are not yet clear, but for the purposes of your
two-tier decision, you need to consider where you need to process
personal data and where you intend to send it. A multi-instance
strategy, whether tiered or not, might seem to be easier than a
single-instance strategy, because then the data stays within the
region. However, this might turn out to be very costly in terms
of infrastructure when, in fact there may be no infringement. For
example, the U.K. Data Protection Act states:
“Personal data shall not be transferred to a country or territory
outside the EEA unless that country or territory ensures an
adequate level of protection for the rights and freedoms of data
subjects in relation to the processing of personal data.”
The EEA countries are Austria, Belgium, Bulgaria, Cyprus, Czech
Republic, Denmark, Estonia, Finland, France, Germany, Greece,
Hungary, Iceland, Ireland, Italy, Latvia, Liechtenstein, Lithuania,
Luxembourg, Malta, Netherlands, Norway, Poland, Portugal,
Romania, Slovakia, Slovenia, Spain, Sweden, U.K.
This means you can pass data freely within these countries, as
each has agreed to enforce strong European Union (EU) protection
laws and companies operating in these countries follow these laws.
Outside these countries, you may need specific and individual
agreements in the countries and among parties.
See the Information Commissioners Office website for further
details. Also, review the EU Privacy Directive 1995/46/EC for the
detail related to data protection within the EU.
4.9 Ability to Localize, Version Control/Upgradability
The higher the option number, the higher the risk of not being able
to easily upgrade to accommodate new business requirements,
but the easier it can become to produce a localized version, and
thereby exacerbate the upgradability issue.
Guidance:
• Implement second-tier solutions as close to “vanilla” as possible
(i.e., absolute minimal changes), ensuring that each deviation
is documented in as much detail as would be required by
someone new to the project to understand.
• Localization and upgradability is where the COE earns its
bonus as it becomes the “modification police.” Ensure that
every localization requirement is passed through the COE,
and mandate the COE to stringently assess each request
and to refuse changes wherever possible. Make it extremely
troublesome for business units to make requests. Endless form
filling seems to do it.
4.10 Connectivity
Care should be taken with regard to communication and to
the danger of over-engineering your network infrastructure and
connectivity. If asked, most business units would like high-speed
connections to all parts of the business. That is, until they are
required to pay for those connections. Then, miraculously, they find
that they only need to receive and send data by file transfer on a
weekly basis. While connectivity is becoming less of an issue, the
reality is that some business units are unable to receive guaranteed
service. As a result. a SaaS or even regionally hosted model
may not be practicable. This is where many traditional vendors
provide the most strength – in their ability to provide their solutions
on-premises or hosted (including SaaS), as discussed previously.
Guidance: There is little point to evaluating second-tier solutions
until you have established your network architecture and
connectivity requirements and constraints. Many subsidiaries may
not require real-time integration. Either way, you need to develop
your own infrastructure map depending on your regional needs.
Without it, do not proceed.