Understand the Deployment Options for a Two-Tier ERP Suite Strategy

15 May 2013 ID:G00237583
Analyst(s): Nigel Montgomery

VIEW SUMMARY

Adopting a two-tier ERP strategy can dramatically reduce regional business unit implementation times, provide greater agility and improve operational costs. CIOs understanding its definition, the rationale for selection and the diverse deployment options is key to a successful implementation.

Overview

Key Challenges

  • Changing business priorities at acquired or fast-growing subsidiaries can hasten the need for local systems ahead of an achievable global ERP model rollout.
  • High implementation and support costs, along with diverse and complex processes, can often prevent the use of a global ERP solution for small subsidiaries (those with fewer than 200 employees).
  • Corporate IT functions have no mandate to force ERP standardization in a decentralized ERP landscape.
  • When considering a two-tier ERP approach, in their rush to select a solution and show forward momentum of the project, organizations frequently fail to identify the most appropriate deployment options for their needs.

Recommendations

  • Establish a clear understanding of what a two-tier ERP strategy encompasses.
  • Develop a clear understanding of the deployment options and scenarios available, and identify those that are most desirable.

Table of Contents

Introduction

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-service opportunities across all business units as possible and the potential for a high degree of governance. It is believed that this is the most cost-effective and most reliable approach; boosted by "one throat to choke" vendor control. As discussed in "How to Determine If a Two-Tier ERP Suite Strategy Is Right for You," roughly 70% of companies surveyed in a recent Gartner 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 can take a long time to achieve an international rollout; meaning 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 which can require formal systems to meet fast-changing business circumstances. A second-tier solution might be an acceptable interim approach.
  • When unacceptable support costs have arisen through successive mergers and, acquisitions or through historic homegrown 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 rationalize to reduce costs or increase information visibility.

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 it can act as a guide to help you determine the most favorable deployment options to adopt for success.

Analysis

Defining 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 administrative ERP processes such as financials, human resources and procurement, which are able to be harmonized across all divisions as shared services. 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 and local manufacturing.

The term "two-tier ERP" has been used for several years, although it is also referred to as "hub and spoke" or "multitier ERP." It should not be confused with a best-in-class approach. The main difference is that best of breed combines modules from various vendors in an overall solution, whereas 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 developed, consolidated and evolved during recent years, the enterprise-level system vendor 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.

To add to the confusion over terminology, even the second tier, as used in a two-tier strategy, can be misleading. Some companies require more than one additional tier — effectively, a multitiered strategy. Some subsidiaries may require another tiered solution below the second tier, particularly in distribution and retail industries, where an even smaller system may be required to support, for example, franchisees. For the purposes of simplicity, our use of the term "two-tier ERP" encompasses these multitiered solution scenarios, because the strategy determination, governance requirements and selection process are common. In other words, selecting a two-tier approach means that you accept the possibility of a multitiered deployment requirement. It's all in the requirements definition. For more on two-tier ERP in the context of other IT priorities, see "Hype Cycle for ERP, 2012."

Understanding Your 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 (see "Ten Factors That Can Affect ERP Total Cost of Ownership").

Figure 1. ERP Common Deployment Options
Figure 1.ERP Common Deployment Options

Source: Gartner (May 2013)

Options 0 and 1 — Zero Tier

Deployment Options 2 through 7, shown in Figure 1, denote scenarios in which a central core ERP system exists and likely some shared services are implemented across the business. However, this is not always the case. Sometimes, organizations deploy regionally, divisionally or even by single business unit, without a central ERP core system, and never plan to include one. This zero-tier approach ranges from complete business unit independence (see Option 0 in Figure 2), with no integration at all except for occasional file transfer to enable basic financial consolidation to a synchronized model, see Option 1 (see Figure 2) where organizations synchronize between business units to varying degrees, and utilize corporate performance management and consolidation tools for central financial and management reporting, yet stick with a heterogeneous approach to ERP. An example of this zero-tier/Option 1 model might be a holding company. Option 0 could be considered as having no strategy at all. It is often the starting point of consolidation efforts.

Note: The critical factor is not the deployment combination, but the positive act of deciding and acting on the choices as part of your ERP strategy.

Figure 2. ERP Deployment Options 0 and 1
Figure 2.ERP Deployment Options 0 and 1

Source: Gartner (May 2013)

As can be seen in the pictorial view for Option 1 in Figure 2, some of the independent business units may choose to utilize the same solution and may synchronize their databases in order to share inventory and planning information, while other business units have less need to share real-time data and will operate much more loosely connected deployments with different solutions.

Options 0 and 1 are deployment models that are often the basis for calls to consolidate, because the cost of support and maintenance can be excessive, while control is minimal.

However, one federated approach can be effective as a long-term zero-tier strategy. This is where each business unit uses its own instance of a templated or closely configured solution, deployed by the corporate organization. The organization then synchronizes each database, providing information transparency throughout the organization. Upgrade and maintenance costs can be reduced and change management control can be instigated, especially if all the instances are housed within a single data center; otherwise, each business unit requires its own infrastructure. Not only does this increase support costs, but it also risks the local business unit tampering with the solution. For additional detail on related instance strategies (e.g., loosely coupled ERP), see "Determining the ERP Suite Strategy for a Newly Merged Enterprise."

Options 2 and 3 — Single Tier

These options are versions of a single-tier model. Option 2 (see Figure 3) denotes a single instance of an enterprise solution with regional users connected. Option 3 (see Figure 3) denotes two or more instances of the same product 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 using one product and is a popular approach to satisfying regional requirements, because of the opportunity to create shared services and still centralize the control. 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 instance the customer calls "Oracle in a box," with slimmed-down processes for small sales/distribution offices.

Figure 3. ERP Deployment Options 2 and 3
Figure 3.ERP Deployment Options 2 and 3

Source: Gartner (May 2013)

Option 4 — Two Tiers, Different Suites, Same Vendor

Option 4 (see Figure 4) 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's JD Edwards EnterpriseOne, albeit customers with the latter configuration rarely come to light.

Figure 4. ERP Deployment Option 4
Figure 4.ERP Deployment Option 4

Source: Gartner (May 2013)

Option 5 — Two Tiers, Different Suite/Vendor, One Second-Tier Version

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 provided by a different vendor from the one providing the enterprise solution (see Figure 5), configured for deployment to all subsidiaries that are unable to make use of the enterprise-level global solution. In this configuration, the enterprise-level system becomes the first tier, while the additional solution from the new provider becomes the second tier. The second-tier solution can be deployed as one instance or in multiple instances.

Figure 5. ERP Deployment Option 5
Figure 5.ERP Deployment Option 5

Source: Gartner (May 2013)

Option 6 — Two Tiers, Different Suite/Vendor, Second-Tier Shortlist

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 an 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 Figure 6).

Figure 6. ERP Deployment Option 6
Figure 6.ERP Deployment Option 6

Source: Gartner (May 2013)

Option 7 — Multiple Tiers, Laissez Faire

This scenario (see Figure 7) 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 mergers and acquisition exercises; inheriting a wide array of different ERP solutions. Despite having a corporate solution at headquarters, regional subsidiaries are given no guidance or control and often simply deploy localized or homegrown ERP solutions based on local requirements. As with Option 5, this approach often includes discrete second-tier solutions, but these are often old versions that have been heavily modified. Information transfer to the enterprise level is usually by file transfer or rekeying, or there is no transfer. Needless to say, this option should not be adopted without a clear understanding of the implications, but you may recognize it.

Figure 7. ERP Deployment Option 7
Figure 7.ERP Deployment Option 7

Source: Gartner (May 2013)

Regional Versus Global

The explanation of two-tier ERP deployment options within this research infers that the two-tier ERP approach will be global (i.e., across the entire company), and that the second tier follows the initial installation of a first tier. This also infers one core ERP solution. The research is presented in this way to present each tiered deployment option in an easy-to-understand form. But it is not the only viable approach.

Depending on the scenario facing an organization, it might decide on a split or hybrid approach, possibly determining that one part of the business should opt for a central core ERP with subsidiaries either residing as a node on the core instance or using a separate ERP supplied by the same company (Option 4), while another division is deployed with a federated deployment, as described in Option 1 (see Figure 8).

Figure 8. Hybrid Deployment Model
Figure 8.Hybrid Deployment Model

Source: Gartner (May 2013)

This type of split or hybrid strategy is common when different parts of the business have little process/functional crossover between divisions or where a company's organizational structure is such that there is not a mandate to force consolidation across the entire business. It is also possible that companies will choose to implement the second tier before the rollout of the core global solution; thus, a company may be single tier regionally, but federated globally. The key is that this should be decided as a strategy, not as an after-thought.

The Rationale for Considering Two Tiers Over One

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 two-tier 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.

Cost Imperative

One company we spoke with during our research cited dramatic savings through adopting a two-tier ERP approach. The smaller solution, which satisfies 135 users among its subsidiaries, 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 the enterprise-level solution. This company's operation in China is even more cost-effective, at 22 times less cost, in part due to reduced service costs.

These sorts of results might seem attractive to CIOs who are under pressure to provide a solution for smaller business units and are already conscious of the inappropriate size of the global ERP system for such small business units. It seems to contradict one of the key drivers for single-instance systems — IT cost reduction. Sadly, you can't have it both ways. If you are approaching two-tier ERP simply in hopes of saving IT costs across the organization, then you are unlikely to be successful. Although the cost to the individual business unit might look more attractive, adding more solutions increases the overall cost of future upgrades and adds to potential governance risks. It also adds cost, albeit a fraction of the cost of supporting the first tier. Upgrade efforts and associated costs can run an added 50% to 100% of the initial instance effort/cost for each additional instance, depending on the amount of variation in configuration and customization (see "Centralized ERP Lowers Total Cost of Ownership, but Cost Is Only One Consideration for Instance Decisions" [Note: Some documents referenced in this research have been archived; some of their content may not reflect current conditions.]).

However, this overall additional cost might be worth it because it means that the local business unit can operate unimpeded, potentially benefiting from increased business revenue that equates to many times the increase in IT costs for the tiered solution. This is why it is critical that a two-tier ERP strategy not simply be seen as an IT exercise. Without the benefit realization at the business unit level, the undertaking will simply add costs to the IT budget.

Manufacturing Plant Agility

Today's multitier supply networks need real-time information to profitably capitalize on market opportunities and mitigate risk (see "Opportunity Response Optimization: Making Money by Design Rather Than by Accident"). 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 manufacturing resource planning (MRP) systems are challenged to live up to these new expectations. Solutions tailored to the size of the business unit can provide the agility required (see "A New Approach to Plant-Centric ERP" and "Develop and Manufacture Anywhere to Reach Global Markets and Optimize Product Supply Networks"), 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.

The Weight of a Fully Loaded Approach

Companies seek to fully load each division that uses its corporate systems with the cost of shared services and licenses, maintenance, support, etc. However, this can prove too expensive for some smaller business units. It also creates resistance and ill-feeling toward the enterprise system, hence the view that a two-tier approach might be a better fit.

Using a Sledgehammer to Crack a Nut

Companies that are rolling out a single global ERP solution often configure their solution to meet the needs of the vast majority of business units — generally, the larger units, which account for the bulk (70%-plus) of the company's revenue. Such companies subsequently discover, and are somehow surprised to learn, that the configured system is too cumbersome for their smaller business units, which often consist of fewer than 30 to 50 users each. The process and support overhead caused by implementing a complex single ERP system in these subsidiaries can reduce overall productivity and significantly hinder the smooth operation of smaller business units.

Even if smaller subsidiaries were considered within the global template, rollout often takes three to five years longer than originally predicted. This means that smaller, but potentially growing, business units (such as those in the Asia/Pacific region and South America) have little prospect of receiving the solution for five to seven years and, therefore, are forced to implement a different system ahead of any global rollout.

Business Transformation Opportunity

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 on the part of senior management to undermine the power and autonomy of country managers, division managers and/or brand managers. 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 single-system consolidation (see "ERP Consolidation: Convincing Others Requires 'the Art of War'").

The problem with a two-tier approach is that it has a tendency to perpetuate an "every man for himself" culture within subsidiaries. Unless a two-tier strategy is formalized at a corporate level as an official managed strategy, it can undermine overall control and the savings that consolidation can provide. It is for this reason that Options 3 and 4 are the most selected two-tier deployment options. Additionally, all the companies we spoke with during our research cited the importance of executive-level support for a two-tier strategy, regardless of company size and/or complexity. Without it, none of the options will prove successful.

The perceived reduced costs to the subsidiary of the second-tier 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 be why the company has not solved the issue sooner. 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 also work well when a company has several different franchise-based regional entities, where control is not dictated from the center.

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.

Value Perception

According to studies by Gartner, just 37% of companies actually measure the business value from their ERP projects (see "How Do You Expect to Get Value From ERP If You Don't Measure It?"). This lack of value definition leads the business to poorly value ERP; prompting a reduction in commitment and pressure to reduce IT 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 the adoption of a tiered strategy. 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 to ensure that key performance indicators are monitored, regardless of deployment option. Without tangible value recognition, it will become increasingly difficult to further develop any global strategy, regardless of which option is selected.

The Lure of SaaS

An acceleration factor in the exploration of a two-tier strategy as a deployment option is the emergence of 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, including:

  • 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 negotiations.
  • 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 requirements — Because the solution is hosted by the vendor, there is a smaller impact on local IT resources — this is 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.
  • 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 — Hardware requirements for subsidiaries are greatly reduced, although some desktop upgrading may be required to make the most of the system's features.

SaaS ERP solutions are becoming increasingly credible for two-tier deployment. However, 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 the connection is satisfactory. This is still a limiting factor in SaaS two-tier deployments. For these and other factors, Gartner believes that SaaS ERP for more than the simplest small or midsize businesses will, for the foreseeable future, be limited to some nondifferentiating niches (see "Predicts 2013: Reinventing the Roles of ERP and Application Suites").

In addition to pure SaaS, there are many other variations of cloud-based ERP, some of which may serve as attractive options (see "How to Select the Right Cloud ERP").

Divestiture

A single-instance strategy can present issues if a company wants to divest operating businesses. A two-tier ERP strategy aids the company's ability to create a separate new instance to be used to set up the new business.

Conclusion

Assuming you have chosen to adopt a two-tier ERP strategy within your organization, or even if you have ruled it out (see "How to Determine If a Two-Tier ERP Suite Strategy Is Right for You"), you have already taken an important step — namely, formalizing an important part of your ERP strategy.

A two-tier ERP strategy should be determined by line of business, regional and executive management plus the IT organization, working together to identify the optimal approach. Do not attempt two-tier ERP as an IT-only (cost saving) initiative.

As the number of installed instances or systems increases, so can the costs. Explicitly define and manage your two-tier ERP strategy to control complexity and costs. Resist multiple systems and version unless absolutely necessary, but accept the potential for multiple instance and phased deployment.

There is no preprescribed deployment configuration for success, as each company begins from a different position and has different aspirations and limitations. This means that it is hard to find comparable vendor references for prospective candidate systems.

Leading ERP vendors are beginning to package offerings to support the formal strategy, which will likely accelerate adoption, increasing the visibility of two-tier ERP in the market and thereby alleviating upper management concerns regarding the risks of such an approach. However, these packaged solutions are slow to emerge. Vendors are not effectively prioritizing the development of the necessary tools and tangible service offerings to assist customers through the business change. Customers are still dealt with on a one-to-one basis, with a heavy bias toward consulting services. Even vendors that have significantly moved their deliverables to assist clients still have to create a consistent global field operations approach.

Part of the problem is that, although the need for ERP consolidation is discernible across all industries, a clear vendor pipeline for two-tier ERP is harder to define because prospective customers request help with consolidation, not to apply a two-tier ERP strategy. Given that a desire for a two-tier strategy is not to be the starting point, vendors find it hard to market toward. However, if the recent increase in Gartner client inquiries is a guide, during the next two to three years there will be much greater emphasis on two-tier ERP as a solution search criteria.