How to Apply the Concept of Two Tier ERP to Your Company

Executive Summary

  • Two-tiered ERP is a specific way of managing multiple ERP systems.
  • This serves to explain how to apply two tier ERP in real terms.

Introduction

The basic proposal that two-tiered ERP reduces costs can be true. According to research that is available at Software Decisions, the cost savings on the basis of total costs of ownership (TCO) can range from the a slightly negative cost savings (that is a cost increase) to roughly one fourth of costs when compared to the TCO of providing ERP functionality for users with a 100 percent tier 1 ERP strategy. However, it is not possible to ascribe a specific value to the cost savings estimate without knowing the following:

  1. The specific ERP systems to be used.
  2. How many ERP systems are in the mix.
  3. How many instances are to be modeled.

This is because the savings entirely depend upon factors such as the following:

  • ERP TCO Variability: ERP applications have a high variability in their total cost of ownership. There is also a weak relationship between the cost of the ERP system and its capabilities—meaning some of the best ERP systems are the least expensive—but also most often not included in a software selection as they lack the brand name, marketing, and coverage of IT analysts and recommendations of consulting companies.
  • The degree of Transition to the Tier 2 ERP Application(s): The more users are transitioned to the Tier 2 ERP application, the more money will be saved. If a company has a thousand total users and transitions seven hundred of them to a tier 2 ERP application, the predicted savings will be higher than if the same company were to transition only five hundred users to a tier 2 ERP application.

Reduced Costs

Of course, reduced costs are not the only benefits of two tier ERP strategy—one of the major benefits is having more diversity of functionality, and a better fit between the application and the business requirements. Too often this is lost in the story of cost reduction brought by two tier ERP. However, it bears emphasizing that following a two tier ERP strategy can lead to lower costs, but it is not automatic. It very much depends upon how the strategy is implemented. The benefits come down to the quality of the software selection and the depth of the analysis regarding the overall solution architecture of ERP systems. Something that is also open to debate is how the ERP systems would be integrated. I have already stated that the commonly presented practice of integrating ERP systems to one another is less cost-effective than integrating all the ERP systems to a common or master BI system. Therefore, choosing to follow a two tier ERP strategy is really just the starting point of a series of questions, each of which must be carefully analyzed and effectively decided. If errors are made along the way, it is actually exceedingly easy to end up with a two tier implementation that nets the company little benefit.

Proponents of Two Tier ERP

Proponents present two tier ERP oversimplify the actual outcomes of following the strategy as if those that follow it essentially can’t lose. Proponents of two-tiered ERP are correct when they state that the strategy can save companies money. However, in addition to exaggerating the cost savings, they are trying to have their cake and eat it too by proposing cost savings without explaining the actual reasons for the cost savings. Some of the proponents of two tiered ERP are silent on the underlying reason for the cost savings for political reasons. They want to sell their ERP software, but don’t want to offend their prospects who have sizable investments, often poorly performing investments into tier 1 ERP applications. Another reason that proponents don’t want to explain the underlying reason is that they do not want to offend their supporters, which is the case with NetSuite—which will bring up how much a two tiered ERP strategy can save SAP customers, but is mum on how much it can save Oracle customers— because of their business relationship with Oracle.

Additionally, two tier ERP proponents have a strong tendency to leave out the history of ERP in an effort to keep their audience focused on their final conclusion, a final conclusion that is an oversimplification of what we know about ERP systems. This serves to provide a misimpression as to important features of a two-tiered ERP strategy. These misimpressions are listed below:

  1. The Novelty of Two-Tiered ERP: Two-tiered ERP is not new. Most companies that use ERP already use different ERP applications for their various tiers.
  2. The Reason for the Cost Savings of Two-Tiered ERP: Many of the proponents of two-tiered ERP are quick to point out the cost savings that come from following the strategy, but are relatively silent on why this should be the case. The reason is very simple: Tier 1 ERP systems are expensive and furthermore do not provide companies with much of a return on investment (actually our research at Software Decisions concludes that most tier 1 ERP systems have a negative return on investment). That is, most companies would have been better off both financially and operationally if they had never purchased or implemented their tier 1 ERP system. Two tiered ERP is often presented as if it is some great innovative idea, when, in fact, an inefficient system is simply being replaced with slightly more efficient systems. Here’s an analogy. Let’s say a wealthy family purchased five Lamborghinis. A family friend points out that if they sold four of the Lamborghinis (keep one Lamborghini for social appearances) and instead bought four Hondas, the family’s automotive costs would decline by following a “two-tiered automobile strategy.” Quite naturally, a Lamborghini is a hugely expensive prestige item. It should not be considered some great intellectual breakthrough that one can reduce one’s automotive budget by replacing Lamborghinis with more practical automobiles. If the tier 1 systems are so cost inefficient a good question that many companies should consider asking themselves is who recommended purchasing the tier 1 ERP systems in the first place?

Two-tiered ERP will save companies money. Most proponents of two-tiered ERP would like the recipients of their message to stop the analysis at that point and to simply buy a Tier 2 ERP system (from them) and have that be the end of the discussion. However, it should definitely not be the end of the discussion. At Software Decisions, a comparison of multiple solution architecture strategies was performed, which are available at this link.

The findings are that, while two-tiered ERP is a cost savings strategy, it is not the strategy that saves companies the most money or provides the most functionality or the lowest long-term maintenance. ERP companies and consulting companies that are signed up to the two tiered approach can’t tell you what is the best overall strategy—because they have a particular offering to sell.

The strategy that does is a best-of-breed strategy that uses a best-of-breed application in every area, including a best-of-breed financial and accounting system. This strategy may also use an ERP system, but the highest-rated ERP systems are not the most well-known ERP systems; rather they are lesser known systems that provide much better value, and unlike the Tier 1 ERP applications and many of the Tier 2 ERP applications, the best-of-breed vendors “play nice” with other applications rather than using the ERP sale as a wedge to force in more applications (a strategy that is referred to as “penetrate and radiate”). Instead, the best ERP software values in the market come from specialized vendors who only provide ERP software—not from software conglomerates whose ERP applications are simply one of their many offerings and who are planning their next acquisition.

The best-of-breed strategy has the extra benefit of providing the best total functionality. Research available clearly shows that companies that follow this strategy will save between roughly one-third and one-half on their overall solution architecture TCO, and this is including all integration costs. This compares to a predicted cost savings of between an actual cost increase and one-quarter for a two-tiered ERP strategy. Furthermore, the best-of-breed strategy combines the largest possible cost savings with the best functionality of any other strategy, meaning it also provides the highest predicted return on investment. Two-tiered ERP does provide some additional variability in functionality, but the benefits are primarily on the cost side of the equation. Therefore, moving to a two-tiered strategy is an improvement over deploying single instance ERP, but it is not the best strategy that a company can follow.

Implementing the Two Tiered ERP Strategy

Therefore, for companies looking for the best overall solution architecture strategy, it’s neither employing a 100 percent tier 1 ERP strategy, nor a two-tiered ERP strategy (both of which would be augmented with what is often mediocre applications offered by the ERP vendor for “integration” along with other assorted best of breed applications.

However, executive decision makers most often don’t have the authority to review the overall corporate solution architecture, but instead must make decisions on incremental additions to their corporate solution architecture. For these decision makers, a the first question with respect to two tiered ERP is whether it is better than 100 percent tier 1 ERP strategy, and for this the answer is yes. The second question is “which tier 2 ERP system,” and fi nal question is “what is the best way to integrate all of the ERP systems.” The answer to the fi rst question is that it very much depends upon how the two tier strategy is implemented, as has already been discussed in this chapter. Now we will look at the second of these two questions.

Choosing a Two Tier ERP System

Many ERP software vendors present themselves to their prospects as if they have the best answer for how to choose a two tier ERP system, and the answer is unsurprisingly their software. ERP vendors have made the case that some ERP vendors have a leg up on others in terms of being the tier 2 or tier 3 ERP application. After analyzing this area, as well as their documentation and their statements, it’s difficult to see how any of this argument holds any water. The best reason not to believe something is if it has no evidence, but in this case there are two other reasons why it’s not a good idea to listen to ERP vendors on the topic of two tier ERP.

  1. Solution Architecture Role: ERP vendors are attempting to serve as solution architects for their clients when they propose why their software is part of a grand two tier ERP strategy. There is a long history of software vendors and consulting companies serving as solution architects for buyers, and it rarely works out well. Software vendors cannot look after the overall architecture because of their bias to insert their applications at every turn.
  2. Distraction: The advantages of a two tier ERP strategy are based upon a buyer gaining access to a lower cost and lower maintenance ERP system, it is not based upon integration. It is worth repeating this because many ERP vendors are combining several issues which will always lead to confusion on the part of buyers. The primary benefit of two tiered ERP is based upon getting access to a lower cost and lower maintenance ERP system as well as gaining access to more functionality, which can meet more business requirements without expensive customization. Let us remember, that if the main objective were an integrated system, and if one integrated system lead to lower costs, then we would simply stick with a 100 percent tier 1 ERP strategy. However, companies that have followed this strategy have experienced the highest possible costs of any possible ERP solution architecture. And in this vein, the most beneficial ERP system is the one that best meets the business requirements of the company.

Many ERP vendors are proposing the old integration argument, and the Tier 2 and Tier 3 ERP vendors will discuss how their systems integrate better to the teir 2 ERP system that is already in place. However, a tier 2 ERP strategy can be implemented with the ERP system—but this is not the way to implement this strategy—which leads into the final question.

How to Integrate the Tier 2 or Tier 3 ERP System

ERP systems must be integrated to other ERP systems for really two reasons—one is the two entities that run each ERP system do business with each other, and therefore it may be convenient if the two ERP systems are integrated—however it’s certainly a minor consideration. Unrelated companies have no problem doing business with each other when their ERP systems are not integrated through the standard business documents/transactions of purchase orders, sales orders, etc. Secondly, ERP systems were never designed to be integrated to other ERP systems. The second, and far more important reason for ERP systems that are within the same overall enterprise to be integrated, is reporting. However, ERP systems are not generally all that proficient at reporting—which is the primary capability of business intelligence systems. ERP systems can have data extracted from them and sent to business intelligence systems, and two or more ERP systems can be integrated to a single business intelligence system in the same way. In fact, this is the most logical way of implementing multiple ERP systems that result in integrated reporting.

Getting the Best ERP System……and Other Systems.

The fact that a company already uses one particular BI application should not promote that company to try to purchase an ERP system from the same vendor. This is because getting the best ERP system and best business intelligence system for the company’s requirements is far more important than getting the systems with some faux integration that comes from the same vendor. Just the analysis of long-term maintenance costs between the different ERP applications demonstrates this, but of course, the other side of the story is the functionality differences between the ERP applications that are often quite significant. For example, in the case of ProcessPro, an ERP system that is customized for process industry manufacturing (things like cheese, petroleum refining, mining, etc.) the applications come standard with a number of key areas of functionality that no other ERP system have in total, but many other ERP vendors partially have or pretend to have. Process industry manufacturing buyers that choose systems that have less of this specialized functionality, accepting the integration argument, or that the customization will be “not that big of a deal,” end up with problematic ERP implementations that cost a lot to maintain. Hopefully, this emphasizes the importance of mating the application to the requirements—although there are many other examples that could be given. Furthermore, there is no software vendor that offers both a leading ERP system and a leading business intelligence system. In fact, the software vendors that offer ERP systems offer some of the lowest productivity and highest cost business intelligence systems, and purchasing both from one vendor is a guarantee of ending up with at least one bad application.

Conclusion

In order to implement two-tier 2 strategy most effectively, it’s necessary to resist the arguments presented by two tier ERP proponents and also to dig a little deeper into under what circumstances and why following a two tier ERP strategy can save companies money. Many proponents of two tier ERP will make the argument that their systems are better suited to be the second or third tier, when in fact any ERP system can be equally placed in these tiers. The hyperbole on two tiered ERP should not distract buyers from attempting to find the best match between the ERP system and the business requirements. Secondly, it is in most cases unnecessary to integrate the multiple ERP systems that are part of a multi-tiered ERP solution architecture. Even when companies buy and sell from one another, all of this can, and is, easily managed with standard purchase order and sales order functionality that requires no integration. For consolidated reporting, it is necessary to have all of the ERP systems in the company’s ecosystem to have data extracted from them, but again, here the most important feature is the capabilities and the productivity of the business intelligence solution. The best software vendors in business intelligence do not offer ERP systems, but some of the lower quality and higher cost ERP vendors do. The best approach is to find the highest value applications in both ERP and business intelligence and combines them as on any other project, there are simply no “special rules” when it comes to two tiered ERP.

Financial Disclosure

Financial Bias Disclosure

This article and no other article on the Brightwork website is paid for by a software vendor, including Oracle and SAP. Brightwork does offer competitive intelligence work to vendors as part of its business, but no published research or articles are written with any financial consideration. As part of Brightwork’s commitment to publishing independent, unbiased research, the company’s business model is driven by consulting services; no paid media placements are accepted.

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References

The Real Story Behind Tier ERP

Two Tiered ERP 2

The Real Story Behind Two Tier ERP: Separating the Marketing from The Usable Strategy

What the Book Covers

If you need help determining your company’s overall enterprise software strategy and how two-tiered ERP fits in, this book is for you.

Two-tiered ERP is widely understood as the use of different ERP systems for different layers of an organization. Until this book, the effectiveness of a two-tiered ERP strategy could only be determined through anecdotal evidence, the marketing literature of ERP software vendors, and the advice of consulting companies. By understanding two-tiered ERP software within the context of ERP’s history, readers will see how two-tiered ERP may represent a crack in the façade of “big ERP,” and will know how to formulate a comprehensive and logical response to proposals about implementing a two-tiered strategy.

By reading this book you will:

  1. Eliminate confusion over definitions of two-tiered, multi-tiered, and single instance ERP.
  2. Review SAP and Oracle’s Tier 1 and Tier 2 ERP products.
  3. Understand why two-tiered and single instance ERP is not the best strategy.
  4. Appreciate that WHAT is written about two-tiered ERP depends greatly upon WHO is writing it.
  5. Recognize the logic used by vendors to sell two-tiered ERP and whose interests are being served by a two-tiered strategy.
  6. Learn an alternative strategy that provides functionality, cost savings, and the best return on investment.

If you are just beginning your research on ERP systems, read the companion book by the same author, The Real Story Behind ERP: Separating Fiction from Reality first, as it provides the most exhaustive history of ERP currently published.

Related Books

This book is closely tied to the book Enterprise Software TCO, a lack of proper analysis in multiple dimensions (as well as TCO) explaining the uptake of solution categories which are not validated by any evidence. Once ERP systems could not demonstrate much in the way of financial benefits, the book explains how a new logic was developed — that ERP systems were simply “essential infrastructure.” This also turns out not to be true. Of course, the initially proposed argument that ERP software would be the only system that companies ever needed is now laughable three decades after the ERP trend began. Readers will learn that with respect to ERP software, old logics are never proven, simply new hypotheses proposed.

The book is also connected to the book Enterprise Software Selection, because the selection of so many poor quality ERP software solutions from big-name vendors demonstrates a clear inability on the part of many companies to perform a proper software selection.

This book provides a strong focus on SAP ERP as well as Oracle ERP. This gets into SAP ERP ECC/R/3 and Oracle JD Edwards EnterpriseOne and SAP Business One and Oracle JD Edwards World. SAP ERP software is both the author’s area of expertise as well as the most popular ERP software application. ERP software solutions are discussed from the perspective of Tier 1, Tier 2 and Tier 3.

See the Book Page

How to Understand Why Two Tier ERP is Not New

Executive Summary

  • Two-tiered ERP is a specific way of managing multiple ERP systems and presented as if it is new.
  • This serves why two-tiered ERP is not new.

Introduction

The first thing to consider when understanding what to do with two-tiered ERP is that two-tiered ERP is not new. Two-tiered or multiple- tiered ERP has been used since ERP systems were initially sold. What is new is the marketing of the concept: the use of multiple ERP systems from different vendors is a way of improving the value returned from ERP implementations.

The Unstated Assumption of Two-tiered ERP

What is unsaid regarding two-tiered ERP may be even more interesting. The story that is being told regarding two-tiered ERP is not the full story; instead, it is an engineering/marketing construct that only tells part of the story. Tier 2 and Tier 3 ERP vendors don’t dare contradict the established viewpoint that Tier 1 ERP software is necessary, even though it isn’t. Software vendors don’t want a lot of controversy or “trouble”—they just want to sell software. Thus the Tier 2 and Tier 3 vendors have developed the two-tiered concept as an adjunct to a centralized ERP system. The vendors have presented this digestible new strategy without undermining the sacred cow of Tier 1 ERP, which would be off-putting to companies that have spent so much money on tier 1 ERP systems and have so little to show for it. The two-tiered ERP concept allows Tier 2 and Tier 3 ERP vendors to tiptoe around what makes the two-tiered strategy work—unlike other ERP “savior concepts” that have come before it such as rapid big ERP implementation methodologies (an oxymoron if there ever was one) or service oriented architecture (i.e. SOA—a philosophy that Tier 1 vendors had zero interest in supporting).

Hopefully, this book has provided enough information to convince you that two-tiered ERP both a) makes sense and b) is nothing new. However, if one accepts the premise that two-tiered ERP is worthwhile, the question becomes what to do about it. A big part of this decision is determining who to listen to; so many entities in the market claim theirs is the right course to follow with respect to two-tiered ERP. However, very few of these vendors could be considered financially unbiased, and none provide any evidence to support these claims.

Let’s start off by listening to what the Tier 1 vendors have to say on the topic.

The Tier 1 ERP Software Vendors Tier 1

ERP software vendors have attempted to co-opt and change how two-tiered ERP is implemented. Let’s remember that the original idea behind two-tiered ERP was to implement below Tier 1 ERP applications into subsidiaries and sub-companies that had lower functionality demands than the parent company. Two-tiered ERP was initially presented as a way to reduce cost and complexity, to which the Tier 1 ERP companies say:

“Great, we are on board. Just implement multiple instances of our Tier 1 software.”

However, that is not a two-tiered ERP strategy: that is a multi-instance ERP strategy using the same software. Tier 1 ERP vendors counter this argument with their second proposal:

“We offer mid-market ERP systems also, so use our mid-market solutions for the other tiers.”

Depending upon whether the vendor is SAP or Oracle, the cost savings can be lower or about the same as other well- known Tier 2 ERP applications. However, adjusting for more than costs, the argument is actually better for SAP, as they have a far more capable Tier 2 ERP application in SAP Business One than does Oracle in Oracle JD Edwards World. Both software vendors propose that they offer a better value versus alternatives that do not offer both a tier 1 and tier 2 ERP application, as their respective tier 1 and tier 2 ERP systems are integrated to one another or share a common heritage. However, a close examination of each software vendor’s system calls this assertion into question. SAP’s Tier 1 offering (called ECC or R/3) has nothing at all to do with SAP Business One, their Tier 2 offering. SAP Business One was not developed by SAP but was renamed after SAP acquired TopManage Financial Systems, along with TopManage’s sister company TopTier. As such SAP Business One has a completely different technical heritage than SAP ECC. And while SAP will no doubt advise that it has some adapters that connect SAP ECC to SAP Business One, the connection benefits between these systems should be viewed with great skepticism if previous experience with SAP’s integration claims is any indication.

How Acquisitions Play into Two Tier ERP

Both of Oracle’s main ERP systems—Oracle JD Edwards EnterpriseOne and Oracle JD Edwards World—were the result of acquisitions and were not developed by Oracle. Regardless of any integration that exists between the systems, Oracle JD Edwards World is an application that should be retired as it is not a viable option for future purchases.

SAP and Oracle—knowing they have limited ability to stop a customer set on the concept from moving to a two-tiered ERP strategy—would like to steer customers in a direction that benefits SAP and Oracle. Rather than performing a proper software selection, SAP and Oracle would like their customers to simply choose the solutions that SAP and Oracle want them to choose. Once again they will argue that their systems will integrate better with their tier 1 ERP systems, an argument that we discredited in the previous section. Even if integration were not an issue, their solution may not be a good decision as it’s unlikely the proposed application is the best fit for the company’s business requirement. Secondly, integrating the lower-tier ERP systems into a master ERP system is only one way of implementing two-tiered ERP. Another, less costly, approach is simply to integrate all the ERP systems to a master business intelligence system. Many ERP vendors leave this alternative out when discussing two tier ERP with potential clients. However, integrating to the master business intelligence system is, in my view, a preferable solution architecture.

Biased “Advice” from Tier 1 ERP Vendors

It’s unclear why anyone would listen to Tier 1 ERP software vendors on the topic of two-tiered ERP. Their only interest is to redirect purchases back to their applications, and so any of their opinions or recommendations are based simply on their marketing and sales function. They are countering a movement in the marketplace with the tools they have available. Furthermore, nothing that either SAP or Oracle has predicted on the topic of ERP has ever turned out to be true. Bill Maher lampooned those who promoted the Iraq War.

“If you’re someone from one of the think tanks that dreamed up the Iraq War, who predicted that we would be greeted as liberators, and that we would not need a lot of troops, and that the Iraqi oil would pay for the war, that the WMDs would be found, that the looting was not problematic, that the mission was accomplished, that the insurgency was in its last throws, that things would get better after the people voted, after the government was formed, after we got Saddam, after we got his kids, after we got Zarqawi, and that the whole bloody mess would not turn into a civil war…you have to stop making predictions.”

The same could be said for Tier 1 ERP software vendors. Buyers that have followed the advice of SAP or Oracle in setting up their solution architecture have resulted in the highest cost, and lowest functionality corporate IT infrastructures, as is explained in the Brightwork Research & Analysis TCO studies.

SAP routinely spins false marketing constructs that have little to do with reality, such as NetWeaver and HANA. Oracle’s internal culture of lying runs so deep that other software vendors point to it as a reason to increase their own lying. Many marketing departments have put effort into developing literature regarding their position on two-tiered ERP, with the single intent of getting you to think they have the best approach to two-tiered ERP. Much of the information provided by Tier 2 and Tier 3 ERP software vendors is of a dubious nature, as demonstrated by the following quotation from Sage, a Tier 2 ERP software vendor:

“Well-run, global organizations are increasingly adopting a two-tier enterprise resource planning (ERP) strategy.”

If one were to read through the source paper of this quote, one would note that this bold pronouncement is never supported by any evidence. The statement is not, “Increasingly a few well-run, global organizations are adopting…”; the statement is categorical. In fact, the only evidence presented throughout the paper is that two-tier ERP is becoming a topic of greater interest among corporate buyers. This is a problem, because the paper implies that it has evidence that two-tiered ERP is what good companies implement as will be demonstrated at some point in the paper (but never is).

High Cost of Tier 1 ERP

Two-tiered ERP does make sense due to the high cost and poor performance of Tier 1 ERP. However, there is a difference between something appearing logical and stating that better companies are employing the strategy.

“Organizations in the market for ERP solutions are increasingly considering a two-tier ERP strategy. A recent study by Constellation Research found that forty-eight percent of buyers in 2011 were considering a two-tier strategy, up sharply from thirty-two percent in 2010 and twenty-seven percent in 2009”

The above statement is a standard way to begin a promotional paper of this type. However, the statement does not demonstrate whether a two-tier strategy has actually worked in practice. Instead, it merely provides evidence that more companies are focused on the question. This increased interest could be due to any number of reasons, such as the enormous quantity of marketing literature produced by software vendors and the prevalence of conference sessions on the topic. The article goes on to trace the supposed roots of two-tiered ERP.

“Two-tier ERP systems began their rise in popularity during the economic recession that began in late 2008. As IT budgets were slashed, IT departments were forced to make do with less. In many cases, large-scale ERP migration plans were delayed or eliminated entirely. Instead of moving to new systems, companies focused on improving existing systems, including legacy ERP applications. As a result, many organizations decided to retain functionality in their existing systems that were still working while migrating to Tier 2 systems where existing solutions were not meeting their requirements.”

This paragraph is not true. The popularity of two-tiered EPR did not rise during the economic recession of 2008. Two-tiered ERP has always been used for one reason: generally, Tier 1 ERP is too expensive for subdivisions, and companies never moved to single instance Tier 1 ERP.22 This entire paragraph is confusing and apparently, the author does not know the history of ERP. Instead of being based in the history of ERP, this paragraph attempts to develop a narrative where Tier 2 ERP is a significant trend and to give the impression that two-tier ERP is entirely new. The paper goes on to say:

“At the same time, organizations began realizing that big-bang, corporatewide ERP installations are often ineffective. When a system becomes very large, it becomes costly to customize, maintain, and upgrade.”

Porblematic ERP Implementations

For some time we have proposed that an incremental implementation strategy be used even within one application—rolling out less complex functionality earlier. Generally, this approach is not followed. Implementation methods tend to change little over the years, in that they rarely reflect what has worked or not worked historically. Since I began working on IT implementations in 1997, I have seen little adjustment to implementation methodologies. No evidence is presented in the paper that companies are moving away from big bang implementations. I could find no research that even studied the movement of companies away from big bang IT implementations to incremental IT implementations. The Sage paper goes on to say that two-tiered ERP is being driven by changes in corporate structures.

“For example, many organizations have undergone multiple mergers and acquisitions that leave them with multiple ERP solutions—and unacceptable support costs.”

There is nothing at all new about this, except for the fact that support costs from the Tier 1 ERP vendors have been increasing steadily. However, multiple companies being part of another company, all with different ERP systems, is why two-tiered or multi-tiered ERP has become a popular “strategy” since ERP systems first began being used in the mid-1980s—although calling it a “strategy” may be giving it too much credit for forethought. Rather, the strategy resulted from circumstances.

“Seventy percent of respondents to a recent Software Insider survey remarked that existing, Tier 1 systems are too expensive. An estimate published by CIO magazine in 2009 placed the cost of the average Tier 1 ERP system deployment at between $13 million and $17 million. ROI calculation on Tier 1 ERP systems show that high costs are due to overruns in implementation, customization, maintenance fees, and staff costs. Upgrade costs are also high—45 percent of respondents said that upgrades are too costly.”

Yes, the survey results reflect reality but are presented in the article as if they represent new information. In fact, the only new part to this is that support fees have increased. Tier 1 ERP systems have been known to be quite expensive for decades.

The Sage paper goes on to report that many respondents to a survey believe that Tier 1 ERP systems are expensive.

“When all of the implementation, ongoing maintenance fees, upgrades, and modifications are considered, a two-tiered system can offer significant financial savings. For example, Gartner Research found that companies see a thirty-three percent reduction in implementation costs when a two-tier system is deployed.”

Firstly, our research is quite a bit more thorough than Gartner’s because we estimate the cost savings for the entire TCO of a two-tiered ERP strategy—and we have tested a number of scenarios. Our research shows that a thirty-three percent reduction in TCO costs is the upper end of the cost savings continuum, while a predicted TCO cost savings in the twelve percent to seventeen percent range is a more reasonable expectation. However, it depends upon the size of the Tier 1 ERP system as compared to the Tier 2 ERP system.

Obviously, Tier 1 ERP systems are bad values. Any other strategy, such as using a best-of-breed application (even a best-of-breed finance application), will yield far better financial outcomes. All this seems to beg the following question: If Tier 1 ERP systems are so expensive, why have they been recommended by Gartner and the major consulting companies for more than three decades? (Hint: It’s not because Tier 1 ERP provides good value to customers. No research has ever produced a positive return on investment for Tier 1 ERP.) So, whose interests are these entities looking out for, if not the customer’s?

The Answer is Two Tier ERP?

Sage presents a lot of information, but seems interested in drawing only one conclusion: the answer is two-tiered ERP. In doing so, they leave out other conclusions that are just as interesting and important to analyze. The Sage paper goes on to highlight a well-known issue regarding Tier 1 ERP systems and innovation.

“Yet thirty-five percent of Software Insider survey participants found that enterprise-class ERP vendors have not innovated quickly enough. Subsidiaries are finding that they can customize Tier 2 applications more quickly than they can convince corporate to change the global ERP system to meet their local needs.”

This is also true. Tier 1 ERP software vendors have been using their ERP applications as cash cows for more than a decade and a half. They use the high profits from their ERP systems to acquire or develop non-ERP applications, which they then sell into their customer bases, acquiring a higher and higher percentage of their customers’ IT budgets. Again, who are the culprits for this end result? Those who recommended Tier 1 ERP systems as necessary: the major consulting companies and Gartner (who is used repeatedly as a source in the Sage article), as well as other analysts who told companies that Tier 1 ERP would lead to great things.

Fast Implementations?

The Sage article goes on to praise the speed with which Tier 2 ERP applications can be implemented.

“A two-tiered infrastructure can be deployed quickly and cost effectively. The time to implement and modify or upgrade is likely to be shorter, which means that deploying such a system will deliver a shorter timeto- benefit, and these systems can be modified more quickly and easily than a Tier 1 ERP solution.”

This could be filed under the category of “self-evident.” This quotation again states that Tier 1 ERP software is inefficient and expensive to operate. Of course, anything— with the possible exception of lagging business intelligence applications (i.e., IBM Cognos, SAP BI, Oracle BI)—are going to seem efficient compared to Tier 1 ERP, which brings up again the question of why Tier 1 ERP is used in the first place. Marketing Does not Equal Reality Just because a vendor has invested in marketing literature about two-tiered ERP, does not mean they are a good choice for your two-tiered or multi-tiered ERP strategy. In fact, an ERP vendor’s position or marketing material on two-tiered ERP is immaterial to any purchasing decision. Different ERP systems are fundamentally separate. We have evaluated thirteen ERP systems, and none of these ERP systems were designed to be integrated to other ERP systems. Gartner states this, albeit more delicately.

“Do not assume that integration between systems will be plug-and-play, even if provided by the same vendor.”

The vendors of some of the better ERP systems that we have reviewed have not written any marketing literature on two-tiered ERP. Conversely, some of the lowest-scoring ERP on systems include the most literature on two-tiered ERP. Any company that intends to use a variety of ERP software vendors can simply use the same software selection approach that tends to result in the best software being selected. No review of the various literature on two-tiered ERP is necessary.

Major Consulting Companies

The major consulting companies don’t have much interest in promoting two-tiered ERP because their main interest is in billing for tier 1 ERP resources; resources for lower tier ERP bill out at a lower rate. Furthermore, there are more software vendor options, and major consulting companies are not interested in retraining or hiring new resources so that they can bill hours. So the “recommendation” of major consulting companies on two-tiered ERP will be that it is “too early to jump in,” and that two-tiered ERP will take resources away from the really important work of “improving the tier 1 ERP system and moving toward a single instance.” Not surprisingly Accenture published a document entitled “Why Big Systems Are Here to Stay,” which perhaps should have been called “Why Big Systems Are Here to Stay: Because We Make Tons of Money That Way.” In this document, Accenture makes the following contentions:

“And a third advantage of an ERP environment has to do with how data is managed, integrated and secured. If not properly integrated, cloud and software-as-a-service solutions can create a more chaotic, less reliable and less secure data environment.”

This is an interesting assertion because ERP environments have zero advantage over non-ERP environments with respect to data management, integration or security. ERP systems that I evaluated often had the lowest data quality of any software category—particularly for the Tier 1 ERP vendors as the applications have such dated data management tools. As for integration, ERP systems may be integrated to themselves, but the Tier 1 ERP vendors are some of the most difficult systems to integrate with other applications. As for the security argument, ERP systems are not more secure than other software categories.

The above Accenture statement also confuses the topic of ERP systems versus SaaS systems. SaaS is a delivery method for software; ERP is a category of enterprise software. SaaS can deliver as an on-premises solution for any application, including ERP. ERP systems that are on-premises are more secure than cloud or SaaS applications, but that is a different issue.

The Evidence Presented by Accenture?

Overall, the evidence to support the statement made in the Accenture paper is severely lacking, and it should qualify as FUD (fear, uncertainty and doubt). Accenture has a financial incentive to slow the movement away from Tier 1 ERP and toward SaaS solutions because it’s how they make a lot of money: they have far less control once the application is delivered via SaaS. With SaaS, the software vendor tends to take over consulting and support. Interestingly, nowhere in the paper does Accenture mention how it makes money (which is with on-premises consulting and support) and how this may influence its “recommendations.”

Accenture goes on to say that the best approach is a hybrid: some on-premises and some SaaS. They then proceed to make another self-serving proposal, that this IT ecology must be managed by using a trusted “broker.”

“So, who’s in charge of managing this complex hybrid system? The answer lies in the rising trend of using an integrator or trusted broker. This brokerage can act as either a consultant or as a managed services provider. This holistic or managed services approach enables companies to treat their IT resources as just that and also provides a new level of fl exibility for companies and CIOs.”

And who would be this trusted broker? That’s right—Accenture! After spending decades overcharging and misdirecting their clients to all the wrong software in the on-premises environment, Accenture would like to be handed the keys to managing their clients’ IT solution architecture in the new on-premises/SaaS “hybrid” environment.

The major consulting companies don’t really have “opinions” on topics; all they see is whatever maximizes their revenues. It’s very simple: two-tiered ERP along with SaaS-delivered software reduces their revenues—therefore, they are against it. Now, if what I am saying is true, why would Accenture develop a partnership with NetSuite, as the links below describe?

http://www.netsuite.com/portal/landing/accenture.shtml

http://www.oracle.com/us/corporate/press/1966087

Generally, partnership statements of this kind are not reliable indicators regarding a policy within the consulting companies. Companies develop partnerships all the time, and many of them do not extend beyond the marketing press release and the insertion of company logos on one another’s websites.

Both software vendors and consulting companies love having partnership logos on one another’s websites. However, in most cases, these partnerships are much less than meets the eye. I cover this topic in the following article about the overused and often meaningless integration certifications that many smaller software vendors have on their websites that show some integration to a major ERP software vendor.

A far better indicator of how dedicated a company is to a particular strategy or line of business is whether they put out marketing collateral on the topic. And the major consulting companies have not done this—at least at the time this book was published. If their clients demand that they provide Tier 2 and Tier 3 resources, the major consulting companies will do it; after all, they prefer to have the business rather than to lose the business, but they would prefer not to do this.

IT Analysts

Having read the reports of several analysts on two-tiered ERP, it was interesting to see their take on the topic. IT analysts have not spent space in print explaining the history of ERP to their subscribers. Some of them use phrases such as, “two-tiered ERP can be effective if implemented properly,” which sounds authoritative. As there are no studies on the effectiveness of two-tiered ERP, this statement sounds quite fabricated unless they can provide the evidence to back it up. Statements like this provide a nice escape hatch for IT analysts. If the trend does well, the analyst can say, “I predicted it,” and if two-tiered ERP does not work well, the analyst can say, “It was not implemented properly.” This approach is copied from economists and allows one to sound authoritative without doing any research and without committing either way.

I was very surprised that none of the analysis on two-tiered ERP brought up the fact that the analysis was contradictory to the original logic of ERP, something that I consider to be one of the biggest stories related to two-tiered ERP. Another letdown was that not a single IT analyst asked the question: If two-tiered ERP is so advantageous and saves so much money, what does this mean regarding Tier 1 ERP?

An Algorithm for Starting Trends Without Evidence This is how trends get started in enterprise software; the process seems to have the following stages:

  1. The Marketing Machine: Software vendors with a financial bias propose something is a good idea and rev up the marketing machine.
  2. Stoking the Fire: IT analysts write reports on the idea, without declaring the source of the new idea—the financially biased software vendors. They do not evaluate the merits of the proposal but instead write articles—perhaps with a few anecdotes of why “it could be” a good idea.
  3. The Conference Circuit: Vendors and consultants start presenting on the topic at conferences, and articles are written about the idea in IT publications.
  4. The Conference Aftermath: Purchasing company executives attend these conferences, and come back saying, “We need to take a look at two-tiered ERP.”
  5. The Surveys: Surveys are performed that show that X percent of executives are thinking about whether or not to implement the new idea.

Enterprise software buyers are thus primed for the marketing materials and sales pitches from the software vendors that started the trend in the first place. This is very reminiscent of how topics become popular in national politics. Often an event will occur, prompting a number of stories on the topic. Then a survey is taken and the survey shows that this topic (not without coincidence) is on people’s minds. Another person was able to control public opinion in the same manner. His name was William Randolph Hearst and here is his famous cable:

“When Hearst Artist Frederic Remington, cabled from Cuba in 1897 that ‘there will be no war,’ William Randolph Hearst cabled back: ‘You furnish the pictures and I’ll furnish the war.’”

The above essentially describes how historically media outlets have been used to manipulate what people think and what they feel. The history of media, in general, goes back much further than the history of media for enterprise software. In fact, the history of enterprise software only goes back to roughly 1970 (most software applications prior to this period were shrouded in secrecy as they were military in nature). However, many of the same outcomes are consistent to the point of repetitiveness and are easy to catch if one studies the topic. Knowledgeable entities can influence media systems. In fact, a major impetus of marketing is to influence storylines in a way that makes them seem entirely authentic.

Conclusion

SAP and Oracle have attempted to control the two-tier ERP story and to co-opt the trend so that their customers buy lower tier ERP systems from them. Neither of these software vendors has proven to provide good information to their customers, and, in fact, both gouge their customers to a ridiculous degree on support costs. They should have zero credibility with buyers, especially if one actually evaluates their history of being right with their previous predictions and advice. Of course, the bad quality information on this topic is not limited to SAP and Oracle. This chapter provided numerous examples of evidence-free statements made by those that often have a substantial influence on the information technology media and also what buyers think.

Financial Disclosure

Financial Bias Disclosure

This article and no other article on the Brightwork website is paid for by a software vendor, including Oracle and SAP. Brightwork does offer competitive intelligence work to vendors as part of its business, but no published research or articles are written with any financial consideration. As part of Brightwork’s commitment to publishing independent, unbiased research, the company’s business model is driven by consulting services; no paid media placements are accepted.

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References

The Real Story Behind Tier ERP

Two Tiered ERP 2

The Real Story Behind Two Tier ERP: Separating the Marketing from The Usable Strategy

What the Book Covers

If you need help determining your company’s overall enterprise software strategy and how two-tiered ERP fits in, this book is for you.

Two-tiered ERP is widely understood as the use of different ERP systems for different layers of an organization. Until this book, the effectiveness of a two-tiered ERP strategy could only be determined through anecdotal evidence, the marketing literature of ERP software vendors, and the advice of consulting companies. By understanding two-tiered ERP software within the context of ERP’s history, readers will see how two-tiered ERP may represent a crack in the façade of “big ERP,” and will know how to formulate a comprehensive and logical response to proposals about implementing a two-tiered strategy.

By reading this book you will:

  1. Eliminate confusion over definitions of two-tiered, multi-tiered, and single instance ERP.
  2. Review SAP and Oracle’s Tier 1 and Tier 2 ERP products.
  3. Understand why two-tiered and single instance ERP is not the best strategy.
  4. Appreciate that WHAT is written about two-tiered ERP depends greatly upon WHO is writing it.
  5. Recognize the logic used by vendors to sell two-tiered ERP and whose interests are being served by a two-tiered strategy.
  6. Learn an alternative strategy that provides functionality, cost savings, and the best return on investment.

If you are just beginning your research on ERP systems, read the companion book by the same author, The Real Story Behind ERP: Separating Fiction from Reality first, as it provides the most exhaustive history of ERP currently published.

Related Books

This book is closely tied to the book Enterprise Software TCO, a lack of proper analysis in multiple dimensions (as well as TCO) explaining the uptake of solution categories which are not validated by any evidence. Once ERP systems could not demonstrate much in the way of financial benefits, the book explains how a new logic was developed — that ERP systems were simply “essential infrastructure.” This also turns out not to be true. Of course, the initially proposed argument that ERP software would be the only system that companies ever needed is now laughable three decades after the ERP trend began. Readers will learn that with respect to ERP software, old logics are never proven, simply new hypotheses proposed.

The book is also connected to the book Enterprise Software Selection, because the selection of so many poor quality ERP software solutions from big-name vendors demonstrates a clear inability on the part of many companies to perform a proper software selection.

This book provides a strong focus on SAP ERP as well as Oracle ERP. This gets into SAP ERP ECC/R/3 and Oracle JD Edwards EnterpriseOne and SAP Business One and Oracle JD Edwards World. SAP ERP software is both the author’s area of expertise as well as the most popular ERP software application. ERP software solutions are discussed from the perspective of Tier 1, Tier 2 and Tier 3.

See the Book Page

The Reasons for the Rise of Two Tiered ERP

Executive Summary

  • Two-tiered ERP is a specific way of managing multiple ERP systems.
  • This serves to explain the reason for two-tiered ERP’s popularity.

Introduction

It is important to understand who initially proposed two-tiered ERP, because this tells us a great deal about whose interests it serves. Two-tiered ERP arose as a marketing strategy specifically by the Tier 2 and Tier 3 ERP software vendors. Its most notable and vocal proponent is the software vendor NetSuite, but now pretty much all ERP vendors, regardless of their tier, have position documents to let prospects and current customers know their preferred strategy. This is the case even though two-tiered ERP is a direct contradiction to the single instance logic that Tier 1 vendors have been promoting since the initial development of the ERP software market. It takes living through the initial ERP sales period in the mid-80s, reviewing the old documentation, or performing interviews to find out that not only was single instance the official proposal of ERP vendors but that a single instance ERP system would be the only system that any ERP customer would ever need to implement. You can now pick yourself up off the floor after falling down laughing, but I kid you not: this was the pitch.

The Background on the Development of the Term “Two-tiered ERP”

Two-tiered ERP was originally conceived of as a philosophical wedge designed to crack open the lucrative Tier 1 ERP market to Tier 2 ERP vendors. The intent of proposing two-tiered ERP was not to present something that was necessarily true, but to sell specific ERP software—and for consulting companies to sell ERP services.

At some point, Tier 1 will be vulnerable to some type of challenge. As is described in part by this book (and in far more detail in, The Real Story Behind ERP: Separating Fiction from Reality), ERP has not achieved the objectives that it was predicted to achieve and many of the ERP systems have aged quite badly. ERP is on its way to being “just another system” instead of the centerpiece of the solution architecture. Overpaying for ERP is now one of the least effective uses of IT budgets. Many large consulting companies misrepresent this fact to their clients. They provide the impression that ERP is so transformational, so important and has such a high ROI that the company should not be concerned with how much they pay for ERP (in particular, how much they pay for their consulting). Nothing could be further from the truth. ERP’s often generic functionality, will not improve a business very much, and in order for ERP to have a positive ROI, it must be procured and implemented and maintained at a reasonable cost. Two-tiered ERP is an important concept, but not for the reason many people think. It is an important concept because two-tiered ERP represents one of the first cracks in the façade of single instance ERP.

Now, three decades after companies began purchasing ERP systems and preparing themselves for a brave new world of system efficiency, many companies have aging ERP systems as ERP vendors (particularly Tier 1 vendors) are using their ERP systems as cash cows. Rather than improving their systems to at least keep them up to date, vendors have used this money to develop new non-ERP applications, which they then attempt to sell into their existing ERP accounts. The applications are not sold on the basis of functionality, usability, or other application-specific factors, but on the idea that the applications will integrate better to their ERP system.

I consult with clients that rely primarily upon ERP systems for supply chain planning, and using these systems is like stepping into a time machine. I was recently working in SAP R/3-ECC-ERP (its name changes depending upon who you are talking to at the time) and was struck by how dated and of poor quality this “flagship” application was in 2013. It has changed very little from the application that I began working with in 1997. And yet, all of that time SAP has been banking support charges that average 20 percent of the initial purchase price while putting close to nothing back into the product.

Tier 1 vendors simply have little incentive to continue to develop their ERP systems. Most Tier 1 vendors have saddled their customers with aging and low functionality ERP systems, but with high costs. This is the “ERP trap.” Companies that bought big ERP never saw much of a financial benefit, and are now paying an even bigger price as they are stuck with dated systems of low capability that eat up large portions of their IT budget. Every year that I spend time in SAP or Oracle ERP, the more out of date their applications seem.

Is Two-tiered ERP the Savior of ERP?

Generally speaking, the dissatisfaction with ERP systems—and Tier 1 ERP systems in particular—is high. Those that have proposed the concept of two-tiered ERP know this, and have, in part, based their strategy around this dissatisfaction. However, two-tiered ERP is just the latest in a number of popular philosophies that have been proposed to improve and rectify the problems with ERP. The narrative of all these philosophies has never been to question the foundations of ERP (although there is ample evidence to justify doing so), but to suggest a way of adjusting or improving ERP. What has not been recognized is that many of the criticisms leveled against ERP, and particularly big ERP, are inherent to features of big ERP systems—and therefore not amenable to improvement.

Possibly the most ridiculous of these philosophies was service-oriented architecture (SOA), which was the philosophy prior to two-tiered ERP. Supposedly SOA was going to stoke up the value of ERP systems. At one point all of the Tier 1 and Tier 2 ERP software vendors produced some trumped-up white paper that described their “vision” for SOA. All of the major consulting companies proposed not only that SOA was logical, but predicted that SOA was going to be a huge trend that was going to help clients reclaim value from their stogy old ERP systems. Many books were written about this new concept, and many presentations were given at conferences. However, SOA, while proposed with great confidence, has now faded with essentially zero effect on ERP. Interestingly, none of the companies that promised so much from SOA have suffered in the marketplace, and none have had their credibility reduced. Intriguingly, those who pumped up the SOA message are now hoping that recipients of the message have short memories and have by now forgotten about all those SOA promises. It should be stated that the concept of SOA was ludicrous from the beginning, as I explained in the following article that I wrote back in 2010 when SOA was somewhat in vogue.

Why Did SOA Not Take Hold?

The reason SOA was never going to take hold in ERP systems (aside from its technical features; a programmer is better qualified to offer an opinion on that than am I) was because Tier 1 and Tier 2 ERP vendors base their competitive strategy on closing off options for their customers—not on publishing their functionality to be used by all. SOA was about breaking down barriers and allowing any application to call upon the functionality of any other application. All Tier 1 and most Tier 2 ERP software is based upon the opposite philosophy: a philosophy of closed-off systems. The ERP system is used as a “wedge” to get into a customer. Once in, the ERP system is used to justify the purchase of uncompetitive applications from the same ERP vendor on the basis of these systems being easier to integrate back to the ERP system. Why would big ERP vendors support an approach based on open standards, which would allow their applications’ functionality to work flexibly with other applications? That is exactly the opposite of their business model. No real technical knowledge was required to predict that SOA would not happen in the ERP space—only knowledge of how big ERP software vendors operate.

Clearly, two-tiered ERP is yet another trend to get behind, to write articles about, and to base conference presentations upon. Unlike SOA, it is based upon a number of truths. I want to be clear that the proponents of two-tiered ERP are not objective sources of information; they are marketers whose primary motivation is to help sell more software. Two-tiered ERP is a marketing construct based upon a truth (although generally the specific truth is not articulated) that Tier 1 ERP systems are not good values for medium-sized companies. In fact, the evidence, which is compiled in, The Real Story Behind ERP: Separating Fiction from Reality, is that Tier 1 ERP applications are poor values, even for the largest companies.

A Dangerous Idea Two-tiered ERP is a threat to Tier 1

ERP vendors because once more diversity is allowed in enterprise software purchases, it will soon be apparent that Tier 1 ERP vendors offer some of the worst value of all applications purchased by the enterprise software market. We estimated the total cost of ownership (TCO) of purchasing both ERP and non-ERP software from an ERP vendor (a one-hundred-percent ERP vendor software strategy) and the TCO of buying mostly from a Tier 1 ERP vendor. Both strategies are the most expensive purchasing strategies that one can follow, and result in the lowest attainable functionality, implement-ability and usability. Even so, it is still the dominant approach followed by most large and mid-sized companies in the developed countries.

Two-Tiered ERP and SaaS It is widely assumed that “software as a service” (SaaS) is a necessary part of a two-tiered ERP strategy. Two-tiered ERP is about speeding implementation timelines and reducing costs, and both of these objectives are accomplished when using SaaS-delivered solutions.

Matching the ERP System to the Environment Tier 1

ERP vendors essentially own the Fortune 1000 in the US. Large companies have complex requirements and the IT budgets to match. However, Tier 1 ERP also has a high total cost of ownership, long implementation durations, and a degree of complexity that is a poor match for smaller companies. In fact, a major mistake has been for mid-sized companies to “stretch” to implement Tier 1 ERP. Many of these companies ended up with ERP systems that fell to a low level of capability because the companies lack the funding to support the systems. This is partially because of the software, and partially because ERP software has been parasitized by major consulting companies whose business model is to greatly increase the costs of ERP implementations as well as any other enterprise software they implement.10 I would know because I have clients that are in this exact predicament. This is truly the worst-case scenario: an expensive system delivering weak functionality and no real way out. The ERP system cannot be removed because the company spends so much of its IT budget maintaining the Tier 1 ERP system that they cannot afford to pull out. This is the ERP trap and a vicious cycle. It is a phenomenon that was never considered and never predicted but is now entirely commonplace.

In these companies, Excel becomes the predominant system for almost all analysis. Everything becomes about extracting data from the ERP system, making changes in Excel, and uploading the output of the processing back to ERP.

Example

Here is an example. One of my clients used a Tier 1 ERP system for forecasting. The forecasting functionality within the ERP system was extremely difficult to use, and was essentially a black box system. The forecast accuracy was abysmal; first, they could not run the forecasting models appropriately, and second, they could not figure out how to interpret the output because the application had no real user interface—data was uploaded and data was downloaded. In truth, it was barely an application at all—at least not in terms of how we think of a modern application. Just as big of a problem as the poor output was the time wasted by the employees who had to constantly perform gymnastics to adjust for the poor forecast. For this particular client, I used an inexpensive, but modern, forecasting application to create my own forecasts for the company and to do things they never could have done using the functionality in their ERP system. This is the heavy price that is paid if one relies upon ERP systems for planning functions.

Many companies operate as I have just described, and they are operating in a way that is decades behind what is possible. When clients use predominantly Tier 1 ERP systems to get their work done, it saddens me to think of how much human potential is wasted within these companies by working with (and often around) bad software. Poor software selection saddles companies with poor quality applications for many years, and employees are put under pressure to meet objectives that often they cannot meet because the tools they are given are of such low quality. It seems like a bad deal for everyone but a lucky few who benefit from either selling or implementing the software from the major ERP vendors.

The Truth To Two-Tiered ERP

As was discussed previously, two-tiered ERP is based upon an interesting kernel of truth about ERP systems. The actual usage of ERP is explained below:

“Our research finds that one-third of companies with more than 1,000 employees use an ERP application supplied by a single vendor while two-thirds use software from two or more vendors; one-third have software from four or more vendors. There are largely two reasons why companies have heterogeneous ERP environments. One is purely historical: Automating back office functions began decades ago, and companies initially did not roll out or upgrade the systems across the entire enterprise. Moreover, some parts of the organization may have been built through acquisitions. If the acquired entity was relatively large, it often made sense to leave the existing systems in place.

A second reason is that, when it comes to ERP, one size simply does not always fit all; lines of business can be different enough that a single vendor’s offering is not well suited to the needs of all. A two- tier approach recognizes that a big ERP system generally, and the headquarters ERP system specifically, often is a bad fit for the needs of a small offsite division or a remote manufacturing unit in, say, Recife, Brazil that is part of a mostly services-oriented corporation. Using the headquarters ERP vendor’s manufacturing application capabilities may well be overkill for this single-site operation. 

Global firms have a long legacy of ERP heterogeneity, with Forrester noting as long ago as 2004 that a third of firms were already running 10 or more instances.”A Strategic Approach to Establishing Two- Tier ERP

Tier 1 ERP vendors would like you to forget that the vast majority of companies that use ERP systems have multiple ERP systems—sometimes multiple ERP instances in one company—due to things such as each country having its own ERP instance, or a subsidiary in the same country having a separate ERP instance. That is important to consider.

Therefore, part of the two-tiered philosophy is really just “business as usual,” although with the rise of the two-tiered philosophy, this is the first time, at least that I could find, that ERP companies diverged from their primary philosophy of a single instance. Tier 1 vendors developed marketing literature on two-tiered ERP after Tier 2 and Tier 3 ERP vendors released their own marketing literature, promoting the use of their applications for all the tiers. This might make for nice marketing literature, and may help muddy the waters, but it makes little sense to simply use a tier 1 ERP system for all business units/subsidiaries, at least if different instances are required (which would be if the different business units/ subsidiaries have different configuration and customization needs). Using tier 1 ERP software for all of the tiers undermines the advantages of two-tiered ERP, in that a) the buyer would not receive a diversity of functionality as provided by multiple ERP systems and b) the buyer would not receive any benefits of lowered costs and TCO from lower cost ERP tier 2 and tier 3 ERP systems.

Marketing Literature for Multi Tier ERP

Tier 1 vendors clearly released this marketing literature as a defensive measure— to prevent the Tier 2 and Tier 3 vendors from making much headway with the concept of two-tiered ERP. Customers were reading the two-tiered documentation from smaller ERP software vendors, and wanted to know the position of Tier 1 ERP software vendors (one could have guessed their position before reading their documentation). SAP and Oracle have countered with a second proposal: Continue to use their applications for the second tiers, but use their Tier 2 solutions (SAP Business One and Oracle JD Edwards World). Because these are much less expensive applications. This approach is at least cost-effective, but it reduces the

competitiveness and diversity of functionality available to the buyer. If a buyer, through a competitive software selection decides to include SAP Business One or Oracle JD Edwards World as their tier 2 ERP system, then that is perfectly fine, but to simply reward these applications with the selection on the basis of the fact that the buyer already owns the vendor’s Tier 1 offering makes no sense at all, as there are few technological advantages to doing this.

competitiveness and diversity of functionality available to the buyer. If a buyer, through a competitive software selection decides to include SAP Business One or Oracle JD Edwards World as their tier 2 ERP system, then that is perfectly fine, but to simply reward these applications with the selection on the basis of the fact that the buyer already owns the vendor’s Tier 1 offering makes no sense at all, as there are few technological advantages to doing this.

The Supporting Logic Versus Marketing Hyperbole

Most often two-tiered ERP is presented as something new, but, in fact, it is a very common practice. The real difference is in the acknowledgment that a foundational characteristic—single instance ERP—is giving way to a standard approach of multiple ERP systems, not merely as part of a short-term approach, but as part of a long-term strategy. In the past, it was considered more appealing to state that, while one had multiple ERP instances, eventually the company would move to a single instance.

The multi-ERP strategy has been around for as long as there have been ERP systems. Yet IT analysts, consulting firms, and IT trade periodicals that discuss the “new trend” of two-tiered ERP strategies, most often fail to bring up the rather important fact that a big part of the ERP value proposition was supposed to be a single instance of ERP, as explained in the following quote from an article in the Sloan Management Review:

“The concept of a single monolithic system failed for many companies. Different divisions or facilities often made independent purchases, and other systems were inherited through mergers and acquisitions. Thus many companies ended up having several instances of the same ERP system or a variety of different ERP systems altogether, further complicating their IT landscape. In the end, ERP systems became just another subset of the legacy systems they were supposed to replace.”

How can so many entities actively promote the concept of two-tiered ERP without even mentioning that it is in complete opposition to one of the original value propositions of buying ERP systems in the first place? This is a good time to analyze just a few of the logics that were used to sell ERP.

Conclusion

At this point two tier ERP comes across to many as a thoughtful enterprise software strategy, however, an analysis of the origins of two tier ERP point to it being nothing more than a marketing construct that was first proposed, or at least popularized by NetSuite. Marketing constructs can be true or false, but it’s important to identify the source of any concept in order to understand why it was proposed in the first place. In this case, this construct was designed to open up the clients that were primarily tier 1 ERP customers to tier two and three ERP products. There is really nothing more than anecdotal evidence quoted that is used to demonstrate that two teir ERP systems reduce costs/provide benefits over a 100 percent tier 1 strategy, however, given the high expense and low value of tier 1 ERP systems, it would be surprising if a two tier strategy, if properly configured, did not improve outcomes for buyers. I will explain various two tier ERP strategies and their impact on costs and value in Chapter 6: “Applying the Concept of Two-tiered ERP to Your Company.” Two tier ERP has been co-opted as much as possible by Oracle and SAP, however, at its heart, it is essentially a thinly disguised indictment of tier 1 ERP systems generally, and single instance tier 1 ERP systems in particular. In fact, two tier ERP is one of the first cracks in the façade of tier 1 ERP systems, something that, if enterprise software decisions were primarily based upon research and historical analysis, rather than based upon trends and “what other people are doing,” would have occurred some time ago. Another interesting and strange thing about two tier ERP is that while it sounds or seems novel, in fact, it has been the predominant way that companies implement ERP systems—it is only that two tier ERP is explicit in its statement of ERP diversity as a laudable goal—something that was often considered or accepted as simply a transitory state to the “Holy Grail” of a single instance ERP system.

Financial Disclosure

Financial Bias Disclosure

This article and no other article on the Brightwork website is paid for by a software vendor, including Oracle and SAP. Brightwork does offer competitive intelligence work to vendors as part of its business, but no published research or articles are written with any financial consideration. As part of Brightwork’s commitment to publishing independent, unbiased research, the company’s business model is driven by consulting services; no paid media placements are accepted.

ERP Contact Form

  • Want Honest Information about ERP?

    It is difficult for most companies to make improvements in ERP without outside advice. And it is close to impossible to get honest ERP advice from large consulting companies. We offer remote unbiased multi-dimension ERP support.

    This article is free, we do not answer questions for free. Filling out this form is for those that have a budget. If that describes you, just fill out the form below and we'll be in touch asap.

References

The Real Story Behind Tier ERP

Two Tiered ERP 2

The Real Story Behind Two Tier ERP: Separating the Marketing from The Usable Strategy

What the Book Covers

If you need help determining your company’s overall enterprise software strategy and how two-tiered ERP fits in, this book is for you.

Two-tiered ERP is widely understood as the use of different ERP systems for different layers of an organization. Until this book, the effectiveness of a two-tiered ERP strategy could only be determined through anecdotal evidence, the marketing literature of ERP software vendors, and the advice of consulting companies. By understanding two-tiered ERP software within the context of ERP’s history, readers will see how two-tiered ERP may represent a crack in the façade of “big ERP,” and will know how to formulate a comprehensive and logical response to proposals about implementing a two-tiered strategy.

By reading this book you will:

  1. Eliminate confusion over definitions of two-tiered, multi-tiered, and single instance ERP.
  2. Review SAP and Oracle’s Tier 1 and Tier 2 ERP products.
  3. Understand why two-tiered and single instance ERP is not the best strategy.
  4. Appreciate that WHAT is written about two-tiered ERP depends greatly upon WHO is writing it.
  5. Recognize the logic used by vendors to sell two-tiered ERP and whose interests are being served by a two-tiered strategy.
  6. Learn an alternative strategy that provides functionality, cost savings, and the best return on investment.

If you are just beginning your research on ERP systems, read the companion book by the same author, The Real Story Behind ERP: Separating Fiction from Reality first, as it provides the most exhaustive history of ERP currently published.

Related Books

This book is closely tied to the book Enterprise Software TCO, a lack of proper analysis in multiple dimensions (as well as TCO) explaining the uptake of solution categories which are not validated by any evidence. Once ERP systems could not demonstrate much in the way of financial benefits, the book explains how a new logic was developed — that ERP systems were simply “essential infrastructure.” This also turns out not to be true. Of course, the initially proposed argument that ERP software would be the only system that companies ever needed is now laughable three decades after the ERP trend began. Readers will learn that with respect to ERP software, old logics are never proven, simply new hypotheses proposed.

The book is also connected to the book Enterprise Software Selection, because the selection of so many poor quality ERP software solutions from big-name vendors demonstrates a clear inability on the part of many companies to perform a proper software selection.

This book provides a strong focus on SAP ERP as well as Oracle ERP. This gets into SAP ERP ECC/R/3 and Oracle JD Edwards EnterpriseOne and SAP Business One and Oracle JD Edwards World. SAP ERP software is both the author’s area of expertise as well as the most popular ERP software application. ERP software solutions are discussed from the perspective of Tier 1, Tier 2 and Tier 3.

See the Book Page

How to Understand What is Two Tiered ERP

Executive Summary

  • Two tiered ERP is a specific way of managing multiple ERP systems.
  • This serves as an introduction to the concept.

Introduction

We begin with the word “tier,” which means a hierarchy. Interestingly if you type the word tier into an image search engine or stock photography site, the most commonly returned image is that of a wedding cake.

Other common images are steps, however, the image that I found to be the best analogy is the Kuang Si Falls in Laos—because it signifies integration between the different tiers. As we will see further on in the book, integration between the various ERP tiers is critical to the two tiered ERP method.

The term “two-tiered ERP” has two meanings. The more general definition, which I have taken from Wikipedia, is as follows:

“Two-tier ERP software and hardware lets companies run the equivalent of two ERP systems at once: one at the corporate level and one at the division or subsidiary level. For example, a manufacturing company uses an ERP system to manage across the organization. This company uses independent global or regional distribution, production or sales centers, and service providers to support the main company’s customers. Each independent center or subsidiary may have their own business model, workflows, and business processes.”

The second definition, which is attributed to Gartner, is very specific. It imposes certain requirements on how two-tiered ERP is employed and defines different types of two-tier ERP implementations.

“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 [bold added]. 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.”

According to Gartner, if there is no master ERP system to which the other company’s ERP systems are integrated, it is a “zero-tier system.” Gartner proposes that, in order for a two-tiered solution to meet the definition, it must include an overseeing or master ERP system or some type of integration that connects up the ERP systems. Furthermore, Gartner has the following to say regarding zero- tiered ERP strategies:

“A zero-tier approach, where there is no integration between the core (Tier 1) solution and the solution(s) used by subsidiaries (each operating autonomously under its own profit and loss [P&L] rules), is not considered a tiered strategy—it’s also usually a mess waiting to happen. Only if some level of financial consolidation or information sharing among systems is present (subsidiary to core, or subsidiary to subsidiary) is it considered tiered.”

Gartner’s definition is a bit too rigid for general use; two-tiered ERP is often described simply as using different ERP systems from different software vendors for different parts of the business. Gartner goes on to propose that two-tiered ERP is not a best-of-breed approach where modules from the different ERP systems are mixed and matched.

“The term ‘two-tier ERP’ has been used for several years, although it is also referred to as ‘hub and spoke’ or ‘multi-tier 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.”

On this I agree; two-tiered ERP does not combine different modules from different ERP systems.

Two-tiered ERP with Integration to a Master ERP System Versus Business Intelligence Integration

Gartner proposes the following architecture to represent two-tiered ERP.

Getting ERP systems to integrate to one another is quite a lot of work. If the various companies do not require integration beyond buying and selling from one another, it’s unclear why Gartner sees this as preferable. There is little payoff for all the work. Certainly the following architecture is preferable.

Companies tend to desire this architecture more as it provides flexibility: different ERP software can be used depending upon the circumstances, but all the ERP systems can be integrated through the business intelligence layer. Gartner seems to consider this to be a two-tiered ERP strategy, as information is shared from the ERP systems.

Actually, a software vendor with some of the best material on the topic of integrating multiple ERP systems is Teradata, the well-respected business intelligence company. This is explained in one of their white papers.

“The Teradata approach centralizes all legacy data before mapping to the new ERP Environment. This allows significant portions of the migration effort to be reused across multiple source systems. Leveraging existing tools can significantly reduce the time required for data mapping and cleansing tasks.”

“The Teradata environment developed during the ERP conversion project provides an alternative to standardizing on a single ERP instance while still enabling a single view of the enterprise. Enterprise-level global visibility can be provided within the Teradata system at a fraction of the cost and time of extending an ERP instance into these regions. “Because the road to reducing ERP instances generally stretches across many years, a decision to collapse ERP instances is not taken lightly. Strategic business or cost considerations may dictate that a company looks for alternatives to get to a single view or reduced ERP instances, but never gets to a single ERP instance [bold added]. Whatever the case for the company in question, a data warehouse provides the platform that facilitates integration and eases ERP transitions.”

Notice the bolded statement, that while a single instance is often put forward as a goal, that it is often not reached. Teradata then provides the detail related that comes with moving to a single instance ERP.

However, Teradata’s applications can also be used to simply manage a two-tiered ERP solution architecture.

They are speaking here of migrating ERP systems, however, this experience can also be leveraged for integrating multiple ERP systems to a single business intelligence platform. That is with multiple ERP systems integrated to a single business intelligence platform the buyers can receive a comprehensive view of the multiple businesses that are controlled by different ERP systems.

Two-tiered Versus Multi-tiered ERP

These last two graphics represent what two-tiered ERP is not, which is the integration of different ERP systems. Notice that I included a Tier 3 ERP system in the graphic.

So while “two-tiered ERP” implies the use of two tiers of ERP systems, in fact, two-tiered ERP can also mean the use of a third tier ERP system. Essentially this is another dimension to the definition of two-tiered ERP: two-tiered ERP can mean more than two tiers as explained in the following quotation.

“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 multi-tiered 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 multi-tiered 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 multi-tiered deployment requirement. It’s all in the requirements definition.”

When one gives the topic some thought, two-tiered ERP is actually a rather strange shorthand for various divisions and subdivisions, as there is also a term called “multi-tier ERP.” Multi-tier ERP is where different tier ERP systems—Tier 1, Tier 2 and Tier 3—are deployed, with Tier 3 being used for the smallest of the entities within or associated with the purchasing company. One might propose that “multi-tier ERP” is the more accurate term as it applies more broadly. However, “two-tier” ERP is by far the most commonly used term. As “multi-tier” is used infrequently in practice, I will stick with “two-tier” for this book, and I will use the term “two-tiered ERP” to also mean multi-tier ERP.

How Two-tiered ERP Is New Two-tiered

ERP is the opposite of single instance ERP—the long-held logic originally used by ERP software vendors to sell the ERP concept. This logic held that the company should use a single integrated system for all of its subsidiaries. In fact, the reason for the use of the term “tier” is to present the company as a hierarchy of superior and subordinate subsidiaries. However, the term is actually not all that helpful, except to the degree that the higher tier ERP is used for bigger entities and vice versa. Single instance ERP, long held out as a goal by ERP vendors, never became the normal mode of operation. And this is a very important distinction: two-tiered ERP is different conceptually from single instance ERP, but is simply a reflection of what has come to be, and therefore does not differ from common practice. This very interesting feature of two-tiered ERP will be discussed in detail in this book and is central to understanding the concept as well as the reality of ERP.

As has been explained, two-tiered ERP normally means that different types of tiers of vendors are used for different subsidiaries of a company. These tiers correspond to how the ERP vendor is classified. As mentioned in the first chapter, SAP and Oracle are considered Tier 1 ERP vendors, while Microsoft, Infor and Epicor are considered Tier 2 ERP vendors. Generally, the systems from Tier 1 ERP vendors have more functionality, are more expensive, and are directed toward the largest companies, as explained by the following Gartner quotation.

“Tier 1 vendors that sell ERP systems are typically those that are used by global corporations with annual revenues in excess of $1 billion. Such systems are more complex, provide greater functionality, need higher numbers of trained personnel and have higher cost of ownership. Tier 1 vendors are likely to offer global support to their clients. SAP, Oracle and Microsoft are considered Tier 1 vendors in the ERP space. “Tier 2 ERP vendors mainly serve mid-market businesses, with revenues from $50 million to $1 billion. Their products are of medium complexity and functionality, and have lower ownership costs than their Tier 1 counterparts. Often they are focused on individual industry verticals, whereas Tier 1 products are broad-based. Fujitsu, Epicor, Ramco and Sage Software are some Tier 2 ERP vendors. “Tier 3 vendors sell ERP systems that are designed for small companies that have annual revenues from $10 million to $50 million. Such systems have the least complexity and costs of ownership; at the same time, their broader functionality is also much lower. However, they often have greater focus on individual industry verticals. Expandable, NetSuite and Syspro are some examples of Tier 3 vendors.”

However, this second general definition—or modality of the first definition—is two-tiered philosophy as it is generally implemented. This is expressed in the following quotation:

“A typical set-up is to have Oracle or SAP operating as the primary system while adding a different tool elsewhere, often using a software- as-a-service delivery model. Infor, Microsoft, Epicor, Plex, Ultimate Software, NetSuite, Workday, QAD and IFS are some of the more frequently used vendors for the secondary deployments, Wang noted.”Two-tier Strategy a Way to “Reinvigorate” ERP

However, because SAP offers both a Tier 1 and Tier 2 ERP application, a two-tiered strategy could consist of using two different applications from the same software vendor.

If all of this discussion of tiers and ERP applications have left your head spinning, you are not alone. The following graphic should help clarify which vendor is in what tier.

Some view the term “Tier 2 or 3” to be an indicator of software quality or value. It isn’t. The Tier 1 ERP vendors produce some of the worst-value ERP applications that are sold in the ERP software category. Two of the highest quality and highest value ERP applications that we have evaluated at Software Decisions are actually Tier 2 ERP software vendors.

To wrap up this chapter, the following features apply to two-tiered ERP:

  • Tier 2 ERP software vendors focus on the mid-market, and Tier 3 ERP software vendors focus on the mid-market and even the small market.
  • Two-tiered ERP is defined as using applications from different software vendors from each tier. Most often the top tier would use a Tier 1 ERP application (often an on-premises version of the software) while the subsidiaries may use a Tier 2 or Tier 3 ERP application.
  • Some Tier 1 ERP vendors recommend using their Tier 1 software for all the various companies. However, this is not a two-tiered strategy; it is a multi-instance strategy—that is a multi-instance of the same application.

Conclusion

The term two-tier ERP means applying different ERP systems to different “tiers” of the business. In a nutshell, the larger and more prominent parent companies tend to receive the tier 1 applications, while the subsidiaries receive ERP systems that are considered tier 2. IT analysts and software vendors present a model where multiple ERP systems are connected to a master ERP system. There is no real evidence provided as to why this is a good thing, and it is also contradictory to ERP systems, as ERP systems are designed to represent the “enterprise.” Furthermore, attempting to integrate multiple ERP systems increases the expense of following a multi-ERP system strategy. There is also no strong delineation between the use of the term two-tier ERP versus multi-tier ERP strategy. Both refer to the use of multiple ERP systems for various tiers of entities within one business. However, both of these terms are clearly the opposite of the term “single instance ERP,” which was an unrealized goal of many buyers that implemented ERP systems, but upon closer examination, there is real justification for the goal of using a single instance ERP system. Certainly using one system can save money as it provides economies of scale—and the more users a single instance of an application has, the lower its costs tend to be per user. However, this relationship cannot be generalized to it being a universally applicable strategy as one must give up flexibility, functionality and must perform more customization to the application as it grows in scope. Complexities in mating one monolithic system to variable requirements was a major reason that the single instance concept, while appealing if one only considered an overly simplistic set of assumptions, never became a commonly implemented approach.

Financial Disclosure

Financial Bias Disclosure

This article and no other article on the Brightwork website is paid for by a software vendor, including Oracle and SAP. Brightwork does offer competitive intelligence work to vendors as part of its business, but no published research or articles are written with any financial consideration. As part of Brightwork’s commitment to publishing independent, unbiased research, the company’s business model is driven by consulting services; no paid media placements are accepted.

ERP Contact Form

  • Want Honest Information about ERP?

    It is difficult for most companies to make improvements in ERP without outside advice. And it is close to impossible to get honest ERP advice from large consulting companies. We offer remote unbiased multi-dimension ERP support.

    This article is free, we do not answer questions for free. Filling out this form is for those that have a budget. If that describes you, just fill out the form below and we'll be in touch asap.

References

The Real Story Behind Tier ERP

Two Tiered ERP 2

The Real Story Behind Two Tier ERP: Separating the Marketing from The Usable Strategy

What the Book Covers

If you need help determining your company’s overall enterprise software strategy and how two-tiered ERP fits in, this book is for you.

Two-tiered ERP is widely understood as the use of different ERP systems for different layers of an organization. Until this book, the effectiveness of a two-tiered ERP strategy could only be determined through anecdotal evidence, the marketing literature of ERP software vendors, and the advice of consulting companies. By understanding two-tiered ERP software within the context of ERP’s history, readers will see how two-tiered ERP may represent a crack in the façade of “big ERP,” and will know how to formulate a comprehensive and logical response to proposals about implementing a two-tiered strategy.

By reading this book you will:

  1. Eliminate confusion over definitions of two-tiered, multi-tiered, and single instance ERP.
  2. Review SAP and Oracle’s Tier 1 and Tier 2 ERP products.
  3. Understand why two-tiered and single instance ERP is not the best strategy.
  4. Appreciate that WHAT is written about two-tiered ERP depends greatly upon WHO is writing it.
  5. Recognize the logic used by vendors to sell two-tiered ERP and whose interests are being served by a two-tiered strategy.
  6. Learn an alternative strategy that provides functionality, cost savings, and the best return on investment.

If you are just beginning your research on ERP systems, read the companion book by the same author, The Real Story Behind ERP: Separating Fiction from Reality first, as it provides the most exhaustive history of ERP currently published.

Related Books

This book is closely tied to the book Enterprise Software TCO, a lack of proper analysis in multiple dimensions (as well as TCO) explaining the uptake of solution categories which are not validated by any evidence. Once ERP systems could not demonstrate much in the way of financial benefits, the book explains how a new logic was developed — that ERP systems were simply “essential infrastructure.” This also turns out not to be true. Of course, the initially proposed argument that ERP software would be the only system that companies ever needed is now laughable three decades after the ERP trend began. Readers will learn that with respect to ERP software, old logics are never proven, simply new hypotheses proposed.

The book is also connected to the book Enterprise Software Selection, because the selection of so many poor quality ERP software solutions from big-name vendors demonstrates a clear inability on the part of many companies to perform a proper software selection.

This book provides a strong focus on SAP ERP as well as Oracle ERP. This gets into SAP ERP ECC/R/3 and Oracle JD Edwards EnterpriseOne and SAP Business One and Oracle JD Edwards World. SAP ERP software is both the author’s area of expertise as well as the most popular ERP software application. ERP software solutions are discussed from the perspective of Tier 1, Tier 2 and Tier 3.

See the Book Page

How ERP is Similar to a Out of Control Octopus

Executive Summary

  • ERP has grown into an out of control octopus that has taken over IT.
  • The implications of such high overhead systems go little covered in IT media.

Introduction

Economics gave us the useful term of “externality.” When an entity engages in a behavior that places costs on other entities for which it does not compensate them, this is referred to as a negative externality. The ERP craze has been primarily an exercise in the perpetuation of a negative externality on the part of ERP vendors and ERP implementation companies on ERP buyers, and given the evidence of poor ERP functionality and costs, it is amazing that it has gone on for this long. It is the greatest misallocation of resources in the still relatively young enterprise software industry.

The Results of Research into ERP Systems

My analysis of the research into ERP systems tells a very interesting story about how software is purchased. I have explained the issue of ERP systems to a number of people—from executives to technical resources, to laypeople. A very effective analogy to use with people not familiar with ERP is to think of ERP as an octopus. ERP systems began as one thing, and now they are an unruly and expensive octopus, which connects throughout the enterprise but mostly in unproductive ways. The following quotation brings up an interesting point that more companies should consider.

“Over the last two decades, companies have plowed many billions of dollars into enterprise resource planning (ERP) systems and the hardware required to run them. But what, in the long run, will be the legacy of ERP? Will it be viewed as it has been promoted by its marketers: as a milestone in business automation that allowed companies to integrate their previously fragmented information systems and simplify their data flows? Or will it be viewed as a stopgap that largely backfired by tangling companies in even more systems complexity and even higher IT costs?”Nicolas Carr

The Reality of ERP ROI

ERP software is a category of software with a very low ROI (if one limits the financial returns to the ERP system itself), and a negative ROI when one looks at how ERP negatively impacts a company’s overall software investment—for instance, the negative affect on the company’s other applications, as well as how ERP isolates companies from customers and suppliers. In the book, Enterprise Software Selection: How to Pinpoint the Perfect Software Solution using Multiple Information Sources, I describe how most companies that buy enterprise software lack the internal ability to validate the claims made by software vendors. In addition, they are often led down the garden path to a bad decision by consulting companies that place their interests ahead of their clients. ERP systems became so popular because the actual claims about their benefi ts were never analyzed properly.

How The Lucrative Nature of ERP Leads to Censorship on the Topic of ERP Benefits

Because ERP systems have been so lucrative for software vendors and consulting companies, there has been a strong incentive for them to get companies to purchase them. For decades, when a company complained to their consultants about their current system’s shortcomings, the consultants commonly responded that what the company really needed was an ERP system (cue the oversimplified explanation of how ERP systems integrate all of the company’s processes). One can imagine how many times this same conversation has played itself out at companies around the globe. The unfortunate fact of the matter is that most ERP systems were purchased without appropriate research; a very large percentage of them were purchased because they were seen as the “thing” to implement. This faulty logic controls many IT purchase decisions, as the following quotation attests.

“Interviews with the managers confi rmed that if a successful strategic IT (e.g., laptops to salespeople) was implemented by one or two firms, the other competitors soon followed the lead. Thus, although the IT intensity of the industry increased, no net performance effect was observed.”The Relationship Between Investment in Information Technology and Firm Performance: A Study of the Valve Manufacturing Sector, Information Systems Research

The Misleading Sales Job of ERP

At its heart, ERP was a misleading and oversimplified, although a highly compelling, concept. It was never a good investment and now hinders a company’s ability to leverage the Internet and reduces its ability to gain value from its other applications. ERP was based upon several false assumptions that have been explained throughout this book. The central premise of ERP—that you could have a single set of integration applications from a single vendor that would always meet the implementing company’s needs and therefore greatly reduce and almost eliminate the need to integrate to other applications—was delusional when it was first proposed. It is even more delusional now.

How Cloud and (AWS and Google Cloud, etc..) Works Against ERP

The development of information systems in the form of Internet and SaaS/PaaS/IaaS service providers has worked in the against ERP. ERP are primarily closed systems, but SaaS/PaaS/IaaS are open systems.

The future of information systems will involve mixing and matching the best solutions from a variety of vendors, with much of the data storage and processing being handled remotely. The IT burden on companies will be greatly reduced, and ERP has no place in this model. The more that companies cling to their ERP investments, the less they will be able to participate in this open approach to accessing application functionality. Forward-thinking companies will consider their ERP investments as what they are: sunk costs. They will migrate to better functionality in other systems and take a piecemeal approach to ERP. The logics that were used to sell ERP systems was never anything more than hypotheses. When I explain why any well-promoted concept should have evidence to support it, often the listener simply repeats the hypothesis back to me. At that point, I have to say, “Yes that is the hypothesis, but there is no evidence to support it.”

Of course, anyone has the right to propose any hypothesis they like. However, while a hypothesis may turn out to “make sense” or seem likely, it’s only through testing that we can know for sure. If a hypothesis has had a full opportunity to be tested (after 30 years, ERP has certainly had this opportunity) and has proven false, then it is time to dispense with the hypothesis and to move to a new one. That is how all knowledge advances. Two powerful vendors—SAP and Oracle—were installed at the top of the enterprise software hierarchy because of ERP.

This development has been bad for the enterprise software market, as these two actors have abused their power by offering their clients low value and high costs, and by using account control techniques. Many other ERP vendors were never able to capitalize on their ability to sell ERP software and to sell other types of software.

Is There Truly No Alternative to ERP?

Proponents of ERP make it sound as if there are no alternatives to ERP, or that the alternatives are “poorly integrated” (which is another way of saying that there are no alternatives). A misleading argumentative technique frequently used by people who are not interested in evaluating or discussing alternatives is to judge ideas as not representing valid alternatives. When an alternative is presented, they may say, “That is not a real alternative,” when it is in fact an alternative; it is simply not an alternative they agree with.

Reversing the Evidence Requirement for ERP

Arguments are certainly simplified when you state that all other alternatives are not real alternatives, do not provide evidence to support your claims, and announce that you have chosen the one true alternative. The following quotation is an example of this type of argument.

“If I’m a major enterprise, especially a manufacturer, what’s the cost of NOT having an ERP system?”

This frames the question in the reverse and is an example of the logical fallacy of shifting the burden of proof. It is designed to essentially ask the person on the other side of the argument to prove that ERP is not a good investment. This is called “proving a negative.” The responder is asked to prove that ERP is not a good investment. This is not how proof works in science. We don’t start off by making a contention, providing no evidence, and then asking the other person to prove our statement is incorrect. But since the question was asked…the bulk of evidence shows that the benefi ts of ERP systems are small. Therefore, naturally, the costs of not having an ERP system are less than the cost of having an ERP system, both in terms of implicit and explicit costs. A company with no ERP system will incur fewer software-related costs and gain better functionality (by choosing the best software for its needs rather than whatever their ERP vendor is offering).

“What are my alternatives to accomplish the same objectives? I submit those alternatives are few and poorly integrated.”

There are a wide variety of alternatives available to accomplish the same objectives. Quite a few financial and accounting applications can be selected and connected to any number of other applications in order to replicate (and greatly exceed) what ERP does. Secondly, while ERP systems are better integrated to themselves, which is a highly parochial way of looking at integration, ERP offers no integration benefit for connecting to a company’s other systems, and may offer higher integration costs than non-ERP environments. Here is a further quotation from the failed Air Force’s ECSS initiative:

“It’s not worth the money to poorly implement anything. It’s worth the money to take the time, hire people with the appropriate knowledge, and do the necessary planning and testing to minimize the chances of an ERP installation failing.”

Unending Excuses by ERP Consultants and Vendors on ERP Failures

In this statement, the individuals take the common approach to analyzing ERP failures: the failure of the ERP project was related 100 percent to how it was implemented and not related to issues with the ERP system itself. How do faulty implementation methodologies explain the low satisfaction rate with ERP systems as a whole? How did a system, which has never shown much financial and operational benefit to companies, gain its halo? Were all ERP systems incorrectly implemented? These types of comments are extremely common among ERP proponents, but they offer no evidence and no new information. They provide nothing more than an excuse, which—thirty years into ERP history—is becoming somewhat stale. The evidence, which few have any interest in reviewing, is that ERP systems produce a meager return on investment, and in other ways are major distractions for companies, drawing energy away from other initiatives. All of the investment of time and money in ERP must be compared against what it could provide if invested in other areas.

Options for ERP

ERP proponents like to present the idea that there are not options to ERP. In fact, they go a step further, they state that there aren’t real alternatives to whatever ERP they happen to have resources they can bill for. Then after they buy ERP, they tell their customers they don’t have options outside of buying applications from the same vendor that made the ERP system. Consulting companies are very good at leading companies down a restricted number of options, all of which end up benefiting the consulting company itself.

Here is the truth, there are a large number of options to ERP systems, and furthermore to how any ERP system is used. Here are just a few alternatives — without getting into any specific vendor offerings.

  1. A commercial ERP system can be purchased, but large areas of it unused, and combined with better external functionality.
  2. A commerical ERP system can be purchased, but large areas of it unused and connected to custom functionality/custom applications rather than porting the code to the ERP system (that is not recoding everything in say SAP’s ABAP and porting to the SAP system)
  3. An open source ERP can be used and with the large extra pool of money, any number web-based (hosted on AWS or Google Cloud for example) applications can be developed and connected to the ERP system.
  4. ERP can be dispensed with entirely, and a financial solution can be connected to both specialized applications and custom coded applications.
  5. ERP can be dispensed with entirely, and a custom coded solution can be created which covers financials and other and combined with specialized applications.

These are just five options. Any number of permutations are possible from these options. The evidence of decades of ERP projects heading back to the 1980s is clear; no company of any size or complexity will use an ERP system by itself without support from other applications.

Financial Disclosure

Financial Bias Disclosure

This article and no other article on the Brightwork website is paid for by a software vendor, including Oracle and SAP. Brightwork does offer competitive intelligence work to vendors as part of its business, but no published research or articles are written with any financial consideration. As part of Brightwork’s commitment to publishing independent, unbiased research, the company’s business model is driven by consulting services; no paid media placements are accepted.

ERP Contact Form

  • Want Honest Information about ERP?

    It is difficult for most companies to make improvements in ERP without outside advice. And it is close to impossible to get honest ERP advice from large consulting companies. We offer remote unbiased multi-dimension ERP support.

    This article is free, we do not answer questions for free. Filling out this form is for those that have a budget. If that describes you, just fill out the form below and we'll be in touch asap.

References

https://www.forbes.com/sites/oracle/2015/12/24/5-signs-that-cloud-erp-has-serious-momentum/#4a8073d2e8cc

The Real Story on ERP

ERPThe Real Story Behind ERP: Separating Fiction From Reality

How This Book is Structured

This book combines a meta-analysis of all of the academic research on the benefits of ERP, coupled with on project experience.

ERP has had a remarkable impact on most companies that implemented it. Unplanned expenses for customization, failed implementations, integration, and applications to meet the business requirements that ERP could not–have added up to a higher Total Cost of Ownership for ERP were all unexpected, and account control, on the part of ERP vendors — is now a significant issue affecting IT performance.

Break the Bank for ERP?

Many companies that have broken the bank to implement ERP projects have seen their KPIs go down— but the question is why this is the case. Major consulting companies are some of the largest promoters of ERP systems, but given the massive profits they make on ERP implementations — can they be trusted to provide the real story on ERP? Probably not, however, written by the Managing Editor of SCM Focus, Shaun Snapp — an author with many years of experience with ERP system. A supply chain software expert and well known for providing authentic information on the topics he covers, you can trust this book to provide all the detail that no consulting firm will.

By reading this book you will:

  • Examine the high failure rates of ERP implementations.
  • Demystify the convincing arguments ERP vendors use to sell ERP.
  • See how ERP vendors take control of client accounts with ERP.
  • Understand why single-instance ERP is not typically feasible.
  • Calculate the total cost of ownership and return on investment for your ERP implementation.
  • Understand the alternatives to ERP.

Chapters

  • Chapter 1: Introduction to ERP Software
  • Chapter 2: The History of ERP
  • Chapter 3: Logical Fallacies and the Logics Used to Sell ERP
  • Chapter 4: The Best Practice Logic for ERP
  • Chapter 5: The Integration Benefits Logic for ERP
  • Chapter 6: Analyzing The Logic Used to Sell ERP
  • Chapter 7: The High TCO and Low ROI of ERP
  • Chapter 8: ERP and the Problem with Institutional Decision Making
  • Chapter 9: How ERP Creates Redundant Systems
  • Chapter 10: How ERP Distracts Companies from Implementing Better Functionality
  • Chapter 11: Alternatives to ERP or Adjusting the Current ERP System
  • Chapter 12: Conclusion

How To Understand Alternatives to Standard ERP Advice

Executive Summary

  • ERP vendors and consultants propose that there are no alternatives to ERP.
  • Learn about very realistic ERP alternatives.

Introduction

ERP promoters make a serious misrepresentation in their discussions of ERP by suggesting that there is no alternative to ERP. To think that there is no alternative, one would have to be biased (either financially—they work in or somehow make money from ERP—or nonfinancially—they are simply used to ERP environments), or they simply don’t understand the enterprise software market very well. Actually there are plenty of alternatives to ERP. Some of the alternatives call themselves “ERP” because this has become desired terminology, even though they would not meet the technical defi nition of ERP.

Is Criticism of ERP Simply Negative and Counterproductive?

As part of a broader and quite interesting article about enterprise software, Cynthia Rettig was critical of ERP and SOA software and implementations. In this article, she begins with the following explanation of how IT grew as a percentage of investment since 1970.

“Back-office systems—including both software applications and the data they process—are a variegated patchwork of systems, containing fifty or more databases and hundreds of separate software programs installed over decades and interconnected by idiosyncratic, Byzantine and poorly documented customized processes. To manage this growing complexity, IT departments have grown substantially: As a percentage of total investment, IT rose from 2.6 percent to 3.5 percent between 1970 and 1980. By 1990 IT consumed 9 percent, and by 1999 a whopping 22 percent of total investment went to IT. Growth in IT spending has fallen off, but it is nonetheless surprising to hear that today’s IT departments spend 70 percent to 80 percent of their budgets just trying to keep existing systems running. “But these massive programs, with millions of lines of code, thousands of installation options and countless interrelated pieces, introduced new levels of complexity, often without eliminating the older systems (known as ‘legacy’ systems) they were designed to replace. In addition, concurrent technological and business changes made closed ERP systems organized around products less than a perfect solution: Just as companies were undertaking multiyear ERP implementations, the Internet was evolving into a major new force, changing the way companies transacted business with their customers, suppliers and partners. At the same time, businesses were realizing that organizing their information around customers and services—and using newly available customer relationship management systems—was critical to their success.

“The concept of a single monolithic system failed for many companies. Different divisions or facilities often made independent purchases, and other systems were inherited through mergers and acquisitions. Thus, many companies ended up having several instances of the same ERP systems or a variety of different ERP systems altogether, further complicating their IT landscape. In the end, ERP systems became just another subset of the legacy systems they were supposed to replace.”

So much money now flows from the ERP industry that criticism is not well tolerated. A lot of water has passed under the bridge here; many entities (whose pockets would be lined by the sale) recommended ERP systems to clients, even though there was no evidence that the ERP systems would improve the condition of these companies. Several of those who criticized Cynthia Rettig had the following to say:

“There’s really nothing new in [Ms. Rettig’s] analysis. But Rettig goes a step further and says there’s no hope for the future. In fact, while she doesn’t offer any remedies for her gloomy prognosis, she does quash one—service-oriented architecture (SOA).”

The beginning of this quotation provides an example of the logical fallacy argument from repetition. Those who dislike research or someone else’s conclusions, but do not have anything of substance to add offer this standard criticism. Rettig disagrees with the proposal that SOA will solve the problems of ERP (a prognosis that ended up being true). Why is that considered “gloomy”?

SOA to the Rescue?

If there is little evidence that SOA will remedy the issues with ERP, then why invest resources into it? Secondly, if there is “nothing new” in Rettig’s analysis, perhaps the analysis is synthesized in a different way. Furthermore, I read through countless articles on ERP that repeated unfounded statements regarding the benefits of ERP—and Rettig’s analysis, and I can’t recall anyone criticizing these generic articles that could have come off of a copy machine from previous articles, yet one of the first articles to be critical of ERP as a concept is not new? What is this author’s definition of new? The explanation that ERP systems have performed poorly by any measure and have a bleak future is not generally accepted, so her analysis is new in the sense that it explains something that is generally not known. Actually Rettig’s article is novel in many ways; it is not original research, but does a nice job referencing multiple sources of original research. Furthermore, there is nothing new in the multitude of articles about the opportunity of ERP or about getting more value from ERP, or how SOA was going to make all the ERP investments worthwhile. But no one seems to criticize those articles—because they are promotional. In terms of the criticism regarding “not offering any remedies,” firstly, not every form of analysis needs to provide a solution. The very idea that research or observations need to provide remedies (why would anyone think that is true?), is itself a pretext for rejecting research. This does not provide a positive outlook. In fact, the remedy should be self-evident: reduce one’s investment in ERP software, and do not place one’s bet on SOA as a solution.

As it turns out, this remedy would have been the correct choice. This type of criticism deliberately evades the obvious behavioral adjustment that is implicit with Cynthia Rettig’s analysis. As long as the standard is what is positive rather than what is true, the evidence required for a promotional statement will always be lower than the evidence required for a critical statement.

Reducing ERP Dependency

Companies will benefit if they reduce their dependency on ERP—particularly “Big ERP”—in even small ways. Any redirection of resources away from ERP (for example, replacing ERP functionality with external systems) should benefi t the company over the long term. However, companies that buy new non-ERP software that helps them manage their businesses better rather than their ERP software must still pay the support cost of the system, and they will pay the same amount even if they turn off portions of their ERP system. This is a major reason as to why so many companies have continued to implement uncompetitive functionality in their ERP systems when so many better solutions are available in the marketplace: they are attempting to utilize their pre-existing investment in their ERP system. However, our research demonstrates that this is a faulty logic: companies can only expect to save 12.5 percent of the application’s TCO by leveraging the sunk cost of a previously implemented ERP system. Other applications that are specifically designed to meet business requirements (aka best-of-breed) have better ratings in a variety of compensating criteria. Companies must consider which costs are higher: the cost to purchase better software plus pay the support cost of their ERP system, or the continuing indirect costs associated with their ERP system, including:

  1. A longer implementation
  2. More customization expense
  3. A higher-risk implementation
  4. Lower functionality/worse fit of functionality
  5. Lower usability
  6. Lower maintainability

The Research is Conclusive for the Negative Hypothesis

Once all the negatives are recognized, ERP cannot even be shown to improve the financial performance of companies. The only real demonstrated benefit of ERP has been to the ERP vendors and to implementation companies, not to the actual buyers of ERP software. A purchase of an ERP system is an extremely effective way to lock in a customer to a vendor, and to allow the vendor to sell other applications to current customers. Have ERP systems been beneficial for SAP, Oracle, IBM, Deloitte and all manner of consulting companies? There the evidence is clear: ERP has greatly benefited those that sell and implement ERP software. Therefore, if you want to benefit from ERP, sell it or implement it, but don’t buy it.

ERP Adjustment

The value of Big ERP is just not there. Some of the highest rates in the enterprise software space are being charged for what amounts to basic functionality. The resources can be transitioned from Big ERP to applications that offer a better ROI. ERP disintegration is a term that I have coined to describe what should be the next phase of ERP: that is, to begin to give up the long-dead idea that ERP can meet all of a company’s needs (the original proposition for ERP), and that “getting the most” out of ERP is the best strategy for a company to follow. Getting the most from ERP translates very simply to giving the least to your business. Rather than trying to get ERP to do things that it is not good at doing, more diverse applications should be brought into the fold, along with more analytical skills. The ERP period was a period when many people turned their brains off and put their trust in ERP vendors and in offi cial “authorities” (all of whom had fi nancial confl icts of interest) to answer all of their question and to meet all of their requirements. With ERP disintegration, true system integration skills will be brought back within implementing companies and custom solutions will be developed that fit the company’s needs. On average, companies still have 60 percent of their ERP systems modules implemented. It’s been a long road and the payoff has been poor.

It is now all too obvious that the promise of ERP will not be realized, and it will not get better in the future. Too often, applications were purchased from the ERP vendors because customers preferred to go with familiar vendors over vendors whose software best met their business requirements. IT departments have been covering up the defi ciencies in software purchased from the major ERP vendors for many years now, and it has led to poor outcomes. Companies looking for the easiest route to enhancing the value of their IT spend should break the cycle of dependency on their ERP vendors and create a competitive environment that rewards software innovation and the best software available. This means running tighter and more analytical software selections, and comparing what is currently implemented in the ERP system against applications that could improve the area.

Free from Overinvestment in ERP

Freed from overinvestment in ERP, the company is able to choose the best software for its needs in each area and then integrate this software directly to the fi nance system. However, for those who already have ERP, the question becomes: What to do with the ERP system, and how to best leverage it?

Essentially, the effect of the ERP system must be minimized. Different areas of the ERP system will gradually cede ground to other applications and the more quickly this happens, the more quickly companies can improve their IT by leveraging the better functionality in non-ERP applications. As a result, ERP vendors will have less infl uence over your company, and your company may not need to upgrade its ERP system as frequently. Remember that there is no reason to look to other software from the ERP vendors, or to give their software preferential treatment.

One approach to detaching from your ERP system is to deactivate complete modules or portions of modules. ERP systems are modular, and in fact, most companies have not implemented all of the modules in their ERP system, but instead continue to use other applications and connect them to the ERP system—although they pay a high price in integration costs and functionality incompatibility to do so. A company can run one module or several modules, and can slowly decommission portions of each module and attach best-of-breed applications. A company that is running a sales and distribution module, along with a production planning module and finance/accounting module, could deactivate the production planning module and instead use a best-of-breed production planning and execution system from the vendor of their choice. They would then integrate this production planning module back to the ERP sales module and the finance/accounting module, instead of integrating the external production planning and execution system to the production planning module, which would then interact with the sales module and the finance/accounting module.

There are plenty of alternatives to an ERP centric approach, and many companies use them. I have included a few alternatives in this book, but this book is really directed toward a review of the research on ERP.

ERP Alternatives Per Company Size

Larger companies tend to be the bread and butter of large ERP vendors such as SAP and Oracle. Mid-sized companies do not use anywhere near the amount of functionality offered by these software vendors. SAP and Oracle started off building their software around the needs of big companies. They adjusted their software to appeal to smaller companies, but their solutions are simply overkill for anything but the larger companies. Therefore, when people address the topic of Big ERP, it is from the perspective that ERP has proven something—at least at big companies. When they do this, they essentially accept the assumptions they have heard from the marketing departments of ERP vendors and their lieutenants, the large consulting companies. As I have shown in this book, research has proven that the fanciful projections regarding ERP were simply marketing hyperbole. To accept the position that “ERP must be helpful” is to accept something that has never been proven. It is argumentum ad numerum—a fallacious argument—that concludes the proposal is true because many people (and companies) believe it to be true.

Options for ERP

ERP proponents like to present the idea that there are not options to ERP. In fact, they go a step further, they state that there aren’t real alternatives to whatever ERP they happen to have resources they can bill for. Then after they buy ERP, they tell their customers they don’t have options outside of buying applications from the same vendor that made the ERP system. Consulting companies are very good at leading companies down a restricted number of options, all of which end up benefiting the consulting company itself.

Here is the truth, there are a large number of options to ERP systems, and furthermore to how any ERP system is used. Here are just a few alternatives — without getting into any specific vendor offerings.

  1. A commercial ERP system can be purchased, but large areas of it unused, and combined with better external functionality.
  2. A commerical ERP system can be purchased, but large areas of it unused and connected to custom functionality/custom applications rather than porting the code to the ERP system (that is not recoding everything in say SAP’s ABAP and porting to the SAP system)
  3. An open source ERP can be used and with the large extra pool of money, any number web-based (hosted on AWS or Google Cloud for example) applications can be developed and connected to the ERP system.
  4. ERP can be dispensed with entirely, and a financial solution can be connected to both specialized applications and custom coded applications.
  5. ERP can be dispensed with entirely, and a custom coded solution can be created which covers financials and other and combined with specialized applications.

These are just five options. Any number of permutations are possible from these options. The evidence of decades of ERP projects heading back to the 1980s is clear; no company of any size or complexity will use an ERP system by itself without support from other applications.

Conclusion

Executive decision-makers undermine their software selection process when they attempt to validate the statements about and capabilities of applications that neither they, nor other people in their company, have experience with. The executive decision-maker is in a position of weakness, which makes it difficult for them to make informed decisions. First-hand experience regarding all enterprise software is available and can be found on LinkedIn or Dice. Independent consultants may be hired full-time and work on-site, or be hired remotely, depending upon the circumstances and the consultant’s availability. An independent consultant is far more reliable than a consulting company for advising on a software selection. Unlike a major consulting firm, an independent consultant is not attempting to staff consultants on the project. However, in order to minimize bias, it should be explained to the independent consultant that they will not be part of the implementation in any way. This removes any potential for financial bias and makes the consultant indifferent as to which software the company decides to implement.

Financial Disclosure

Financial Bias Disclosure

This article and no other article on the Brightwork website is paid for by a software vendor, including Oracle and SAP. Brightwork does offer competitive intelligence work to vendors as part of its business, but no published research or articles are written with any financial consideration. As part of Brightwork’s commitment to publishing independent, unbiased research, the company’s business model is driven by consulting services; no paid media placements are accepted.

ERP Contact Form

  • Want Honest Information about ERP?

    It is difficult for most companies to make improvements in ERP without outside advice. And it is close to impossible to get honest ERP advice from large consulting companies. We offer remote unbiased multi-dimension ERP support.

    This article is free, we do not answer questions for free. Filling out this form is for those that have a budget. If that describes you, just fill out the form below and we'll be in touch asap.

References

https://www.forbes.com/sites/oracle/2015/12/24/5-signs-that-cloud-erp-has-serious-momentum/#4a8073d2e8cc

The Real Story on ERP

ERPThe Real Story Behind ERP: Separating Fiction From Reality

How This Book is Structured

This book combines a meta-analysis of all of the academic research on the benefits of ERP, coupled with on project experience.

ERP has had a remarkable impact on most companies that implemented it. Unplanned expenses for customization, failed implementations, integration, and applications to meet the business requirements that ERP could not–have added up to a higher Total Cost of Ownership for ERP were all unexpected, and account control, on the part of ERP vendors — is now a significant issue affecting IT performance.

Break the Bank for ERP?

Many companies that have broken the bank to implement ERP projects have seen their KPIs go down— but the question is why this is the case. Major consulting companies are some of the largest promoters of ERP systems, but given the massive profits they make on ERP implementations — can they be trusted to provide the real story on ERP? Probably not, however, written by the Managing Editor of SCM Focus, Shaun Snapp — an author with many years of experience with ERP system. A supply chain software expert and well known for providing authentic information on the topics he covers, you can trust this book to provide all the detail that no consulting firm will.

By reading this book you will:

  • Examine the high failure rates of ERP implementations.
  • Demystify the convincing arguments ERP vendors use to sell ERP.
  • See how ERP vendors take control of client accounts with ERP.
  • Understand why single-instance ERP is not typically feasible.
  • Calculate the total cost of ownership and return on investment for your ERP implementation.
  • Understand the alternatives to ERP.

Chapters

  • Chapter 1: Introduction to ERP Software
  • Chapter 2: The History of ERP
  • Chapter 3: Logical Fallacies and the Logics Used to Sell ERP
  • Chapter 4: The Best Practice Logic for ERP
  • Chapter 5: The Integration Benefits Logic for ERP
  • Chapter 6: Analyzing The Logic Used to Sell ERP
  • Chapter 7: The High TCO and Low ROI of ERP
  • Chapter 8: ERP and the Problem with Institutional Decision Making
  • Chapter 9: How ERP Creates Redundant Systems
  • Chapter 10: How ERP Distracts Companies from Implementing Better Functionality
  • Chapter 11: Alternatives to ERP or Adjusting the Current ERP System
  • Chapter 12: Conclusion

How ERP Distracts From and Undermines Intercompany Transfer

Executive Summary

  • Because ERP offers mediocre functionality, it distracts from better functionality outside of ERP.
  • Learn why this leads to so much waste on ERP projects.

Introduction

ERP sets up mediocre functionality at companies, and interferes with buying better software that could provide a great deal of value to the business. I will use several examples in this chapter to explain this prevalent feature of ERP software. ERP implementations result in generic functionality being installed. Then, after the ERP system is installed, other applications that provide better functionality are frequently and selectively used to replace ERP. These superior applications must often coexist with portions of the ERP functionality that are still active.

The Problem with ERP and Intercompany Transfer

An intercompany transfer is when a company buys product from “itself.” While companies make a big deal about being global (and many certainly operate globally), when it comes to fi nance, a company must actually be incorporated in every country in which it operates, and must report to the tax authorities based upon its activities within a country. Thus, when a product (or service—but as this is planning we concern ourselves with products) is sent/sold between two different companies—say an automotive component from Toyota Japan to Toyota U.S.—an accounting transaction must be generated to record that the product has been transferred. This transaction, which is dated and has a transfer price, moves the product from Toyota Japan’s “books” to Toyota U.S.’s “books.” If you search for the term “intercompany transfer” in Google or on Amazon, you will fi nd that most publications on the topic of intercompany transfer are on the topic of intercompany transfer pricing. While accounting transactions are not particularly “relevant” for supply chain movements, they do have to be accounted for so that the supply network design can support the type of activities required on the accounting side. Supply chain planning systems and ERP systems generally have a standard workflow for dealing with intercompany movements, and this will work for simple intercompany transfers. However, as soon as the intercompany transfer becomes even slightly more complex, ERP systems most often require expensive customization. Furthermore, because of the rigid design of ERP systems, this customization will consume many analytical and development hours.

Intercompany Transfer Alternatives

There are two basic ways of handling intercompany transfers: a billing stock transfer order and a standard stock transfer order. A standard stock transfer order (STO) is used between locations that are part of one company code. With a standard STO, no billing document is necessary because the STO is an internal movement. A billing STO combines the document used for internal company movements with the invoicing aspect of a purchase order. This is shown in the following graphic.

A normal stock transfer, transfers goods between two internal locations without any billing.

A billing STO simply performs the same movement, and then performs the intercompany transfer in the ERP system. This is shown in the graphic below:

Intercompany transfer is covered by standard ERP system functionality. It combines an internal movement with billing, hence the “billing-STO.” Billing STOs work for straightforward intercompany transfers. The billing STO is the most straightforward way of transitioning ownership between two companies within one global company. However, it does not even come close to meeting all of the requirements of an intercompany transfer. For instance, some companies have multiple locations that interact with one another during an intercompany movement; while the billing relationship is between two locations, the goods are moving between different locations. Entities other than the receiving location can be involved in invoicing the sending location.

In fact, there can be four or five locations (or possibly more, although I have never seen more than five location interactions). The standard billing STO will not meet the requirement because the billing is not applied to the location that is sending the product. This is a complexity that is missed by those who propose the non-billing STO for every intercompany transfer situation. (I know as I used to be one of those who proposed the non-billing STO for a company that had a more complex need than I fi rst understood.)

Matching Purchase Order/Sales Order for Asymmetrical Intercompany Transfers

To understand this nonstandard approach to intercompany transfer, we will begin by reviewing the standard purchasing goods transfer.

Standard purchasing transfers goods from an external location to an internal location with billing. However, intercompany transfer combines features of both the internal stock transfers and purchasing.

When the interaction between the locations is complex, and there are more than two locations, customization is required. Here the stock transfer goes between locations B and A, but the invoices go between locations A and C.

A custom program is required to take a stock transport requisition (STR), which in this case is created in the external supply chain planning system, and convert it into several documents, such as the Sales Order and Purchase Order pair between locations A and C, and the STO between locations C and B.

Thus, while an STR is created in APO, once it is sent to ERP, that same transaction becomes a purchase order and sales order (which cancel each other out as they are for the same item or items and same quantities. The sales order and purchase order are simply two transactions moving within a company, or should I say two different companies—a company buying and selling to itself but situated in different countries). Let’s review how the two different approaches work.

  1. Standard Intercompany Transfer: When product flows from an intercompany location A to location B and the invoice flows from location B to location A, a billing STO is the standard and most direct way of managing the relationship between the locations. The external supply chain planning system is unaware that the STO is billing or not billing. Billing is managed completely in the ERP system as external supply chain planning systems do not deal with money. This approach is relatively easy to confi gure.
  2. Asymmetrical Intercompany Transfer: When more than two locations are involved in the stock transfer relationship, the billing STO is not the way to set up this relationship, as it will place the invoice on the wrong location. In this case an STR is still created within the external supply chain planning system between the sending and receiving locations. However, once this STR is sent to the ERP system, the STR must be converted to matching purchase orders and sales orders. These items will move between additional locations beyond the two that are involved in the stock transfer. A company involved in broad-scale international stock movements will sometimes have different intercompany transfer models. Some of these models mean the creation of a paired purchase order and sales order from a stock transport requisition/order created in the external supply chain planning system. Other movements may require no sales order, and in this case the STO is simply converted into a purchase order.

Controlling Transfer of Ownership in ICO Movement

In most cases, the transfer of ownership will occur when the product is receipted into the receiving location. Although this is the standard workflow for most ERP systems, it does not meet the requirements of all companies. Some companies want the ownership transfer to occur after the product has left the sending location but before it arrives at the destination location. I have found this to be true particularly of transfers with very long lead times, such as ocean carriage.

The graphic on the following page shows the standard transfer of ownership versus the custom alternative.

The first alternative is preferable as it is in line with how many external supply chain planning systems and the ERP system operate. However, for different reasons, some companies prefer the second alternative. Because the transfer cannot be performed while the product is in-transit, an intermediate location—which is not an actual physical location but is a virtual location—is sometimes set up in order to perform the transfer.

The Core Problem of Limited Dimension Transactions

The issue that companies face when attempting to manage complex requirements of this type is that the ERP system is too limited and too infl exible to be adjusted. Instead of prescribing a limited set of functionality, ERP systems could have been designed quite differently. We use the terminology of STO, non-billing STO, and billing STO. All of this terminology really just describes transactions that behave differently in a dimension where the transaction impacts the ERP system, as shown in the graphic below:

 

A transaction is nothing more than a container that initiates a series of related transactions— which change the state of the ERP database in prescribed ways. Rather than prescribing a limited number of ways that a transaction can behave in a particular dimension, one can open up the options, and this can be accomplished with far less complexity and without the confusing terminology. It is unclear why so many ERP systems took such a prescriptive approach when developing the software in the first place. Perhaps they lacked the development sophistication to make flexible systems and wanted to reduce the costs of development. Creating a system of more limited behavior within the dimensions of a transaction saved development effort and money in the short term, but is ultimately a poor trade-off. The software must be customized per client location, resulting in a great deal of redundant customization (because the same customization, or at least very similar customizations, must be performed in a decentralized fashion at implementing companies). In case the point is elusive, this is exactly what has happened with ERP systems. An alternate development approach is to decompose the transaction to its behavior per dimension, provide an initial set of common dimension combinations, and allow the transaction to be easily extended. This can happen by simply copying over a pre-existing transaction variant and making a single change to a dimension behavior (or to multiple dimension behaviors), resulting in a new transaction variant. An example of this is shown below:

The total library of the transactions categories and variants within those categories constitutes the total of the functionality within any ERP system.

What I have described above would be the perfect scenario, but ERP systems were not designed this way. And because of their transactional inflexibility, the tight integration of their modules means that they restrict the ability of companies to fully leverage the functionalities in applications that are connected to ERP systems. Thus a company with an ERP system will receive less value from any other application that they implement (unless the application is extremely simple) than a company that does not have an ERP system. This is one of the major reasons why most ERP systems are either a dead end—or simply a starter kit setting a company for much more expense and work down the road.

Financial Disclosure

Financial Bias Disclosure

This article and no other article on the Brightwork website is paid for by a software vendor, including Oracle and SAP. Brightwork does offer competitive intelligence work to vendors as part of its business, but no published research or articles are written with any financial consideration. As part of Brightwork’s commitment to publishing independent, unbiased research, the company’s business model is driven by consulting services; no paid media placements are accepted.

ERP Contact Form

  • Want Honest Information about ERP?

    It is difficult for most companies to make improvements in ERP without outside advice. And it is close to impossible to get honest ERP advice from large consulting companies. We offer remote unbiased multi-dimension ERP support.

    This article is free, we do not answer questions for free. Filling out this form is for those that have a budget. If that describes you, just fill out the form below and we'll be in touch asap.

References

The Real Story on ERP

ERPThe Real Story Behind ERP: Separating Fiction From Reality

How This Book is Structured

This book combines a meta-analysis of all of the academic research on the benefits of ERP, coupled with on project experience.

ERP has had a remarkable impact on most companies that implemented it. Unplanned expenses for customization, failed implementations, integration, and applications to meet the business requirements that ERP could not–have added up to a higher Total Cost of Ownership for ERP were all unexpected, and account control, on the part of ERP vendors — is now a significant issue affecting IT performance.

Break the Bank for ERP?

Many companies that have broken the bank to implement ERP projects have seen their KPIs go down— but the question is why this is the case. Major consulting companies are some of the largest promoters of ERP systems, but given the massive profits they make on ERP implementations — can they be trusted to provide the real story on ERP? Probably not, however, written by the Managing Editor of SCM Focus, Shaun Snapp — an author with many years of experience with ERP system. A supply chain software expert and well known for providing authentic information on the topics he covers, you can trust this book to provide all the detail that no consulting firm will.

By reading this book you will:

  • Examine the high failure rates of ERP implementations.
  • Demystify the convincing arguments ERP vendors use to sell ERP.
  • See how ERP vendors take control of client accounts with ERP.
  • Understand why single-instance ERP is not typically feasible.
  • Calculate the total cost of ownership and return on investment for your ERP implementation.
  • Understand the alternatives to ERP.

Chapters

  • Chapter 1: Introduction to ERP Software
  • Chapter 2: The History of ERP
  • Chapter 3: Logical Fallacies and the Logics Used to Sell ERP
  • Chapter 4: The Best Practice Logic for ERP
  • Chapter 5: The Integration Benefits Logic for ERP
  • Chapter 6: Analyzing The Logic Used to Sell ERP
  • Chapter 7: The High TCO and Low ROI of ERP
  • Chapter 8: ERP and the Problem with Institutional Decision Making
  • Chapter 9: How ERP Creates Redundant Systems
  • Chapter 10: How ERP Distracts Companies from Implementing Better Functionality
  • Chapter 11: Alternatives to ERP or Adjusting the Current ERP System
  • Chapter 12: Conclusion

How ERP Distracts From and Undermines Planning Functionality

Executive Summary

  • Because ERP offers mediocre functionality, it distracts from better functionality outside of ERP.
  • Learn why this leads to so much waste on ERP projects.

Introduction

ERP sets up mediocre functionality at companies, and interferes with buying better software that could provide a great deal of value to the business. I will use several examples in this chapter to explain this prevalent feature of ERP software. ERP implementations result in generic functionality being installed. Then, after the ERP system is installed, other applications that provide better functionality are frequently and selectively used to replace ERP. These superior applications must often coexist with portions of the ERP functionality that are still active.

The Problem with ERP and Supply Chain Planning

ERP systems were developed with a strong delineation between supply chain partners and customers. Since then, that delineation has blurred signifi cantly. While ERP systems have been updated since they were fi rst introduced, updating an old design in an attempt to meet requirements it was never designed to meet is quite a bit different than if the software was designed from the beginning to work a particular way. Subcontracting, contract manufacturing, direct sales through the Internet, modeling supplier capacity, supplier collaboration—all of these features blur the line as to what is inside or outside of the company. Let me provide an example. In ERP systems, suppliers are external locations and resources cannot, at least with most ERP systems, be created or exist in supplier locations. Under the ERP design, suppliers are simply for accepting purchase orders. But what if a company wants to model supplier capacity? That is, what if the company wants to perform capacity constraining so as to treat the external location partially as an internal location? Some planning systems can do this but the ERP system cannot, meaning that there is an inconsistency between the ERP system and the planning system that requires work to overcome. Let us look at another example.

Some time ago I received two packages from my favorite running store, RoadRunnerSports.com. I noticed that both packages were not from Road Runner Sports’ distribution center, but separate, one from each manufacturer. I needed to send both packages back, but did not know where to send them: to Road Runner Sports or to the manufacturer’s distribution center addresses, which were listed on the boxes. When I called they told me that all returns come to them. I asked if this was a change in policy—did they no longer fulfi ll their orders? They told me that they used drop shipping for some items but not others, which allows them to provide a larger selection on their website. They stock high volume items at their DC. This is consistent with Amazon’s approach, which is to fulfi ll some, but not all of the orders from their website (Amazon has grown into a marketplace where other online retailers also offer products).

What Changed and Who Must Know What

The old model for order fulfi llment is from a time when most orders were fulfi lled at a physical store. However, with ordering taking place on the Internet, it is not particularly relevant who fulfills the order, as long as it gets done. Amazon was one of the first web retailers to pick up on this fact and now it is a major part of their business. Other online retailers are clearly copying Amazon’s approach. A variety of system adjustments are required to pull this off. The less your systems are designed to do this model of order fulfi llment, the more custom work is required.

This product is sold on Amazon’s website, but the options below are actually fulfilled by someone else. Under this model, the sales order goes from Amazon to the fulfi llment company, and the product goes from the fulfillment company to the customer. Payment goes to Amazon, which then pays some of this money to the fulfi llment company. This is one example of how the traditional roles are changing.

Road Runner Sports must know the inventory position at their fulfi llment company so that they know what they can commit to the customer and what is available to ship. Also, notice that the return does not go back to the fulfi llment company, but goes to Road Runner Sports, which sends bulk returns to the fulfi llment company. Increasingly, what is inside and outside the company is blurred, yet in the ERP model, inventory is shown for internal locations only. The problem is that ERP’s model won’t work for this business requirement. Examples of the blurring distinction between what is inside and outside of a company are covered in detail in the book, Superplant: Creating a Nimble Manufacturing Enterprise with Adaptive Planning Software, which covers multi-plant planning, multi-sourcing and subcontracting. Superplant is the more accurate modeling of location interdependencies for production and supply planning that is provided by standard advanced planning functionality. Superplant alters the assumptions along which a planning system makes decisions. It can see relationships that software lacking these functionalities cannot access. Superplant allows for manufacturing processes to be planned and integrated across plants. Sources of supply are automatically and dynamically selected based upon changing circumstances, and the integrated planning of external partner plants are treated as if they were internal plants.

These functionalities are logically grouped under Superplant as they all relate to improving the scope of planning with respect to how locations are treated when solving a combined supply and production problem. Superplant is characterized by an expansive and integrated view of planned locations, the ability to nimbly react to changes in things such as capacities, and to redirect to other sources of supply. Superplant is not a management technique. It is a specifi c set of software capabilities that must be confi gured, tested and accounted for in a range of areas from user training to integration to ERP systems. For example, with some special multi-plant planning software, companies can leverage more of their manufacturing resources as part of the natural output of the planning system (that is without any manual intervention).

ERP Repeatedly Getting in the Way

In case after case, ERP systems, because of their introverted nature and dated designs, put up substantial barriers to flexibility when locations in a supply network are pseudo internal. Most vendors that sell add-on software don’t spend much time or energy criticizing how ERP systems slow the implementation of their applications, but their implementations are, in fact, slowed. This is because all systems must be made to integrate back to a system that sees strong delineations between “inside” the company and “outside” the company. The very integration between the supply chain modules and the fi nancial modules of ERP systems have made companies that much less adaptable.

Financial Disclosure

Financial Bias Disclosure

This article and no other article on the Brightwork website is paid for by a software vendor, including Oracle and SAP. Brightwork does offer competitive intelligence work to vendors as part of its business, but no published research or articles are written with any financial consideration. As part of Brightwork’s commitment to publishing independent, unbiased research, the company’s business model is driven by consulting services; no paid media placements are accepted.

ERP Contact Form

  • Want Honest Information about ERP?

    It is difficult for most companies to make improvements in ERP without outside advice. And it is close to impossible to get honest ERP advice from large consulting companies. We offer remote unbiased multi-dimension ERP support.

    This article is free, we do not answer questions for free. Filling out this form is for those that have a budget. If that describes you, just fill out the form below and we'll be in touch asap.

References

The Real Story on ERP

ERPThe Real Story Behind ERP: Separating Fiction From Reality

How This Book is Structured

This book combines a meta-analysis of all of the academic research on the benefits of ERP, coupled with on project experience.

ERP has had a remarkable impact on most companies that implemented it. Unplanned expenses for customization, failed implementations, integration, and applications to meet the business requirements that ERP could not–have added up to a higher Total Cost of Ownership for ERP were all unexpected, and account control, on the part of ERP vendors — is now a significant issue affecting IT performance.

Break the Bank for ERP?

Many companies that have broken the bank to implement ERP projects have seen their KPIs go down— but the question is why this is the case. Major consulting companies are some of the largest promoters of ERP systems, but given the massive profits they make on ERP implementations — can they be trusted to provide the real story on ERP? Probably not, however, written by the Managing Editor of SCM Focus, Shaun Snapp — an author with many years of experience with ERP system. A supply chain software expert and well known for providing authentic information on the topics he covers, you can trust this book to provide all the detail that no consulting firm will.

By reading this book you will:

  • Examine the high failure rates of ERP implementations.
  • Demystify the convincing arguments ERP vendors use to sell ERP.
  • See how ERP vendors take control of client accounts with ERP.
  • Understand why single-instance ERP is not typically feasible.
  • Calculate the total cost of ownership and return on investment for your ERP implementation.
  • Understand the alternatives to ERP.

Chapters

  • Chapter 1: Introduction to ERP Software
  • Chapter 2: The History of ERP
  • Chapter 3: Logical Fallacies and the Logics Used to Sell ERP
  • Chapter 4: The Best Practice Logic for ERP
  • Chapter 5: The Integration Benefits Logic for ERP
  • Chapter 6: Analyzing The Logic Used to Sell ERP
  • Chapter 7: The High TCO and Low ROI of ERP
  • Chapter 8: ERP and the Problem with Institutional Decision Making
  • Chapter 9: How ERP Creates Redundant Systems
  • Chapter 10: How ERP Distracts Companies from Implementing Better Functionality
  • Chapter 11: Alternatives to ERP or Adjusting the Current ERP System
  • Chapter 12: Conclusion

How to Understand The Way ERP Creates Redundant Systems

Executive Summary

  • Because ERP begins with duplicate functionality, they create redundant systems.
  • Learn why this leads to so much waste on ERP projects.

Introduction

ERP systems include very basic functionality for supply chain planning and management, sales, reporting, etc. Because this functionality is basic, many companies purchase and connect external systems to the ERP system. Let’s look at the supply chain planning system as an example. In almost all cases, during an implementation the planning system is not integrated to the ERP system’s financial module. Instead it is connected to the ERP system’s supply chain modules. In SAP ERP, the supply chain modules include all three of the nonfinancial modules: materials management, production planning, and sales and distribution.

These modules then communicate with the financial/ accounting module through the normal ERP workflow. This sets up situations where multiple systems are now used: both the ERP system supply chain modules and the supply chain planning system, leading to complex decisions as to what to perform where. These are some of the questions that I help companies with on implementation projects.

 

Ordinarily the external planning system could convert the purchase requisitions that it creates to purchase orders, and then send them to a financial system for reconciliation. In fact, by making the inventory management, planners, and procurement individuals use the ERP system, they are less efficient than if they used the external planning system, which is specifi cally designed for supply chain management. This same problem exists regardless of which type of external application is added—CRM, reporting, etc. The issue becomes, use the ERP system or use the external application.

When an ERP system is implemented, purchase requisitions must now be sent to the inventory management module in the ERP system. At this point, duplicate supply chain documents are created, and these documents must be kept in synch between the two supply chain systems. If there were no ERP system and the company had another supply chain application that it had purchased previously, the existing supply chain application would be decommissioned and the new supply chain application would be connected directly to the financial and accounting system. Therefore, the ERP system has just made the implementation more expensive and more complicated.

The Background on Supply Planning Database Segmentation

In supply planning, segmentation on the basis of the product-location combination is a way of dividing a database so that different rules can be applied to different database components. The standard approach is the following:

  1. Place critical materials (those that are either capacity-constrained or that have long lead times—or both—or have a high profit margin) into the planning system.
  2. Plan noncritical materials with the MRP, DRP and consumption-based logic in the ERP system.

The problem with this approach is that planners must use two systems (the ERP’s supply chain modules and the supply chain planning system) to get the job done. A justification for this design is that the advanced methods available within the planning system would take too much time to run on the entire product-location database. This is a weak argument; simple methods can be run on product-location combinations within the planning system. In fact, any product-location can have a specific method assigned to it by simply assigning only the desired combinations of product-locations. All planning systems I have worked with (and I have worked with quite a few) have this capability.

The Justification for Using ERP Functionality

Some of the justifications for continuing to perform planning in the ERP system have really been about maintaining the relevancy of the ERP system rather than any real benefi t to the company. In this way, ERP has arrested the implementation of more sophisticated and better systems. It’s almost as if companies are continually attempting to justify the investments they have made in their ERP implementations. And of course, when the same vendor that sold them the ERP system is now selling them the bolt on the system, the vendor has the same predisposition: to help convince their customer that their ERP investment was a good one.

Finally, while the traditional approach is to convert planning recommendations (planned production orders, planning purchase orders, planned stock transfers) in the ERP system, it’s actually very easy for planning systems, convert planning recommendations into execution objects (production orders, purchase orders, stock transfer). These execution objects could be integrated more easily to a financial application, cutting out the redundancy of the ERP system. Unlike ERP systems (at least, on-premises systems), the integration of these execution objects would be a simple matter if the financial application published to an integration standard.

Conclusion

ERP has large amounts of functionality that is not useful and reproduces functionality that is far superior in other applications. This causes the mediocre functionality to be overused when far better functionality exists outside of ERP.

Financial Disclosure

Financial Bias Disclosure

This article and no other article on the Brightwork website is paid for by a software vendor, including Oracle and SAP. Brightwork does offer competitive intelligence work to vendors as part of its business, but no published research or articles are written with any financial consideration. As part of Brightwork’s commitment to publishing independent, unbiased research, the company’s business model is driven by consulting services; no paid media placements are accepted.

ERP Contact Form

  • Want Honest Information about ERP?

    It is difficult for most companies to make improvements in ERP without outside advice. And it is close to impossible to get honest ERP advice from large consulting companies. We offer remote unbiased multi-dimension ERP support.

    This article is free, we do not answer questions for free. Filling out this form is for those that have a budget. If that describes you, just fill out the form below and we'll be in touch asap.

References

The Real Story on ERP

ERPThe Real Story Behind ERP: Separating Fiction From Reality

How This Book is Structured

This book combines a meta-analysis of all of the academic research on the benefits of ERP, coupled with on project experience.

ERP has had a remarkable impact on most companies that implemented it. Unplanned expenses for customization, failed implementations, integration, and applications to meet the business requirements that ERP could not–have added up to a higher Total Cost of Ownership for ERP were all unexpected, and account control, on the part of ERP vendors — is now a significant issue affecting IT performance.

Break the Bank for ERP?

Many companies that have broken the bank to implement ERP projects have seen their KPIs go down— but the question is why this is the case. Major consulting companies are some of the largest promoters of ERP systems, but given the massive profits they make on ERP implementations — can they be trusted to provide the real story on ERP? Probably not, however, written by the Managing Editor of SCM Focus, Shaun Snapp — an author with many years of experience with ERP system. A supply chain software expert and well known for providing authentic information on the topics he covers, you can trust this book to provide all the detail that no consulting firm will.

By reading this book you will:

  • Examine the high failure rates of ERP implementations.
  • Demystify the convincing arguments ERP vendors use to sell ERP.
  • See how ERP vendors take control of client accounts with ERP.
  • Understand why single-instance ERP is not typically feasible.
  • Calculate the total cost of ownership and return on investment for your ERP implementation.
  • Understand the alternatives to ERP.

Chapters

  • Chapter 1: Introduction to ERP Software
  • Chapter 2: The History of ERP
  • Chapter 3: Logical Fallacies and the Logics Used to Sell ERP
  • Chapter 4: The Best Practice Logic for ERP
  • Chapter 5: The Integration Benefits Logic for ERP
  • Chapter 6: Analyzing The Logic Used to Sell ERP
  • Chapter 7: The High TCO and Low ROI of ERP
  • Chapter 8: ERP and the Problem with Institutional Decision Making
  • Chapter 9: How ERP Creates Redundant Systems
  • Chapter 10: How ERP Distracts Companies from Implementing Better Functionality
  • Chapter 11: Alternatives to ERP or Adjusting the Current ERP System
  • Chapter 12: Conclusion

How to Understand The Failure of ERP Decision Making

Executive Summary

  • The broad purchase of ERP systems without looking for evidence says many things about IT decision making within companies.
  • Learn what areas lead to so many companies to fail on ERP.

Introduction

Decision-making in companies is often presented as highly rational. The assumption is that attentive and thorough research is performed before purchasing decisions are made. A perfect example of this line of thinking is presented in the following quotation:

“If IT were not delivering value, rational decision makers would not keep investing in it.”Andrew McAfee

The above quotation provides an example of the logical fallacy of an appeal to authority combined with the logical fallacy of an appeal to accomplishment. The same argument could be made for exotic financial instruments. How could mortgage-backed securities and credit default swaps—which fell in value so precipitously that without government intervention every US investment bank involved in these instruments would have had to shut their doors—possibly be lacking in value?

Many entities, ranging from consulting firms to the business press that cover these companies, as well as the software buying companies themselves, have an interest in having this line of reasoning accepted. However, the results of my research and experience in software selection, some of which is encapsulated in the book, Enterprise Software Selection: How to Pinpoint the Perfect Software Solution using Multiple Information Sources, actually show considerable evidence to the contrary. A few of the issues that are problematic for IT decision-making are listed below:

  1. Selecting Biased Information Sources: Companies often lack the knowledge to make appropriate software selection decisions for themselves. Often this issue is not mitigated by hiring external parties because the buying companies are frequently misled by advisory firms. These firms are more interested in selling IT consulting services than in providing objective advice. These advisory firms are not “fiduciaries,” in that they have no legal responsibility to put their client’s fi nancial interests above their own. This issue is similar to the problem of a lack of fiduciary responsibility that the majority of financial advisors have, which is why financial advisors have a very strong tendency to place their clients into investment vehicles that benefit them more than they benefi t their client’s. This is discussed in detail in the following article. Enterprise software buyers rely upon research from entities that are themselves paid by software vendors, along with a host of other limiting factors.
  2. Accepting Simplistic Explanations: As will be shown repeatedly in this chapter, companies deciding which course of action to follow tend to be influenced by oversimplified rationales or logics. If the executive decision-makers knew technology better, and if they had studied the history of enterprise software sales methods, there is no way that the oversimplifi ed logics that were so effective in selling ERP to them would have worked. Another way of looking at this is that it was simply all too easy.
  3. Companies Do Not Delve into Detail on Functionality: There is a strong tendency for buying companies to accept that functionality between the software of multiple vendors is the same, as long as the description of the functionality is the same and the functionality is proven to be similar when demonstrated by a skilled pre-sales consultant. In fact, rarely is the competing functionality “the same.” Often there are very signifi cant differences in the usability, implement-ability and maintainability of functionality that is at first blush seen as identical across multiple applications. A purpose of the software selection process is to determine the best fit between the various desired functionalities versus its documented business requirements and the functionalities that are available from competing applications.
  4. Overestimation of Implement-ability: Companies have a strong tendency to overestimate what they can implement. Software vendors that market a broad or deep set of software functionality are of no help to these companies. However, some functionality is tricky to implement properly. In addition, companies will often have a certain level of funding in mind for software implementations, but will then implement more advanced functionality that requires a greater commitment of funds than they are interested in making. This lack of funding, which increases the general failure rate on projects, is addressed with the concept of Maximum Tolerable Functionality, as explained in the following article:
  5. Susceptibility to Salesmanship: Good salespeople are paid very well by software vendors for a reason. Salesmanship works. However, sales, regardless of how well done, does not have anything to do with how well the application can be implemented. Software salespeople will become “best friends” with their prospects, but after the sale is made, the relationship will not count for much. In fact, salespeople frequently make implementations worse by insisting that overpromised capabilities can be met with “creativity.” Some of the sales presentations that I have seen seem highly conceptual and have little to do with how an application is used in reality; one of the old jokes in this area is that the difference between a car salesperson and a software salesperson is that the software salesperson does not know he is lying. Unfortunately this joke has quite a bit of truth to it.

The Reality of Getting Around Rationality

There is no way of getting around the fact that companies appear far less rational when one works within them and sees “how the sausage is made,” than when one reads about them from afar. Business journalists, afraid of losing their access to information, have a strong incentive to place a positive spin on their coverage of a company, and most of the journalists are suitably compliant. Secondly, journalists don’t actually work in the companies they cover; thus it is quite easy for them to get bamboozled. Typically the executives who are interviewed and provide information to the journalists are good at selling or at least good at making good impressions, and are motivated to improve their prominence in the field as well as to positively impact the company’s stock price. A nice write-up on them and their company gives them even more negotiating leverage for salary increases, bonuses, stock options, etc. The most extreme example of this is the Wall Street Journal, which produces puff pieces on executives, building them into either geniuses or exemplars of highly capable and responsible corporate officers. The Wall Street Journal completely misrepresented how the industry worked when I was young and had not yet worked in these large companies. Now I understand the Wall Street Journal’s focus on making companies look good for stock market ends.

ERP Success and Failure

ERP success and failure rates are difficult to estimate, as was explained several pages ago. Much of this is definitional: what does one consider a success?

The failure rate of ERP systems is far higher than generally understood. While some high-profile failures get released to the business press, in most cases the news simply never gets out. I know of several implementations that have featured very prominently in the marketing literature of several software vendors, and have been featured both by this vendor, and even at the implementing company for over ten years. This customer is the main reference account for the software, has numerous press releases and marketing documents created for the project, and the truth is that the client is barely using the application. This is a case where the client has so much of their reputation wrapped up in the success of this application, that they cannot admit the failure—it is simply too embarrassing. However, another reason that so many implementation failures go unrecognized is that companies often do not even know the applications well enough to know that their implementations have failed. I have written a number of articles that explain how some of the most advanced software available is poorly configured to such a degree that there was no point implementing the sophisticated software that had been selected such as What is Your Supply Planning Optimizer Optimizing?

When I have brought up this matter to several of my clients, I have been told that there is no time allocated to fix the system; we must hit the deadlines to roll out the flawed configuration to new regions. At one company I was told that part of my role was to be enthusiastic about the system and to use my credibility with the business to get them to believe that the system was working well. The information I provide regarding a detailed analysis of system output and its fit with what the business needs is often suppressed and never reaches the ultimate decision-makers. The top decision-makers are in effect insulated from accurate information about how systems perform and instead are told only the good news. It’s a complicated political stew of competing agendas that results in decisions being made without any logical foundation for the positives or negatives of the actual impact of the decisions. However, I suspect that to those readers with significant work experience, this is not exactly news.

Conclusion

The first assumption to dispense with is that because companies are big they must have rational decision-making processes or have effective channels for transmitting information to decision makers. This should help to explain why companies have universally accepted the following examples of logic for implementing ERP systems.

Financial Disclosure

Financial Bias Disclosure

This article and no other article on the Brightwork website is paid for by a software vendor, including Oracle and SAP. Brightwork does offer competitive intelligence work to vendors as part of its business, but no published research or articles are written with any financial consideration. As part of Brightwork’s commitment to publishing independent, unbiased research, the company’s business model is driven by consulting services; no paid media placements are accepted.

ERP Contact Form

  • Want Honest Information about ERP?

    It is difficult for most companies to make improvements in ERP without outside advice. And it is close to impossible to get honest ERP advice from large consulting companies. We offer remote unbiased multi-dimension ERP support.

    This article is free, we do not answer questions for free. Filling out this form is for those that have a budget. If that describes you, just fill out the form below and we'll be in touch asap.

References

https://www.forbes.com/sites/oracle/2015/12/24/5-signs-that-cloud-erp-has-serious-momentum/#4a8073d2e8cc

The Real Story on ERP

ERPThe Real Story Behind ERP: Separating Fiction From Reality

How This Book is Structured

This book combines a meta-analysis of all of the academic research on the benefits of ERP, coupled with on project experience.

ERP has had a remarkable impact on most companies that implemented it. Unplanned expenses for customization, failed implementations, integration, and applications to meet the business requirements that ERP could not–have added up to a higher Total Cost of Ownership for ERP were all unexpected, and account control, on the part of ERP vendors — is now a significant issue affecting IT performance.

Break the Bank for ERP?

Many companies that have broken the bank to implement ERP projects have seen their KPIs go down— but the question is why this is the case. Major consulting companies are some of the largest promoters of ERP systems, but given the massive profits they make on ERP implementations — can they be trusted to provide the real story on ERP? Probably not, however, written by the Managing Editor of SCM Focus, Shaun Snapp — an author with many years of experience with ERP system. A supply chain software expert and well known for providing authentic information on the topics he covers, you can trust this book to provide all the detail that no consulting firm will.

By reading this book you will:

  • Examine the high failure rates of ERP implementations.
  • Demystify the convincing arguments ERP vendors use to sell ERP.
  • See how ERP vendors take control of client accounts with ERP.
  • Understand why single-instance ERP is not typically feasible.
  • Calculate the total cost of ownership and return on investment for your ERP implementation.
  • Understand the alternatives to ERP.

Chapters

  • Chapter 1: Introduction to ERP Software
  • Chapter 2: The History of ERP
  • Chapter 3: Logical Fallacies and the Logics Used to Sell ERP
  • Chapter 4: The Best Practice Logic for ERP
  • Chapter 5: The Integration Benefits Logic for ERP
  • Chapter 6: Analyzing The Logic Used to Sell ERP
  • Chapter 7: The High TCO and Low ROI of ERP
  • Chapter 8: ERP and the Problem with Institutional Decision Making
  • Chapter 9: How ERP Creates Redundant Systems
  • Chapter 10: How ERP Distracts Companies from Implementing Better Functionality
  • Chapter 11: Alternatives to ERP or Adjusting the Current ERP System
  • Chapter 12: Conclusion