How to Use the Solution Architecture TCO Calculations

Executive Summary

  • Common thinking of over TCO or total cost of ownership is incorrect.
  • TCO makes up the total costs in each comparative solution architecture combination.

Introduction

Oftentimes various unsubstantiated proposals are made about that the common different combinations of applications cost. Some quite expensive applications are justified on the basis of a “lower TCO.” What you see below are the only combined comparisons that we know of which are published.

You can consider this to be a solution architecture document. The intent is to arrive at true total costs for the common different combinations of IT decisions.

What Makes Up the Total Costs In Each Solution Architecture Combination?

The input to these combinations are on the basis of our TCO analysis.

This compares the costs of a combination of different applications to come to a total cost. The TCO that we use is comprehensive. It is explained in the section on TCO in detail. This solution architecture document is good for performing comparative analysis. This type of analysis is very rarely performed, so IT buyers really never get a full picture of their solution architecture costs.

Architecture Comparison 
100% SAP100% Oracle Versus 100% Best of Breed
100% Oracle100% SAP Versus 100% Best of Breed
SAP with Two TieredOracle Two Tiered ERP
Oracle with Two TeiredSAP Two Tiered ERP

How Much Do you Know About TCO?

TCO Quiz

This quiz asks the foundational questions of TCO.

Software Selection

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References

See our TCO method which is explained in the following book.

TCO Book

TCO3

Enterprise Software TCO: Calculating and Using Total Cost of Ownership for Decision Making

Getting to the Detail of TCO

One aspect of making a software purchasing decision is to compare the Total Cost of Ownership, or TCO, of the applications under consideration: what will the software cost you over its lifespan? But most companies don’t understand what dollar amounts to include in the TCO analysis or where to source these figures, or, if using TCO studies produced by consulting and IT analyst firms, how the TCO amounts were calculated and how to compare TCO across applications.

The Mechanics of TCO

Not only will this book help you appreciate the mechanics of TCO, but you will also gain insight as to the importance of TCO and understand how to strip away the biases and outside influences to make a real TCO comparison between applications.
By reading this book you will:
  • Understand why you need to look at TCO and not just ROI when making your purchasing decision.
  • Discover how an application, which at first glance may seem inexpensive when compared to its competition, could end up being more costly in the long run.
  • Gain an in-depth understanding of the cost, categories to include in an accurate and complete TCO analysis.
  • Learn why ERP systems are not a significant investment, based on their TCO.
  • Find out how to recognize and avoid superficial, incomplete or incorrect TCO analyses that could negatively impact your software purchase decision.
  • Appreciate the importance and cost-effectiveness of a TCO audit.
  • Learn how SCM Focus can provide you with unbiased and well-researched TCO analyses to assist you in your software selection.
Chapters
  • Chapter 1:  Introduction
  • Chapter 2:  The Basics of TCO
  • Chapter 3:  The State of Enterprise TCO
  • Chapter 4:  ERP: The Multi-Billion Dollar TCO Analysis Failure
  • Chapter 5:  The TCO Method Used by Software Decisions
  • Chapter 6:  Using TCO for Better Decision Making

Solution Architecture Package – Oracle Two Tiered ERP Calculator

Introduction

A two-tiered ERP strategy is where multiple ERP systems are used – most often one tier 1 ERP system is combined with tier 2 and tier 3 ERP systems. The ERP vendors and applications are typically categorized into the following “tiers.” The concept is that different ERP systems are to be used for different “tiers” of the business.

Gartner has the following definition of two-tiered ERP.

“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.”

Gartner’s definition is a bit too rigid to describe how the term two tiered ERP tends to be used, and it also does not explain how the strategy differs from single instance ERP – where the entire entity is migrated to a single – typically tier 1 ERP system. In fact, this is rarely discussed in print, because most of the entities that write on ERP have for years been proposing that companies follow a single instance ERP strategy. Two-tiered ERP is the first public admission by ERP companies that a multi-ERP environment can be beneficial. Since the beginning of ERP in the 1980’s the consistent approach by large ERP software vendors has been to nudge their customers in the direction of centralizing their businesses to a single ERP system. However a broad scale transition to single instance ERP never occurred except for exceptions and for smaller companies, and there are a number of reasons, why, which are explained in detail in the SCM Focus Press book The Real Story Behind Two Tiered ERP.

Two-tiered ERP is an important concept, but not for a reason that many people exposed to the concept realize. It is important because two-tiered ERP represents one of the first cracks in the façade of single instance ERP. ERP has nowhere near 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 and overpaying for ERP is now one of the least effective uses of IT budgets.

Important points regarding two-tiered ERP are the following:

  1. Financial Bias: Most the entities that propose the two-tiered ERP have a financial bias. They tend to be tier 2 or tier ERP vendors that are trying to sell their software by any means necessary, and tier 1 vendors that are attempting to answer the logic for two tiered ERP by recommending that their ERP applications (either tier 1 or tier 2, as both SAP and Oracle have tier 2 ERP applications in addition to tier 1 ERP applications) by proposing that two-tiered ERP is a “fine idea,” as long as it means using their applications.
  2. No Attempt to Provide Evidence: There is some anecdotal evidence that this or that company saved money using a two-tiered ERP strategy, but no real research into the area. Academics have not researched the topic.
  3. No Reliability to Research: No entity that would be traditionally relied upon to perform research on this topic would be able to perform the research without financial bias affecting their research results. This is because they are all in some way financially dependent upon the large software vendors. For instance, even IT publications receive a disproportionate percentage of their advertising from either large software vendors or large consulting companies – both of which would push against any research which showed that two tiered ERP was effective. Entities do not publish research, which contradicts their own financial model.

The Comparisons

Our first comparison shows all using one single instance of Oracle JD Edwards EnterpriseOne ERP system to support 600 users. This is compared against a two-tiered ERP strategy that uses Oracle JD Edwards EnterpriseOne for 200 users, and then four other ERP systems (Epicor, Infor Lawson, Sage X3 and NetSuite OneWorld).

This is a very realistic scenario as the average company that uses ERP systems has five ERP systems within the company. This statistic combines with the statistic that the average ERP system has 60% of its modules actually operational.

Alternate One - 100% Oracle JD Edwards EnterpriseOne VS Multi Two Tier ERP

CategoryApplicationTCOUser #
Tier 1 ERPOracle JD Edwards EnterpriseOne$ 62,340,403600

Alternate One - 100% Oracle JD Edwards EnterpriseOne VS Multiple Two Tier ERP Part 2

CategoryApplicationTCOUser #
Total$ 50,579,450600
Tier 1 ERPOracle JD Edwards$ 23,712,250200
Tier 2 ERPEpicor ERP$ 7,493,575100
Tier 2 ERPInfor Lawson$ 6,308,375100
Tier 2 ERPSage X3$ 6,371,000100
Tier 3 ERPNetSuite OneWorld$ 6,694,250100

This analysis compares the use of five ERP systems versus the use of one ERP system, each serving the same number of users. The cost savings are significant at 19%.

Alternate Two - Oracle JD Edwards EnterpriseOne VS Tier 1 SAP + One Large Tier 2 ERP

CategoryApplicationTCOUser #
Tier 1 ERPOracle JD Edwards EnterpriseOne$ 59,957,378800

Alternate Two - Oracle JD Edwards EnterpriseOne VS Tier 1 SAP + One Large Tier 2 ERP Part 2

CategoryApplicationTCOUser #
Total$ 61,367,489800
Tier 1 ERPOracle JD Edwards EnterpriseOne$ 41,560,269400
Tier 2 ERPSage X3$ 19,807,220400

The next example shows a larger number of users, at 800. It also cuts down the number of ERP systems in the two-tiered ERP strategy to just two ERP systems – Oracle JD Edwards EnterpriseOne and Sage X3. This scenario provides no cost savings. However, it must be remembered that this is only a cost analysis. Having only two ERP systems, also cuts down on the flexibility of the company as there is much more variety in four ERP applications than one. When companies allow different divisions to choose their own ERP systems – that is follow a decentralized approach – they rarely settle on the same ERP system. This is logical because different companies and sub-companies have different requirements that are optimally met by different applications. 

Alternate Three - Oracle JD Edwards EnterpriseOne VS SAP for Both Tier 1 & Tier 2

CategoryApplicationTCOUser #
Tier 1 ERPOracle JD Edwards EnterpriseOne
$ 59,957,378800

Alternate Three - Oracle JD Edwards EnterpiseOne VS SAP for Both Tier 1 & Tier 2 Part 2

CategoryApplicationTCOUser #
Total$ 62,450,719800
Tier 1 ERPOracle JD Edwards EnterpiseOne$ 41,560,269400
Tier 2 ERPOracle JD Edwards World$ 20,890,450400

SAP and Oracle have responded to the tier 2 ERP vendors that is makes more sense to use their tier 2 ERP offerings rather than move to a different ERP vendor for the 2nd tier. This scenario above tests that hypothesis. In this scenario, there are again no cost savings. 

Conclusion

According to our research, one can save money by following a two-tiered ERP strategy, and we predict that the savings would be significant, but it greatly depends upon which tier 2 ERP systems are used, and if the company deploys multiple or a single tier 2 ERP system. There are scenarios where following a two tier ERP strategy will save no money. This only covers the the cost or TCO side of the equation. A major benefit of tier 2 ERP is to gain more diversity in functionality that can be attained by using just one ERP system.

It should be apparent from each of the examples provided above that the primary reason for this cost savings is that tier 1 ERP applications are considerably more expensive than lower tiered ERP systems. Of course, tier 1 ERP systems tend to be better fits for larger companies, although this generality should be questioned more now than ever as both SAP and Oracle have essentially “stabilized” their tier 1 ERP systems – which means little future development — and other ERP applications have closed some of the gap in functionality. Our Software Selection Package for Finance/Accounting explains this point in detail.

Both Oracle tier 1 ERP systems comes with a great deal of implementation complexity and maintenance and it is well understood that their tier 1 offerings tend to be overkill for smaller companies/divisions etc.. Therefore, the claims made by proponents of two-tier ERP strategies regarding costs savings are correct. However, with both Oracle the cost savings changes little whether non- Oracle tier 2 ERP applications are purchased, or if the ERP software from other vendors is purchased. However, our research also does not show that a buyer receives any cost benefit from using Oracle for all the tiers, although the buyer would lose flexibility if they chose to limit their options to purchasing and deploying multiple ERP systems from Oracle. As is most often the case, each application should be selected on the basis of its functionality fit with the business requirements. No other consideration is even close to as important.

Software Selection

  • Want Help with Software Selection for your Business?

    It is difficult for most companies to perform software selection without outside advice. It is impossible to obtain honest software selection support from consulting companies. We offer expert and unbiased remote software selection 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

Montgomery, Nigel. Ganly, Denise. How to Determine If a Two-Tier ERP Suite Strategy Is Right for You. Gartner. October 24 2012

Solution Architecture Package – SAP Two Tiered ERP Calculator

Introduction

A two-tiered ERP strategy is where multiple ERP systems are used – most often one tier 1 ERP system is combined with tier 2 and tier 3 ERP systems. The ERP vendors and applications are typically categorized into the following “tiers.” The concept is that different ERP systems are to be used for different “tiers” of the business. Gartner has the following definition of two-tiered ERP.

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.

Gartner’s definition is a bit too rigid to describe how the term two tiered ERP tends to be used, and it also does not explain how the strategy differs from single instance ERP – where the entire entity is migrated to a single – typically tier 1 ERP system. In fact, this is rarely discussed in print, because most of the entities that write on ERP have for years been proposing that companies follow a single instance ERP strategy. Two-tiered ERP is the first public admission by ERP companies that a multi-ERP environment can be beneficial. Since the beginning of ERP in the 1980’s the consistent approach by large ERP software vendors has been to nudge their customers in the direction of centralizing their businesses to a single ERP system. However a broad scale transition to single instance ERP never occurred except for exceptions and for smaller companies, and there are a number of reasons, why, which are explained in detail in the SCM Focus Press book The Real Story Behind Two Tiered ERP. Two-tiered ERP is an important concept, but not for a reason that many people exposed to the concept realize. It is important because two-tiered ERP represents one of the first cracks in the façade of single instance ERP. ERP has nowhere near 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 and overpaying for ERP is now one of the least effective uses of IT budgets. Important points regarding two-tiered ERP are the following:

  1. Financial Bias: Most the entities that propose the two-tiered ERP have a financial bias. They tend to be tier 2 or tier ERP vendors that are trying to sell their software by any means necessary, and tier 1 vendors that are attempting to answer the logic for two tiered ERP by recommending that their ERP applications (either tier 1 or tier 2, as both SAP and Oracle have tier 2 ERP applications in addition to tier 1 ERP applications) by proposing that two-tiered ERP is a “fine idea,” as long as it means using their applications.
  2. No Attempt to Provide Evidence: There is some anecdotal evidence that this or that company saved money using a two-tiered ERP strategy, but no real research into the area. Academics have not researched the topic.
  3. No Reliability to Research: No entity that would be traditionally relied upon to perform research on this topic would be able to perform the research without financial bias affecting their research results. This is because they are all in some way financially dependent upon the large software vendors. For instance, even IT publications receive a disproportionate percentage of their advertising from either large software vendors or large consulting companies – both of which would push against any research which showed that two tiered ERP was effective. Entities do not publish research, which contradicts their own financial model.

The Comparisons

Our first comparison shows all using one single instance SAP ERP system (ECC/R/3) to support 600 users. This is compared against a two-tiered ERP strategy, which uses SAP ERP (ECC/R/3) for 200 users, and then four other ERP systems (Epicor, Infor Lawson, Sage X3 and NetSuite OneWorld). This is a very realistic scenario as the average company that uses ERP systems has five ERP systems within the company. This statistic combines with the statistic that the average ERP system has 60% of its modules actually operational.

Alternate One - 100% SAP ERP/ECC/R/3 VS Multi Two Tier ERP

CategoryApplicationTCOUser #
Tier 1 ERPSAP ERP/ECC/R/3$ 72,522,188600

Alternate One - SAP ERP/ECC/R/3 VS Multiple Two Tier ERP Part 2

CategoryApplicationTCOUser #
Total$ 54,762,200600
Tier 1 ERPSAP ERP/ECC/R/3$ 27,895,000200
Tier 2 ERPEpicor ERP$ 7,493,575100
Tier 2 ERPInfor Lawson$ 6,308,375100
Tier 2 ERPSage X3$ 6,371,000100
Tier 3 ERPNetSuite OneWorld$ 6,694,250100

This analysis compares the use of five ERP systems versus the use of one ERP system, each serving the same number of users. The cost savings are significant at 24%.

Alternate Two - SAP ERP/ECC/R/3 VS Tier 1 SAP + One Large Tier 2 ERP

CategoryApplicationTCOUser #
Tier 1 ERPSAP ERP/ECC/R/3$ 67,625,688800

Alternate Two - SAP ERP/ECC/R/3 VS Tier 1 SAP + One Large Tier 2 ERP Part 2

CategoryApplicationTCOUser #
Total$ 68,155,345800
Tier 1 ERPSAP ERP/ECC/R/3$ 48,348,125400
Tier 2 ERPSage X3$ 19,807,220400

The next example shows a larger number of users, at 800. It also cuts down the number of ERP systems in the two-tiered ERP strategy to just two ERP systems – SAP ERP/ECC/R/3 and Sage X3. This scenario provides no cost savings.  However, it must be remembered that this is only a cost analysis. Having only two ERP systems, also cuts down on the flexibility of the company as there is much more variety in four ERP applications than one. When companies allow different divisions to choose their own ERP systems – that is follow a decentralized approach – they rarely settle on the same ERP system. This is logical because different companies and sub-companies have different requirements that are optimally met by different applications. 

Alternate Three - SAP ERP/ECC/R/3 VS SAP for Both Tier 1 & Tier 2

CategoryApplicationTCOUser #
Tier 1 ERPSAP ERP/ECC/R/3$ 67,625,688800

Alternate Three - SAP ERP/ECC/R/3 VS SAP for Both Tier 1 & Tier 2 Part 2

CategoryApplicationTCOUser #
Total$ 64,823,695800
Tier 1 ERPSAP ERP/ECC/R/3$ 48,348,125400
Tier 2 ERPSAP Business One$ 16,475,570400

SAP and Oracle have responded to the tier 2 ERP vendors that is makes more sense to use their tier 2 ERP offerings rather than move to a different ERP vendor for the 2nd tier. This scenario above tests that hypothesis. In this scenario, there are moderate cost savings of 4%. 

Conclusion

According to our research, one can save money by following a two-tiered ERP strategy, and we predict that the savings would be significant, but it greatly depends upon which tier 2 ERP systems are used, and if the company deploys multiple or a single tier 2 ERP system. There are scenarios where following a two tier ERP strategy will save no money. This only covers the the cost or TCO side of the equation. A major benefit of tier 2 ERP is to gain more diversity in functionality that can be attained by using just one ERP system. It should be apparent from each of the examples provided above that the primary reason for this cost savings is that tier 1 ERP applications are considerably more expensive than lower tiered ERP systems. Of course, tier 1 ERP systems tend to be better fits for larger companies, although this generality should be questioned more now than ever as both SAP and Oracle have essentially “stabilized” their tier 1 ERP systems – which means little future development — and other ERP applications have closed some of the gap in functionality. Our Software Selection Package for Finance/Accounting explains this point in detail. Both SAP and Oracle tier 1 ERP systems comes with a great deal of implementation complexity and maintenance and it is well understood that their tier 1 offerings tend to be overkill for smaller companies/divisions etc.. Therefore, the claims made by proponents of two-tier ERP strategies regarding costs savings are correct. With SAP, the cost savings are higher if non-SAP or Oracle tier 2 ERP applications are purchased versus most other tier 2 ERP applications. However, we have several less known tier 2 ERP applications that have lower costs than SAP Business One. As is most often the case, each application should be selected on the basis of its functionality fit with the business requirements. No other consideration is even close to as important.

Software Selection

  • Want Help with Software Selection for your Business?

    It is difficult for most companies to perform software selection without outside advice. It is impossible to obtain honest software selection support from consulting companies. We offer expert and unbiased remote software selection 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

Montgomery, Nigel. Ganly, Denise. How to Determine If a Two-Tier ERP Suite Strategy Is Right for You. Gartner. October 24 2012

Solution Architecture Package – 100% Oracle Versus 100% Best of Breed Calculator

Background

It is commonly stated that tier 1 ERP systems are very advantageous, particularly for large buyers. One of the reasons that is often presented is that using both tier 2 ERP systems as well as other applications from the same software vendors saves buyers money – and in fact, that while it is well recognized that the major vendors provide inferior functionality to best of breed vendors (although the term “inferior” is rarely used), the trade off of accepting this inferior functionality is well worth it when one considers the substantial cost savings that are assumed to be available from buying most of one’s software from one vendor. This is the standard logic presented by both large software vendors and large consulting companies that are essentially their partners. Most often the single software vendor is either SAP or Oracle, but other software vendors such as Infor, which have grown through acquisitions, will make essentially the same argument to their potential buyers. Software vendors will often grow because they anticipate that the profit margins available for them if they can offer “full suites” is greater than if they provide more narrow and targeted solutions. As is explained in the SCM Focus Press book, Gartner and the Magic Quadrant: A Guide for Buyers, Vendors and Investors, IT analysts also tend to promote large software vendors as more stable and preferred vendors for their readers. In fact, because of how the Magic Quadrant is configured, the simple act of one software vendor acquiring another software vendor, will move the acquired vendor’s products up in the ranking because so much of Gartner’s Magic Quadrant criteria are simply a proxy for the size of the software vendor.

The (Lack of) Evidence for the Single Vendor Hypothesis

While the logic or reasoning presented above has been highly influential and purchasing decisions for decades, in our research we could find no entity that every demonstrated, or even attempted to quantify the total cost of ownership for following a single vendor approach versus a best of breed approach. Considering how commonly the logic of the single software vendor purchasing strategy is invoked, we found this curious. Before reviewing our quantification of this issue, several characteristics of the single vendor argument should be understood.

  1. Financial Bias: Most the entities that propose the single vendor argument have a financial bias. They are either large vendors with many applications and therefore the advice they provide to purchase as much software as possible from a single vendor (that vendor curiously enough always being them) is self-serving. The other major proponents of this purchasing strategy are large consulting companies. However, they have built their IT consulting practices around specific large vendors, and have resources trained in the applications of the large vendors. SAP and Oracle trade away a great deal of their consulting business to the major consulting companies in return for recommendations to purchase their software to the client’s of the major consulting companies.
  2. No Attempt to Provide Evidence: The single vendor argument neither has any evidence to support it nor do any studies exist to support it. Furthermore is not designed to be either proven or disproven, it is instead part of a marketing program to increase sales of the software vendor and the consulting companies, which propose the hypothesis.
  3. The Research Problem: No entity that would be traditionally relied upon to perform research on this topic would be able to perform the research without financial bias influencing their results, as they are in some way compensated by the large software vendors. For instance, even IT publications receive a disproportionate percentage of their advertising from either large software vendors or large consulting companies – both of which would push against any research which showed that the single vendor approach was less effective/more costly (etc) than a more diverse approach. Publishing such research would be an excellent way to have one’s advertising revenues cut. Entities do not publish research, which contradicts their own financial model. The one entity that could research this topic is the academic system, and there is no record of this type of research every being performed by an academic institution or published in any academic journal. This should not be surprising, academics does not investigate every issue that is of interest in industry.

This Analysis and Assumptions

This analysis is really based upon the individual application TCO Calculators that we sell as individual detailed analysis that breaks down the TCO into software, hardware, implementation and maintenance costs. This 100% Oracle Versus 100% Best of Breed Calculator brings the analysis up a level of abstraction and only lists the overall TCO of each application – but lists the TCO for multiple applications, and then compares competing solution architectures. In our individual application TCO Calculators there are inputs, which change the predicted TCO including the sophistication level of the implementation and the degree of customization among other factors. In order to produce an apples to apples comparison as well as to simplify the analysis, all applications are listed as their most simple state.

  1. Uniqueness of Analysis: This is the only analysis of this kind that we are aware exists. We believe we are the only source that compares the costs of the single vendor strategy versus the best of breed strategy in a published form.
  2. The Underlying Research: The TCO analyses are based upon rigorous and detailed analysis into each application. This is a bottom up analysis where first the TCO is estimated for each TCO component, then added per cost category, and then finally aggregated to account for the overall TCO. For those interested in the detail below that shown in this analysis for any specific application, we recommend our application specific TCO calculators. Those offerings have adjustments that can allow them to be matched to the actual implementation environment.
  3. Estimated Integration Costs: We do not break out integration costs separately. A primary reason for this is that when dealing with software vendors, they also do not break out integration costs – but instead they quote the overall implementation effort. Therefore integration costs are included in the overall TCO costs.

The Comparisons

Our first comparison shows all Oracle applications versus all best of breed applications. The first comparison, or Alternate One, which follows, has no ERP system, but instead uses a best of breed application in each category. In our 100% best of breed application grouping, Rootstock would perform the non-financial ERP functions, and Intacct would provide the financial functionality. Arena Solutions provides bill of materials and PLM functionality, which is much greater than any similar functionality inside of an ERP system.

Alternate One - 100% Oracle VS 100% Best of Breed (Small to Medium)

CategoryApplicationTCOUser #
Total$ 40,736,878324
ERPOracle JD Edwards EnterpriseOne$ 23,400,000200
Financial & AccountingOracle JD Edwards EnterpriseOneCosts Accounted for in ERPCovered by ERP
Inventory ManagementOracle JD Edwards EnterpriseOneCosts Accounted for in ERPCovered by ERP
Bill of Materials/PLMOracle JD Edwards EnterpriseOne*Costs Accounted for in ERP Covered by ERP
Demand PlanningSAP DP$ 2,794,90012
Supply PlanningSAP SNP$ 2,454,90012
Production PlanningSAP PP/DS$ 3,059,02510
Business IntelligenceSAP BI/BW$ 5,945,48040
CRMSAP CRM$ 5,954,48050

This analysis is for a smallish environment with a total of roughly 300 users. These are generally good value best of breed applications. As one can see the cost savings on the basis of TCO is quite significant. Now we will show the same applications for a larger environment.

*Bill of materials/PLM functionality exists in SAP ERP, but only the bare minimum necessary to support accounting and MRP. Therefore it is listed above as partially covered by the ERP system — however we do not recommend attempting to manage the bill of materials in any ERP system. 

CategoryApplicationTCOUser #
Total$ 21,791,622311
ERPN/AN/AN/A
Financial & AccountingIntacct$ 3,218,40075
Inventory ManagementRootstock$ 4,350,500100
Bill of Materials/PLMArena Solutions Arena PLM$ 1,167,47212
Demand PlanningDemand Works Smoothie$ 1,167,47212
Supply PlanningToolsGroup$ 2,726,90012
Production PlanningPlanetTogether$ 1,479,60510
Business IntelligenceTeradata$ 5,440,95640
CRMSalesforce Enterprise$ 2,191,20550

This analysis is for a small to medium sized environment with a total of roughly 300 users.

We have selected some of the better value best of breed applications. As one can see the cost savings on the basis of TCO is quite significant.

Now we will show the same applications for a larger environment.

 

Alternate One - 100% Oracle VS 100% Best of Breed (Large)

CategoryApplicationTCOUser #
Total$ 100,682,6201330
ERPOracle JD Edwards EnterpriseOne$ 59,957,378800
Financial & AccountingOracle JD Edwards EnterpriseOneCosts Accounted for in ERPCovered by ERP
Inventory ManagementOracle JD Edwards EnterpriseOneCosts Accounted for in ERPCovered by ERP
Bill of Materials/PLMOracle JD Edwards EnterpriseOne*Costs Accounted for in ERP Covered by ERP
Demand PlanningOracle Demantra$ 3,963,99630
Supply PlanningOracle Supply Planning$ 4,352,79530
Production PlanningOracle Production Planning$ 3,728,30820
Business IntelligenceOracle BI$ 20,394,651300
CRMOracle RightNow$ 8,285,492150

This analysis is for a larger environment with a total of roughly 1300 users.

CategoryApplicationTCOUser #
Total$ 63,197,5211314
ERPN/AN/AN/A
Financial & AccountingIntacct$ 9,667,936300
Inventory ManagementRootstock$ 13,340,810400
Bill of Materials/PLMArena Solutions Arena PLM$ 5,152,85284
Demand PlanningDemand Works Smoothie$ 2,665,12830
Supply PlanningToolsGroup$ 3,804,80730
Production PlanningPlanetTogether$3,531,95120
Business IntelligenceTeradata$ 19,289,704300
CRMSalesforce Enterprise$ 5,744,334150

 

There is some user aggregation on the Oracle side because multiple user licenses fall under the same overall ERP application. Again the cost savings on the basis of TCO is quite significant, although it is less of a cost savings than applying the best of breed strategy in the smaller environment.

Conclusion

According to our research following a single vendor strategy is not only more expensive than following a best of breed strategy, but is significantly more expensive. It also is important to be emphasized that this analysis included all integration costs. However, even if they had been left out, it is impossible that the costs of the best of breed strategy would have come anywhere near the costs of the single vendor strategy.

Other extremely important points – in addition to the cost analysis presented above is that the best of breed strategy results in the following attributes:

  1. 1.     Much Higher Functionality of Best of Breed: All of the large vendors score significantly below the best of breed vendors in application functionality. This is explained in our Software Selection Packages in detail. The more software that is purchased from one vendor, the more uncompetitive the overall grouping of software will be. A major reason for this is that firstly, not software vendor can be best in every software category. If a software vendor develops its applications internally, this is because a software vendor that is good at developing ERP software is never going to be the best at developing other categories of enterprise software. In the case where the software vendor acquires applications, most acquired applications tend to languish with little development, and tend to become less and less relevant as the time from the acquisition passes. This is explained in our Fake Innovators article.
  2. 2.    Significantly Lower Implementation Risk: Targeted best of breed solutions have lower risk than software purchased from a single vendor. It’s not hard to see why. Best of breed applications are a better natural fit for the implementation environment and require far less customization. The traditional way to manage risk is to listen to advice from major consulting companies and to purchase software from major vendors. This does reduce the perception of risk, or the political implications of a failed implementation as the executive can say “We bought from SAP and used Accenture – what else can one do?” However, this strategy increases the probability that any one implementation will fail, increasing the needs of the executive decision maker to have the political cover of having purchased from a major “brand.”

Our analysis leads to the conclusion that the official logic of purchasing from a single software vendor is flawed, and that it is flawed in every dimension – cost being just one dimension that it turns out to not be true.

Our TCO studies show, and it is no great secret, that vendors with the broadest product lines have the highest TCOs. Furthermore, broad product lines do not simply sit on one platform or use one database. The applications have adapters that connect the applications, in the same way that best of breed vendors have adapters. Of course the major software vendors have advantages in integration as they own all the applications when a buyer follows a single vendor purchasing strategy – but these hypothetical benefits are not anywhere near as significant as generally thought, and cannot come close to making up for the higher TCOs of large software vendors. It should not be surprising that when one purchases software from vendors that have the highest TCOs per application, that a buyer’s overall enterprise wide TCO will also be higher.

This is not to say no applications should be purchased from large software vendors – only that the proposal that buyers should purchased their applications from a single vendor in order to reduce costs and to reduce implementation risk – is not supported by research. In fact, our research shows exactly the opposite, that buyers should pick and choose the best software from the best application provider.

We have analyzed this issue from multiple dimensions and it is difficult to see how the single vendor strategy is even a serious proposal. Our best guess is that it simply began as marketing hyperbole proposed by large vendors, and developed a life of its own after this point – and is simply repeated without anyone noticing that it only would make sense if integration costs were truly enormous – and apparently without anyone noticing that the logic is simply repeated without ever evidence provided to support the claim.

Solution Architecture Package – 100% SAP Versus 100% Best of Breed Calculator

Introduction

It is commonly stated that tier 1 ERP systems are very advantageous, particularly for large buyers. One of the reasons that is often presented is that using both tier 2 ERP systems as well as other applications from the same software vendors saves buyers money – and in fact, that while it is well recognized that the major vendors provide inferior functionality to best of breed vendors (although the term “inferior” is rarely used), the trade off of accepting this inferior functionality is well worth it when one considers the substantial cost savings that are assumed to be available from buying most of one’s software from one vendor. This is the standard logic presented by both large software vendors and large consulting companies that are essentially their partners. Most often the single software vendor is either SAP or Oracle, but other software vendors such as Infor, which have grown through acquisitions, will make essentially the same argument to their potential buyers.

Software vendors will often grow because they anticipate that the profit margins available for them, if they can offer “full suites”, is higher significant than if they provide more narrow and targeted solutions. As is explained in our book Gartner and the Magic Quadrant: A Guide for Buyers, Vendors, and Investors, IT analysts also tend to promote large software vendors as more stable and preferred vendors for their readers. In fact, because of how the Magic Quadrant is configured, the simple act of one software vendor acquiring another software vendor will move the acquired vendor’s products up in the ranking because so much of Gartner’s Magic Quadrant criteria are merely a proxy for the size of the software vendor.

The (Lack of) Evidence for the Single Vendor Hypothesis

While the logic or reasoning presented above has been highly influential and purchasing decisions for decades, in our research we could find no entity that every demonstrated, or even attempted to quantify the total cost of ownership for following a single vendor approach versus a best of breed approach. Considering how commonly the logic of the single software vendor purchasing strategy is invoked, we found this curious. Before reviewing our quantification of this issue, several characteristics of the single vendor argument should be understood.

  1. Financial Bias: Most of the entities that propose the single vendor argument have a financial bias. They are either large vendors with many applications, and therefore the advice they provide to purchase as much software from a single vendor (that vendor curiously enough always being “them”) is self-serving. The other major proponents of this purchasing strategy are large consulting companies. However, they have built their IT consulting practices around specific large vendors, and have resources trained in the applications of the large vendors. SAP and Oracle trade away a great deal of their consulting business to the major consulting companies in return for recommendations to purchase their software to the client of the major consulting companies.
  2. No Attempt to Provide Evidence: The single vendor argument neither has any evidence to support it nor do any studies exist to support it. Furthermore is not designed to be proven or disproven, it is instead part of a marketing program to increase sales of the software vendor and the consulting companies that propose the hypothesis.
  3. The Research Problem: No entity that would be traditionally relied upon to perform research on this topic would be able to complete the study without financial bias influencing their results, as they are in some way compensated by the large software vendors. For instance, even IT publications receive a disproportionate percentage of their advertising from either large software vendors or large consulting companies – both of which would push against any research which showed that the single vendor approach was less effective/more costly (etc.) than a more diverse approach. Publishing such research would be an excellent way to have one’s advertising revenues cut. Entities do not publish research, which contradicts their financial model. The one entity that could research this topic is the academic system, and there is no record of this type of research every being performed by an academic institution or published in an academic journal. This should not be surprising; academics do not investigate every issue that is of interest in the industry.

This Analysis and Assumptions

This analysis is based upon the individual application TCO Calculators that we sell as individual detailed analysis that breaks down the TCO into software, hardware, implementation and maintenance costs. This 100% SAP Versus 100% Best of Breed Calculator brings the analysis up a level of abstraction and only lists the overall TCO of each application – but lists the TCO for multiple applications, and then compares competing solution architectures. In our application TCO Calculators, there are inputs, which change the predicted TCO including the sophistication level of the implementation and the degree of customization among other factors. To produce an apples to apples comparison as well as to simplify the analysis, all applications are listed as their purest state.

  1. The Uniqueness of Analysis: This is the only analysis of this kind that we are aware exists. We believe we are the only source that compares the costs of the single vendor strategy versus the best of breed strategy in a published form.
  2. The Underlying Research: The TCO analyses are based upon rigorous and detailed analysis of each application. This is a bottom-up analysis where first the TCO is estimated for each TCO component, then added per cost category, and then finally aggregated to account for the overall TCO. For those interested in the detail below that shown in this analysis for any specific application, we recommend our application specific TCO calculators. Those offerings have adjustments that can allow them to be matched to the actual implementation environment.
  3. Estimated Integration Costs: We do not break out integration costs separately. A primary reason for this is that when dealing with software vendors, they also do not break out integration costs. But instead, they quote the overall implementation effort. Therefore integration costs are included in the overall TCO costs.

The Comparisons

Our first comparison shows all SAP applications versus all best of breed applications. The first comparison, or Alternate One, which follows, has no ERP system but instead uses a best of breed application in each category. In our 100% best of breed application grouping, Rootstock would perform the non-financial ERP functions, and Intacct would provide the financial functionality. Arena Solutions provides bill of materials and PLM functionality, which is much greater than any similar functionality inside of an ERP system.

Alternate One - 100% SAP VS 100% Best of Breed (Small to Medium)

CategoryApplicationTCOUser #
Total$ 48,292,838324
ERPSAP ERP/ECC/R/3$ 27,895,000200
Financial & AccountingSAP ERP/ECC/R/3Costs Accounted for in ERPCovered by ERP
Inventory ManagementSAP ERP/ECC/R/3Costs Accounted for in ERPCovered by ERP
Bill of Materials/PLMSAP ERP/ECC/R/3*Costs Accounted for in ERP Covered by ERP
Demand PlanningSAP DP$ 4,367,87612
Supply PlanningSAP SNP$ 3,272,58012
Production PlanningSAP PP/DS$ 4,078,70010
Business IntelligenceSAP BI/BW$ 6,430,23040
CRMSAP CRM$ 2,405,95250

*Bill of materials/PLM functionality exists in SAP ERP, but only the bare minimum necessary to support accounting and MRP. Therefore it is listed above as partially covered by the ERP system. However, we do not recommend attempting to manage the bill of materials in any ERP system. 

CategoryApplicationTCOUser #
Total$ 21,791,622311
ERPN/AN/AN/A
Financial & AccountingIntacct$ 3,218,40075
Inventory ManagementRootstock$ 4,350,500100
Bill of Materials/PLMArena Solutions Arena PLM$ 1,167,47212
Demand PlanningDemand Works Smoothie$ 1,167,47212
Supply PlanningToolsGroup$ 2,726,90012
Production PlanningPlanetTogether$ 1,479,60510
Business IntelligenceTeradata$ 5,440,95640
CRMSalesforce Enterprise$ 2,191,20550

This analysis is for a small to medium sized environment with a total of roughly 300 users.

We have selected some of the better value best of breed applications. As one can see the cost savings by TCO is quite significant.

Now we will show the same applications for a larger environment.

Alternate One - 100% SAP VS 100% Best of Breed (Large)

CategoryApplicationTCOUser #
Total$ 113,332,4251330
ERPSAP ERP/ECC/R/3$ 67,625,688800
Financial & AccountingSAP ERP/ECC/R/3Costs Accounted for in ERPCovered by ERP
Inventory ManagementSAP ERP/ECC/R/3Costs Accounted for in ERPCovered by ERP
Bill of Materials/PLMSAP ERP/ECC/R/3*Costs Accounted for in ERP Covered by ERP
Demand PlanningSAP DP$7,294,80130
Supply PlanningSAP SNP$ 5,803,72630
Production PlanningSAP PP/DS$ 4,971,07720
Business IntelligenceSAP BI/BW$ 21,892,800300
CRMSAP CRM$ 5,744,334150

This analysis is for a larger environment with a total of roughly 1300 users.

CategoryApplicationTCOUser #
Total$ 63,197,5211314
ERPN/AN/AN/A
Financial & AccountingIntacct$ 9,667,936300
Inventory ManagementRootstock$ 13,340,810400
Bill of Materials/PLMArena Solutions Arena PLM$ 5,152,85284
Demand PlanningDemand Works Smoothie$ 2,665,12830
Supply PlanningToolsGroup$ 3,804,80730
Production PlanningPlanetTogether$3,531,95120
Business IntelligenceTeradata$ 19,289,704300
CRMSalesforce Enterprise$ 5,744,334150

There is some user aggregation on the SAP side because multiple user licenses fall under the same overall ERP application. Again the cost savings by TCO is quite significant. It is less of cost savings than applying the best of breed strategy in the smaller environment. 

Conclusion

According to our research following a single vendor, strategy is not only more expensive than following a best of breed strategy but is significantly more expensive. It also is important to be emphasized that this analysis included all integration costs. However, even if they had been left out, it is impossible that the costs of the best of breed strategy would have come anywhere near the costs of the single vendor strategy.

Other critical points – in addition to the cost analysis presented above is that the best of breed strategy results in the following attributes:

  1. Much Higher Functionality: All of the large vendors score significantly below the best of breed vendors. The more software is purchased from one vendor; the more uncompetitive the overall grouping of software will be.
  2. Much Lower Implementation Risk: Targeted best of breed solutions have lower risk than software purchased from a single vendor. It’s not hard to see why. Best of breed applications are a better natural fit for the implementation environment and require far less customization. The traditional way to manage risk is to listen to advice from major consulting companies and to purchase software from major vendors. This does reduce the perception of risk, or the political implications of a failed implementation as the executive can say “We bought from SAP and used Accenture – what else can one do?” However, this strategy increases the probability that any one implementation will fail.

Our analysis leads to the conclusion that the official logic of purchasing from a single software vendor is flawed, and that it is flawed in every dimension – cost being just one dimension that it turns out to not be true.

Our TCO studies show, and it is no great secret, that vendors with the broadest product lines have the highest TCOs. Furthermore, broad product lines do not just sit on one platform or use one database. The applications have adapters that connect the applications, in the same way, that best of breed vendors have adapters. Of course, the major software vendors have advantages in integration as they own all the applications when a buyer follows a single vendor purchasing strategy – but these hypothetical benefits are not anywhere near as significant as generally thought, and cannot come close to making up for the higher TCOs of large software vendors. It should not be surprising that when one purchases software from vendors that have the highest TCOs per application, that a buyer’s overall enterprise-wide TCO will also be higher.

This is not to say no applications should be purchased from large software vendors – only that the proposal that buyers should purchase their applications from a single vendor to reduce costs and to reduce implementation risk is not supported by research. Our research shows exactly the opposite that buyers should pick and choose the best software from the best application provider.

We have analyzed this issue from multiple dimensions, and it is difficult to see how the single vendor strategy is even a serious proposal. Our best guess is that it simply began as marketing hyperbole proposed by large vendors, and developed a life of its own after this point. It is repeated merely without anyone noticing that it only would make sense if integration costs were truly enormous. This is apparently without anyone seeing that the logic is repeated merely without ever evidence provided to support the claim.