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.