Two-tier ERP a growing trend among SAP shops, report says

Companies running SAP ERP at the corporate level that are considering running a second ERP instance at the subsidiary level are not alone, according to a new report.

Corporate-level SAP ERP users considering running a second, smaller ERP instance at the subsidiary or plant level -- also known as two-tier ERP -- are not alone, according to a new report.

A growing number of companies, including a large number of SAP shops, are going with two-tier ERP for a variety of financial and logistical reasons, according to Ray Wang, principal analyst and CEO of Constellation Research Inc. and author of the report.

Two-tier ERP deployments are typically used when a parent company keeps an existing ERP system, while subsidiaries or other business units deploy a second ERP system for their specific needs.  

It’s a trend fueled by increasingly attractive on-premise and on-demand alternatives to legacy ERP applications, which the report says are “expensive to run, difficult to upgrade, and impossible to modify for today’s fast changing environments.” For example, on-demand alternatives offer quick ROI, constant updates, and integrate with more easily with other ERP systems than they have in the past, the report states.

Nearly half of the 348 companies surveyed in the first quarter of 2011 said they were considering a two-tier ERP approach, up from about 20% in 2009, according to the report.

Most of the SAP shops that are running two-tiered systems are running an SAP ERP instance for human resources and financials, but running something like JD Edwards or Microsoft at the local level, where the needs are different, Wang said. 

“Food and beverage, pharmaceuticals, construction, we see a lot of that,” Wang said.

Going rogue

The term “two-tier” ERP is applied to a lot of situations that might not actually be two-tier, according to Josh Greenbaum, principal of Enterprise Applications Consulting in Berkeley, Calif. In some instances it might be some part of the company that has implemented some smaller ERP system without having the parent company’s blessing. 

Whether [a certain company is] two-tiered depends on who you ask,” Greenbaum said, adding that some corporations are full of “rogue” ERP deployments.

Nevertheless, it’s becoming increasingly difficult for companies to do business in the global marketplace without going to a second ERP instance, especially as organizations acquire other companies and bring them into the fold, he said.

“If [the company only has one instance of an ERP,] it’s broken with the next acquisition,” Greenbaum said. “Most larger companies are going to want to look at something that’s multi-tier.” It makes sense to go with a second-tier ERP when the subsidiary is in a foreign country, he said, given that those applications specialize in tax codes and regulations specific to the country they’re operating in. One downside of having a second tier is that you need an IT staff with that additional set of skills for that system.

Business ByDesign

Many SAP shops that are running a smaller SAP ERP at the subsidiary level currently use Business One, according to Wang, though “lots” of companies he’s spoken with are talking more about deploying SAP’s on-demand ERP Business ByDesign.

That fits in with SAP’s current strategy of selling Business ByDesign into subsidiaries of its enterprise base. To help make that happen, SAP has included in the 2.6 feature pack a preconfigured financial integration scenario that allows a parent and subsidiary company to communicate along global financial reporting standards. Other scenarios, including one for sales and distribution, are planned for future releases, according to SAP.

That makes sense, said Wang and Greenbaum, although it wasn’t long ago that SAP tried to steer its on-premises ERP customers away from deploying Business ByDesign out of fear that it would  undermine their sales model.

“They didn’t want to cannibalize revenue,” Wang said. “Now that they’ve been able to refocus, I think a lot of this is going to be focused on keeping things end-to-end SAP, by allowing Business ByDesign as an option. It’s a powerful option for a lot of companies.”

An indictment

The question of if -- or when -- a company should go with a second-tier solution reflects a larger problem, Greenbaum said. The two-tier approach might not be as necessary if upgrades and customization of the existing ERP weren’t so costly, Greenbaum said.

 “It’s in many ways an indictment of the vendors as it is a problem at the vendor level,” Greenbaum said.

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