posted on 3/2/2011 12:03:04 PM
No longer are companies putting all of their resources into creating a single-instance enterprise resource planning system, an analyst group says. The new model favors two-tier ERP, and it is quickly gaining favor.
The mirage of a single-instance enterprise resource planning system for global corporations is fading into the digital sunset. So says a new report by the analysts at Constellation Research.
In recent years, the general trend in manufacturing and other industries was to consolidate disparate ERP systems—often the result of acquisitions or departmental siloing—into one mega ERP deployment to run the entire business. The goal of such “single ERP” efforts was to facilitate streamlined business processes and holistically manage business data at a lower cost of ownership.
But over the last decade, the researchers say, “organizations have discovered the failure of the single-instance strategy.”
In lieu of those expected benefits, manufacturers and other users were treated to a dearth of innovation from their ERP vendors, systems that did not adapt well to shifting business requirements, and pesky maintenance fees that returned little value, according to lead author and Constellation CEO R “Ray” Wang.
The alternative, quickly gaining favor, is a two-tier ERP model. A two-tier approach “enables organizations to keep existing ERP systems at the corporate level while empowering divisions or business units to innovate with a second ERP system,” Wang reports.
A look at Constellation’s research, titled “The Case for Two-Tier ERP Deployments,” shows just how quickly the ERP paradigm has shifted. In the third quarter of 2009, just 21% of the companies surveyed by Constellation said they were considering a two-tier ERP strategy. By the first quarter of 2010, that number had grown to 32%. And in the first quarter of this year, 48% of organizations said they were pursuing a two-tier ERP model.
Primarily, it is a familiar business nemesis that is driving the shift toward two-tier ERP. More than 80% of respondents to Constellation’s most recent study cited as their primary motivator the excessive cost of existing ERP systems. The second biggest spur in their side is a lack of industry-specific functionality among single-instance ERP offerings, the survey found.
“Next-gen IT leaders remain frustrated by the lack of innovation and progress in completing...promised functional footprints,” the report states. “As market competition intensifies, industry-specific, purpose-built solutions provide the competitive advantage needed for survival and success.”
Other factors that have dimmed customers’ view of single-instance ERP include the cost of software upgrades; a perceived lack of functional innovation by ERP providers; geographic and language needs that are best met by smaller, regional ERP packages; and the desire to comply with industry-specific regulations.
As distaste with monolithic ERP systems has intensified, a confluence of factors has helped facilitate the rise of a two-tier mindset, according to Constellation. Foremost among them is the emergence of smaller ERP vendors plying alternatives to the vast, department-spanning ERP systems offered by some category heavyweights.
“Despite the dominance of Tier 1 ERP vendors such as Oracle and SAP in the ERP market,” Wang writes, “a number of Tier 2 on-premises vendors have delivered key features such as last-mile functionality, multi-currency, multi-org, greater than 1,000 concurrent user scalability, and compelling user experiences. In many cases, these vendors have delivered better industry-specific and geographic-specific capabilities than Oracle and SAP.”
Neither ERP leader, however, has been blind to the emergence of a two-tier mentality, nor have their competitors. Both SAP and Oracle have developed and executed strategies to focus on small and mid-market customers as well as departments and business units of much larger conglomerates. In a May 2008 article detailing the ERP leaders’ respective plans, Managing Automation quoted Wang, then with Forrester Research, on the sparring match. "The small- and medium-sized part of the market is where all the growth is coming from, particularly if you include divisions of larger enterprises," Wang said. "There are a lot of software upgrades going on right now, and the focus among SMEs is on improving efficiency and regulatory compliance. And both SAP and Oracle are concentrating hard on winning in that space."
Other factors that have broadened the ERP outlook for companies are the emergence of SaaS and cloud-based ERP offerings, which the report says are “best placed to deliver the quickest time to value in a two-tier ERP strategy” due to subscription pricing plans, frequent product innovations, and quick ROI.
The report also lauds improved integration techniques, including APIs based on open standards, Web services, and process integration libraries, as enablers of a two-tier ERP structure in which data from the second tier must roll up to the first. Also key to a more heterogeneous ERP approach is better master data management, Constellation reports.
For now, the dual ERP implementations are mostly on-premises affairs, Wang notes, but “cloud based solutions will gain favor over the next 18 to 24 months.”
And, the report concludes, “Whether SaaS, on-premises, or hybrid, a two-tier ERP strategy will reduce costs, meet new business requirements, and provide better business value.”
For additional commentary on the ERP paradigm shift, see Jeff Moad’s thoughts on Managing Automation’s sister site, Manufacturing Executive.