The idea of two-tier ERP has been around for years, but it has remained stubbornly difficult to deploy and manage. Lately, I've had lots of inquiries from clients about this approach, and lots of presentations from software vendors and system integrators (SIs) promising that it was coming soon. When this kind of convergence between buyers and sellers happens, it sometimes leads to real progress.

My Gartner colleague Nigel Montgomery has written many useful articles and reports about two-tier ERP that discuss the opportunity for larger organizations, as well as the rather disappointing lack of progress in this area by the software vendors. The biggest problem over the years has been that the vendors that are effective at selling ERP to large, global companies have had very little incentive to offer smaller and less-expensive systems for divisions, subsidiaries or remote locations. As long as they could successfully sell large systems, why would they deliberately sell small ones? At the same time, the vendors that were good at building smaller and simpler ERP systems have typically not had effective channels that could sell them to large corporations or implement and support them on a global basis.

In addition to the vendor problem, there has been a great deal of both active and passive resistance to the idea of two-tier ERP from corporate IT organizations. In many cases, they have gotten "single global instance" religion, and any suggestion of distributed systems or local autonomy is considered heresy. Lots of these companies are still in the process of replacing a motley collection of mismatched 1980s minicomputer systems, and they hate the idea of recreating that kind of mess.

For the past 10 years, most of my inquiries about two-tier ERP have come from companies that rolled out their global instances to headquarters and all their larger operations, but they then found themselves with a set of small or rebellious locations that didn't seem like good candidates to join the club. Corporate IT started looking for a second-tier ERP system that they could declare as a "standard" in the hopes of minimizing both the variety and cost. In most cases, they have been pretty disappointed about their options.

While I had noticed that the subject seemed to be coming up more often lately, it was a conversation last week with an SAP executive that made me realize what has changed. She said that they were getting more large enterprise CIOs asking for a two-tier solution because they "have to give those smaller subsidiaries and locations what they want." Oh, how the mighty have fallen! We have written a lot about the shift in power from IT to departments and line-of-business executives, but now we are finding IT having to bend to the wishes of lowly subsidiaries.

Corporations are back in growth mode, and, in many cases, subsidiaries are the "tip of the spear" for developing new business, especially in emerging markets like Asia, Latin America, Africa and the Middle East. A lot of companies are also creating or acquiring new subsidiaries to move into new product and service areas. This means these operations have power and senior management attention - they need to move fast. IT can't treat these as an afterthought or fall back on the old statement of "our ERP system is now supporting 90 percent of the corporation's revenue." That may be true, but it's no longer adequate.

SAP has the largest base of large enterprise ERP customers, and the company has finally gotten serious about developing solutions for subsidiaries. It realized that its 310 largest customers have 145,000 subsidiaries, and this is too large a market to ignore or leave vulnerable to competitors. SAP is working with both large SIs like Accenture and many of its smaller reseller partners to create subsidiary solutions for SAP BusinessOne, SAP Business ByDesign and SAP Business All-in-One.

At the same time, some of the midmarket ERP vendors are also beginning to target those same subsidiaries. NetSuite has been particularly aggressive with its OneWorld product, recently announcing its own partnership with Accenture for two-tier ERP solutions. Microsoft has also been positioning Dynamics AX for what it calls the "hub-and-spoke model."

One of the interesting possibilities is that cloud or SaaS-based ERP will turn out to be an attractive approach for buyers looking for a tier-two ERP solution. Subsidiaries are likely to find the speed of deployment and independence from corporate IT very appealing, while corporate may like the usage-based pricing and the idea that subsidiaries can't really modify the code.

I think that if viable two-tier solutions emerge, a number of organizations are likely to reconsider their ERP deployment strategies. It's difficult and expensive to implement and support a corporate ERP solution in small and even midsize operations, particularly those in locations that present challenges on language support and available IT talent. An ERP vendor or service provider that can address the financial integration, supply chain visibility and master data issues is likely to find a very large potential market.

If you already have two-tier ERP or you're thinking about it - even if you think the idea is hopelessly naïve - I would love to hear from you. As always, I can be reached at jim.shepherd@gartner.com.

Source: Gartner