Organizations that embrace two-tier ERP strategies are better positioned
to both navigate volatile global business conditions and acquire or divest operations that generate operational efficiency and growth.
Two-Tier ERP: Enabling the Future-Ready Global Enterprise with Better Innovation, Customer Experience and Agility
• Cognizant 20-20 InsightsTwo-Tier ERP: Enabling the Future-ReadyGlobal Enterprise with Better Innovation,Customer Experience and AgilityOrganizations that embrace two-tier ERP strategies are better positionedto both navigate volatile global business conditions and acquire or divestoperations that generate operational efficiency and growth. Executive Summary were the high operating costs of existing systems, a lack of industry-specific ERP functionality, To achieve their goals of global efficiency, cost excessive upgrade costs and too little innovation reduction and regulatory compliance, forward- from existing ERP vendors. Saugatuck Technol- thinking enterprises are pursuing uniform, ogy’s 2012 Cloud Business Solution Survey,2 consistent processes and shared services. At the meanwhile, predicts that through 2016, “hybrid” same time, they cannot afford to compromise the cloud deployments, such as two-tier ERP, will flexibility, agility or speed they need to respond to become the enterprise platform of choice, with today’s ever-changing and unpredictable business at least three-quarters of new enterprise IT environment. spending involving hybrid or cloud platforms. To meet these seemingly conflicting needs, a A two-tier ERP approach can provide the ideal growing number of companies are migrating combination of global processes, lower costs, from a single-instance ERP system to a two-tier flexible deployment, agile customization and ease strategy that combines the stability of on-premise of use. Such an approach is useful, for example, ERP with the agility of cloud ERP (i.e., multi-tenant for quickly providing ERP capabilities to a newly ERP delivered in a SaaS model) to create a hybrid acquired or growing business, a spin-off or the environment. On-premise ERP systems function entire enterprise during an ERP transition. This as “systems of record,” or “a single source of fulfills the needs of enterprises that must protect the truth” for corporate data, while cloud ERP existing ERP investments while obtaining signifi- systems act as “systems of engagement,” which cant new value via cloud ERP extensions. are more interaction-focused and geared toward serving customers, employees and partners. Business Drivers For example, nearly half the respondents cited in a ERP systems have formed the information February 2011 report from Constellation Research1 backbone for many organizations since the mid- were considering a two-tier ERP strategy, a to late-1990s, when they were deployed to cope 27-point increase from 2009. Among the drivers with issues such as the Y2K transition, increased cognizant 20-20 insights | january 2013
regulation and the adoption of the euro. Since would also overwhelm the skills and infrastruc- then, however, rapidly changing business and ture of the local business unit, which needs ready- technology landscapes have highlighted the flex- to-deploy, simple and flexible systems that are ibility limitations of on-premise ERP. also robust, cost-effective and able to deliver the same results as on-premise ERP systems. Over time, organizations realized that big-bang implementations of ERP systems are sometimes As global enterprises expand through mergers ineffective. This is especially true when they need and acquisitions, they face the daunting task of to customize ERP instances for consolidating and supporting disparate ERP or Today’s ERP must local needs, which increases homegrown systems across business units in the cost of routine operations, different geographies. With today’s relentless improve an IT upgrades and maintenance. pressure to slash costs and meet ever-changing organization’s These added costs are a business challenges, no organization can afford alignment with the greater burden today, as years of merging, cleansing and synchronizing the economic downturn has data among multiple on-premise ERP systems orbusiness rather than forced organizations to do configuring each instance to local needs. When force the business more with less, pushing them organizations are unable to consolidate to a to fit its processes to improve and optimize single ERP system, a two-tier ERP solution can be existing on-premise systems. a cost-effective, agile solution. into a portfolio of As a result, organizations find applications. the two-tier ERP approach to The Role of Two-Tier ERP be a compelling strategy to Single-instance ERP systems are overly expensive meet their requirements. and take too long to deploy to keep pace with changing business models, competitive pressures, Modern enterprises must swiftly capitalize on regulatory needs and global customer demands. opportunities in emerging markets to stay com- As single-instance on-premise ERP systems petitive, introducing new products or services age, managing and tracking required changes either internally or by acquiring other companies. poses significant challenges to business and IT Either approach requires a rollout of new operations. Unmanaged change requires the IT processing capabilities and seamlessly integrat- team to create quick-fix patches and/or deploy ing them with corporate ERP systems. Deploying point solutions to plug potential gaps. All this a complex, large-scale ERP solution would not adds to the very chaos that organizations seek to only be more expensive than necessary, but it avoid by adopting ERP. Even after deploying the Changing Axis of Innovation Leads To New-Age ERP Key Drivers Shift to System of Emergence of Multi-Tier Engagement Ecosystem • Agility Business • Innovation Customers • Efficiency Employees System of Partners Running Core On-Premise Application Engagement • Collaboration Technology • Digitization Running • Insights Cloud ERP Application Asia Division HQ System of • Reinvent business Record Organization functions • Engage people Security Structure UAE Japan China Subsidiary Subsidiary Subsidiary Database Running Cloud ERP Application Figure 1 cognizant 20-20 insights 2
on-premise ERP system, the core IT team is so reduce costs and quickly add new capabilities,busy mending and tweaking that they have little while giving users personalized content and con-or no bandwidth to roll out the system to new sub- sumer-like ease of use.sidiaries, divisions or processes. Cloud ERP uses this new computing paradigm toA two-tier ERP approach helps organizations provide almost all the capabilities of on-premiseswiftly deploy and integrate new processing capa- ERP systems, but in a consumption-based modelbilities at subsidiaries or smaller business units that is considerably less expensive, easier andthat can be seamlessly integrated into the core faster to deploy (and downsize) than on-premiseon-premise ERP backbone. This approach sig- ERP. Cloud ERP eliminates upfront Cap-Ex costsnificantly reduces the time and cost required to and drives better user adoption and value withimplement, support and maintain ERP capabilities. easier-to-use interfaces.Two-tier ERP does not replace on-premise ERP but By enabling easier collaboration and informationinstead complements it with more agile, flexible access, cloud ERP facilitates the rapid pilotingand lower-cost cloud-based ERP. On-premise ERP of ideas, easily scalable solutions and faster,still provides the standardization and consistency lower-cost expansion into new markets. It alsofor back-office systems of record for processes provides customer service via digital channelssuch as make-to-deliver and record-to-report and makes it easy and less expensive to supportthat are vital for efficient operations, regulatory local language, tax code, currency or regulatoryand legal compliance, and consistent quality requirements.(see Figure 1). Cloud ERP provides differentiated front-officeIn short, embracing cloud ERP while maintaining “systems of engagement” for functions such asexisting on-premise enterprise applications can “procure to pay” or “hire to retire.” This createshelp organizations do the following: value by providing superior user experiences and delivering customized information or process• Penetrate new markets and geographies, while flows that support local business needs in areas retaining business agility and flexibility, as well such as sales, marketing or customer service. as lower total cost of ownership and adopt standard processes. How Two-Tier ERP Helps the Bottom Line• Quickly link newly acquired businesses into — A two-tier ERP strategy can help companies or separate divested business from — existing overcome key technology challenges, such as: ERP systems. • Application modernization (i.e., end-of-life• Increase focus on core business processes by ERP migration): Enterprises considering an keeping them on-premise while enabling mar- application modernization strategy can use ket-facing processes via cloud ERP. two-tier ERP to continue operating efficiently while adapting to rapidly changing business• Shift spend over time from Cap-Ex to Op-Ex. needs.Cloud ERP: Best Option for Two-Tier ERP • Application rationalization: OrganizationsToday’s ERP must improve an IT organization’s can deploy on-premise ERP to support corealignment with the business rather than force corporate functions while deploying cloud ERPthe business to fit its processes into a portfolio for market-facing functionalities.of applications. IT organizations need to innovateand implement flexible systems to support and • New application requirements: Cloud ERP can complement on-premise ERP with next-automate new processing capabilities for business generation disruptive technologies, such asagility. Such systems should facilitate global Web services and process integration libraries,visibility, process efficiency and standardization. to enable applications that operate anytime, anywhere.Even as businesses face these new and urgentchallenges, innovative technologies have created • Cost reduction: Cloud ERP shifts responsibilitynew ERP delivery channels that help meet those from the customer to the vendor for upgrades,needs. Since ERP systems were first deployed, patches and other functions. Cloud ERP alsoorganizations have increasingly turned to virtu- reduces total cost of ownership by eliminat-alization. This entails a services approach to IT ing the need to purchase servers, storage anddelivery and the use of cloud-based systems to network capability for on-premise systems. cognizant 20-20 insights 3
Corporate strategies, as well as organization and In the “defining” stage, we help organizationsoperating models, all play a role in determining understand what constitutes the cloud solutionwhen, and how, to adopt a two-tier ERP model. that best meets their specific requirements. Additionally, we assess the readiness of theConstellation Research cites a large Japanese organization’s systems, people and processes.manufacturer that experienced improved capa- In the “delivering” stage, our application devel-bilities for localization and handling of multiple opment and delivery professionals use best-in-currencies and languages using cloud ERP appli- class technologies to help them compete in theircations, at half the cost of on-premise solutions. markets, and to achieve effective synchroniza-“Going to country-specific deployments resulted tion of master data and maintenance of financialin faster deployment times, quicker updates and operational control at a group level. Afterto regulatory and legislative changes and 17% successful delivery, our line-of-business expertsreduced IT help desk costs,” says the Brazil continue to innovate and help our clients achievecountry manager of a Japanese entertainment measurable gains in speed, quality and efficiency,subsidiary.3 with the help of our experienced cloud business process consultants.Driving Two-Tier ERPIn our work with clients worldwide, we have found Getting Startedthe best ERP standardization model is not neces- Since the best two-tier ERP strategy is gearedsarily the least complex or even the one with the toward the needs of a specific business, companieslowest total cost. The best model, rather, is the should begin by evaluating:one that fits an organization’s specific structureand the critical market challenges it faces. • Where their existing ERP implementations are succeeding — as well as failing — to help captureWe have developed a three-dimensional approach market share, revenue and margins.that focuses on platforms, people and processes • Which of the functions provided by existing ERPto meet the needs of companies in nearly every systems are systems of record (or core ERP) vs.industry (see Figure 2). The approach also enables systems of engagement (or cloud ERP).organizations to deliver functions and servicesrequired by employees and business partners. • Which of their local business units have custom requirements that are too difficult or expensiveWe deliver these ERP solutions by leveraging our to meet with the core ERP system and might becloud applications portfolio and our define-deliv- better served by cloud ERP.er-innovate (DDI) methodology.Two-Tier ERP: A Representative Approach Inputs Work Steps Outcomes Current and future 1. Set business priorities/goals High-level requirements set business strategy and high-level requirements Existing ERP landscape 2. Determine scope Two-tier vs. single ERP platform options 3. Confirm assumptions Existing subsidiaries’ ERP 4. Identify two-tier ERP High-level evaluation process and other applications options and baseline and criteria for cloud ERP selection costs Interview key stakeholders Approach/recommendations 5. Develop a high-level and roadmap business case Executive leadership expectations 6. Finalize recommendation of two-tier ERP architecture, as Assess cloud ERP well as high-level deployment vendor landscape and change management planFigure 2 cognizant 20-20 insights 4
• Whether cloud ERP is the right fit for a small Answering questions like these is the first step off-site division or a remote manufacturing toward deciding whether a two-tier ERP can unit without the budget and skills required to help an organization meet its business needs support a traditional ERP deployment. through a hybrid on-premise and cloud ERP com- bination. A detailed analysis should follow, which• Whether cloud ERP is a cost-effective route should include interviews with key stakeholders, for adding enterprise systems capabilities for an evaluation of the cost of various cloud ERP a business unit slated to be spun off or newly options and criteria to assess the move-forward acquired or whether it is a temporary solution ERP selection process. amid an upgrade of a core system.Footnotes1 R. “Ray” Wang, “ERP Optimization Strategies For Organizations Seeking Innovation, Cost Savings, And Renewal,” Constellation Research, Feb. 28, 2011.2 Bruce Guptill, Alex Bakker, Charlie Burns, Mike West, Bill McNee, “2012 Cloud Business Solution Survey: Summary Data Report,” Saugatuck Technology, March 21, 2012.3 R. “Ray” Wang, “Best Practices: The Case for Two-Tier ERP Deployments,” Constellation Research, Feb. 28, 2011.About the AuthorMunish Gupta is Cognizant’s Global Markets Leader for the Cloud Solution business. He has over 19years of cross-industry experience selling and delivering global business transformation programsusing leading on-premise and cloud enterprise application packages. Munish has assisted Fortune 500senior C-level clients in improving business operations, revenue growth and cost optimization throughinnovative enterprise architecture models, including the hybrid cloud ERP strategy and enablementacross process value chains. He can be reached at Munish.Gupta@cognizant.com. cognizant 20-20 insights 5