08 Mar 2013

The Difference Between ERP Tier 1, ERP Tier 2, and ERP Tier 3

Understanding Each ERP Tier

All ERP solutions are not created alike. Like the Goldilocks story, one might be too big, another too small, but the third is just right. And just right for you, not anyone else, not even your competition. Even though you may have heard about another company in your industry adopting a particular solution, you need to go with is right for your business process. This is why understanding each ERP Tier is important.

Many mid-size businesses think the three ERP tiers equate with Good, Better, Best accordingly.  They believe that a Tier 1 brand name gives you bragging rights, but at what cost? In this case, more expensive is not necessarily the best.  Total Cost of Ownership (TCO) is high for a Tier 1 ERP. Think of it like owning a big house: your bills are bigger when you have more rooms to heat and cool, taxes would be more, and your maintenance would be higher. While those expenses also go up, you’re not getting a lot more for the price. The same holds true for ERP systems, in which TCO is dependent on complexity.

But choosing the least expensive system also might not be the most economical – particularly if you wind up accessorizing the solution with a multitude of spreadsheets. When you don’t buy a powerful enough solution, you may wind up unable to do what you need to run your business, and inefficiency runs rampant. You may find yourself creating so many spreadsheets outside the system that you are essentially manually tracking everything.  We have heard of companies using 90 different spreadsheets to run their business. If Tier 1 ERP could equate to living in a 30 room castle, then Tier 3 is like squeezing all your stuff into a studio apartment.

Consider the three ERP tiers. Don’t wind up trying every bed, every chair, and every bowl of porridge before you settle into the one that’s just right.

ERP TIER 1 Software Solutions

The ERP Tier 1 solutions are basically SAP and Oracle. They are designed to service the needs of Fortune 1000 companies, which for the most part are complex, large businesses that have many departments and global locations. Revenues are typically in measured in billions.  A Tier 1 ERP solution is built with complexity of process in mind. For example, a ERP Tier 1 allows for several people to be working on a single function. The software can split out the task among multiple users. Whereas this is necessary for a billion dollar company, a smaller company would be overwhelmed by the number of steps and the general complexity. ERP Tier 1 solutions generally take a long time to implement and are equipped with a wealth of features at a pretty high price.

ERP TIER 2 Software Solutions

A step down in complexity and cost from ERP Tier 1, Tier 2 products are on offer from several vendors.  Epicor ERP, Infor, Microsoft, Sage and many vertical players fall into this group.  Tier 1 players have consistently tried to “dumb-down” their offerings to find acceptance in this market space and Tier 3 players have tried to move upmarket for the same reason.

ERP Tier 2 systems fit well with mid-size companies. They can have a single or multiple locations.  Generally the needs are less complex than a billion dollar enterprise, but the level of complexity does vary quite a bit in this group.  Because of that, you can find several vertical market players in the Tier 2 category.  These are developers that have focused on the complexity of only one very specialized industry.

Choosing a highly verticalized solution like this may work well for your business since it is tailored almost perfectly to your industry, but you should still exercise caution.  The more verticalized an ERP system is, the smaller the market is.  This makes them more financially vulnerable and they become likely takeover candidates for more fully featured ERP manufacturers.  Check the financial stability of highly verticalized ERP systems to make sure that they are around for the long term.

More horizontal ERP Tier 2 systems tend to be financially stable and often have third-party enhancements that make up for missing complexity out of the box.  These systems tend to be the most popular for the mid-size company.  They can be installed and supported by local partners and offer a lower TCO.

ERP TIER 3 Software Solutions

At the lowest cost level, you’ve got Quickbooks and Sage 50, formerly known as Peachtree. These products do not offer the functionality of Tier 1 and 2 solutions, and may not even qualify as ERP systems. You’re getting basic accounting abilities with these small business tools.

Small businesses or businesses running a vertical line of business (LOB) application with weak accounting benefit from using a Tier 3 solution.  They have a low TCO and are easy to implement.  There is risk that a growing company will quickly outgrow this type of solution, but most Tier 3 companies have some sort of data migration capabilities from these systems.