Imagine a large, global corporation—let’s call it “GlobalCorp.” GlobalCorp’s headquarters is a well-oiled machine on some mythical, high-speed, and quite expensive Enterprise Resource Planning (ERP) system. It is similar to the family’s large, old, very fancy safe: all the most valuable stuff is stored in it, it won’t ever be damaged, and it is extremely difficult to move or change. This is the Tier 1 ERP.
And then think of one of GlobalCorp’s newest acquisitions: a small, high-tech subsidiary just acquired in a rapidly growing market, or a thin, local plant on another continent. Trying to transmogrify the monster, clumsy, and stumbling “safe” of a system on this small startup is typically a recipe for disaster.
This is where the Two-Tier ERP Strategy comes in—it’s a masterstroke, sense-only compromise that accepts the new-reality of business today. It allows the corporate parent to retain its tight control while providing the subsidiaries with the liberty they need in order to shine.
The Need for Two Systems
One, monolithic ERP system for a whole enterprise—the traditional solution—will generally not suffice for two reasons:
- The Expense and Sophistication: Implementing the corporate ERP system in a minor subsidiary is most likely too good to be true. The implementation cost, subscription fees, and pure computing power needed can consume the whole budget of the subsidiary and transform what could have been a helpful thing into an administrative ordeal. It’s like using a bulldozer to move a garden gnome.
- The Need for Flexibility: The Tier 1, core system is designed for stability and global uniformity. It changes at a glacial pace. A smaller subsidiary, however, might need to switch on a whim to become compliant with local regulations, use industry-specific software, or modify its business model. They need a system that can change in one week, not a year.
How the Two-Tier Model Works
Two-tier architecture allows it to be simple to have a tidy separation of duties:
- Tier 1 (The Boss): The high-power, high-scoped, usually on-premises or heavy-use cloud configuration in the corporate headquarters. It does the big picture: consolidated accounts, global reporting, legal and regulatory reporting, and company human resources. It is the total record keeper.
- Tier 2 (The Startup): Smaller, nimbler, typically cloud-based (SaaS) ERP software, used by subsidiaries, regional offices, or independent business units. They deal with the day-to-day operations: **local inventory, regional supply chain, customer relationship management (CRM), and manufacturing processes specific to them.
The secret ingredient to its success is the seamless integration of the two tiers. Data from operations on a day-to-day or real-time basis by Tier 2 (finishing goods inventory or sales orders, for example) are rolled up and forwarded to Tier 1 so headquarters can continue to keep tabs on performance and close books in a timely fashion.
The Three Key Benefits
This approach isn’t so much about cost cutting; it’s about competitive advantage:
- Flexibility and Tailoring: The subsidiary may choose an ERP best suited for its home market, industry (i.e., a highly specialized system for a chemical facility), or stage of development. They can alter their Tier 2 system without jeopardizing Tier 1’s mission-critical, global operations.
- Less Time and Less Cost: A Tier 2, cloud-based ERP is achieved in months, not years, and at a fraction of the cost of the large company. This is critical to bring an acquired business or set up a new global business unit quickly.
- Risk Mitigation: That complexity is insulated. If something in a Tier 2 implementation goes off the rails or gets into trouble, it’s contained within that subsidiary and not likely to take down the entire global operation.
In effect, a Two-Tier ERP strategy allows GlobalCorp to be both a formidable, stable behemoth and an agile, quick-reflex collection of highly expert startups—the perfect blend with which to attack the shaky global economy of the present day.