What is two-tier ERP?
Get a comprehensive overview of the two-tier strategy, its use cases and business benefits, and approaches to implementation.
Overview
Two-tier ERP is a strategy in which an organization runs different ERP systems at two different layers of the organization. One system serves as a stable backbone, while the second layer of systems run on independent and often integrated ERP systems.
Two-tier ERP vs. hybrid ERP
Companies often adopt a two-tier ERP model as part of a merger or acquisition. The tier 1 ERP refers to the parent corporation’s system, which manages central functions. The tier 2 ERP is the subsidiary or regional office’s system, which manages local or specialized functions.
Hybrid ERP, a type of two-tier ERP, combines elements of on-premise and cloud ERP solutions. For many organizations, adopting a hybrid ERP is not an end-goal, but rather a step toward adopting a cloud-only two-tier ERP model.
Common business drivers for adopting a two-tier ERP
Organizations typically explore two-tier ERP solutions when they’re facing major changes to how they’ve traditionally operated, such as expanding their business offerings or adopting a new business model:
Mergers, acquisitions, and divestitures often occur suddenly and adopting a two-tier ERP strategy can be an efficient way to launch a new ERP in a limited timeframe.
Changing business models can require major changes to a legacy ERP, so it may be simpler to adopt a new ERP and integrate it with the original system.
Global expansion, including growth through strategic alliances and joint ventures, requires an ERP system to support these needs.
Why businesses choose a two-tier ERP strategy
Having all of an enterprise’s business units on one global, centrally managed ERP instance has obvious benefits, but it’s sometimes not practical for a variety of reasons:
Urgency
The subsidiary needs a solution in a short timeline and IT lacks the capacity to absorb a new operation into their existing infrastructure.Fit
The parent company’s ERP may be too complex or unsuitable for the subsidiary’s functional, regulatory, or reporting needs.Independence
Legal ownership structures like joint ventures or partial state-owned entities may make sharing a single ERP undesirable.Company culture
Having a separate ERP can foster a subsidiary’s sense of ownership, autonomy, and accountability.Geo-politics
Organizations may be required to maintain distance between certain entities or to observe complex data residency rules.Inheritance through acquisition
Companies who grow through acquisition inherit a diverse set of systems but lack the resources to consolidate them.
Common two-tier ERP use cases
Let’s explore in more depth the most common two-tier ERP scenarios and their benefits for subsidiaries:
Acquisitions
Companies expanding their portfolios or geographic reach through acquisition are typically high-growth or are in industries where mergers and acquisitions are common. Typically, the purchasing company must remove the acquisition from the seller’s IT infrastructure quickly or pay steep fees, making a two-tier ERP a good option for a rapid transition. How photo service company CEWE managed their acquisition of WhiteWall is a great example of how two-tier ERP solves this challenge.
Incubators and joint ventures
Two-tier ERPs are ideal for new entities because they can be implemented quickly – and foster creativity and risk-taking in an agile but contained way. For incubators, the goal is to create an environment where the new entity can govern itself, experiment and grow, and minimize investment expenses. Ownership in joint ventures can be fluid, so keeping entities on separate systems also simplifies exit strategies.
Regional branches
Corporations with regional subsidiaries often run disparate ERP solutions. The challenge is to reduce the cost of managing multiple ERPs while gaining better visibility into all data. Hitachi High-Tech is a good example: It adopted a tier 1 ERP for its Japan headquarters and a tier 2 ERP for its regional offices and integrated them to achieve full visibility across all its systems.
Autonomous divisions
When divisions of a company are not necessarily separate legal entities but have separate processes or business models, a two-tier ERP allows subsidiaries to use separate processes that are not governed by the parent enterprise – Deutsche Telekom and its consulting division Detecon use this strategy.
Divestitures
Two-tier ERPs are typically used as a strategy in divestitures, for example, when Accelleron Industries divested from its parent company. Corporations looking to carve off a division sometimes move it onto its own ERP to make it a more attractive acquisition target because it increases the division’s valuation, simplifies the terms of the transition services agreement, and ensures business continuity for all parties.
Moving to the cloud
The two-tier ERP model plays a pivotal role in cloud migrations, enabling businesses to embark on a gradual and controlled move to the cloud. Australian glass manufacturer Viridian is a prime example of how using a two-tier ERP strategy allows companies to migrate specific functions or business units to the cloud progressively to significantly improve process efficiencies and business outcomes.
Benefits of cloud ERP for second-tier systems
Cloud ERPs offer distinct benefits as compared to on-premise ERPs:
Instant value
Cloud ERP infrastructure can be set up and scaled on demand, accelerating go-live, global deployment, and adapting to changing needs.Autonomy
Subsidiaries can easily manage and change their own cloud ERP services without heavy involvement or governance from headquarters.Continuous innovation
Cloud ERPs offer instant access to new technology and help enterprises stay up to date with changing regulatory requirements.Simple, reliable, and secure
Cloud ERPs are easier to configure and use, and platform-level security updates are applied automatically.Lower TCO
Cloud ERPs are subscription-based, so costs are more predictable and flexible than traditional on-premise infrastructure capital expenses.
Advantages of a two-tier cloud ERP for subsidiaries
From a subsidiary’s perspective, using a tier 2 ERP which is specifically designed to integrate easily with the primary tier 1 ERP provides several benefits, especially when both systems are cloud-based:
- Standardized operations and compliance
Overhead costs are lower and consolidating financial and operational reporting is easier when the ERPs’ processes and technologies are standardized. Using the same policies, analytics tools, and business technology platform across entities simplifies compliance and training – and allows for reuse of development work. - Simplified integration and faster deployment
Cloud ERPs are designed to integrate with primary ERP systems. This allows for smooth data exchange, process integration, and consolidated reporting across the organization, providing a unified view of operations. - Change management advantage
When tier 1 and tier 2 ERP are complementary, all entities share a similar understanding of the entire system’s functionality, processes, and terminology. - Lower TCO
Cloud ERPs operate on subscription-based pricing models which cover software, infrastructure, and support, and they have lower TCO compared to on-premise ERPs. Minimal upfront capital expenditure, more predictable ongoing costs, less downtime, and more flexible budget management contribute to the lower TCO.
SAP’s approach to futureproofing with two-tier ERP
It’s often impossible to predict all the future capabilities subsidiaries will need in their tier 2 ERPs, so providing the ability to quickly adjust and expand functionalities is a cornerstone of our approach to two-tier ERPs.
Broad functional scope
We offer a broad scope, allowing our customers to vertically integrate, expand into new industries, and develop new business models by leveraging core cloud ERP functionalities and extending capabilities with line of business (LoB) and industry cloud solutions.
Geographic reach
We understand that adopting a two-tier ERP also means expanding geographic reach for many organizations, so we’ve developed nearly 60 country-specific versions of our cloud ERP solutions, with support for over 30 languages.
Extensive integration capabilities
We offer an extensive set of tools and accelerators to help companies gain data transparency and connect their processes by integrating ERP solutions. While integration between ERPs may not be a top priority on day one, customers can access our portfolio of tools and content – designed to support dozens of integration use cases – whenever they need them.
Common two-tier ERP integration approaches
Depending on the primary goal, two-tier ERP integrations usually prioritize analytics, master data, or processes during the initial setup. SAP’s tools and resources are designed to support dozens of integration variations.
Analytics
When data structures across ERPs are compatible, integrating analytics across ERPs is very straightforward. For SAP-to-SAP integrations, using SAP Analytics Cloud allows you to aggregate analytical, operational, and financial data for reporting without needing to replicate it.
Master data
Implementing unified data governance is a priority when all tiers need to share a single source of truth, such as for customer records. It’s easy to enable data sharing and synchronization between the tier-1 ERP and SAP S/4HANA Cloud Public Edition.
Processes
For companies whose ERPs work together to complete businesses processes, such as when manufacturing subsidiaries obtain their raw materials from headquarters, the main objective of a two-tier ERP strategy is to integrate their processes and workflows.
The value of integration
Organizations can use RISE with SAP to transform existing tier 1 ERPs to move back to a clean core. GROW with SAP can be used to achieve growth strategies through subsidiaries and divisions. Integrating these two solutions drives:
- Accurate performance measurement of LoB, supply chain, customer relationships, and financials using a consistent set of KPIs.
- Improving data accuracy by eliminating duplicate data entry, inconsistencies, and error-prone manual processes, enabling better decision-making and improving customer satisfaction.
- Streamlining collaboration and communication through real-time access to shared data, documents, and workflows.
- Supply chain optimization by reducing latency of manual processes and enhancing visibility across demand planning, inventory management, and logistics functions.
GROW with SAP for subsidiaries
GROW with SAP is an offering of solutions, adoption services, and learning resources to help you successfully implement a two-tier cloud ERP. At its core is SAP S/4HANA Cloud Public Edition, which provides many features and benefits:
Cloud-based deployment, allowing subsidiaries to access and use the software over the Internet, and to quickly adopt new services, including AI offerings.
Subscription-based model based on usage and number of users. This provides predictability of spend and reduces upfront costs.
Regular updates and maintenance, including security updates and patches, are performed automatically by SAP and subsidiaries are always on the latest release.
Modern user experience through the familiar SAP Fiori interface provides a consistent and user-friendly experience across devices, accelerating user adoption and streamlining operations to improve productivity.
Real-time insights and analytics enabled by SAP HANA in-memory computing and data processing empowers subsidiaries to make data-driven decisions without needing to rely solely on the primary ERP.
Integrated business processes across departments and functions – from procurement and production, to sales and finance – make the flow of data seamless, improve consistency and efficiency, and enhance collaboration.
Best practices are embedded in preconfigured processes and all process documentation is included as part of the offering.
Tools to manage the application lifecycle, implementation process, testing automation, and data migration.
Extensibility toolkit includes low-code/no-code tools, in-app coding environments, and the entire SAP Business Technology Platform to create extensions as needed.
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