The enterprise resource planning (ERP) market is worth more than $50 billion and is on track to see 10.5% compound annual growth over the next 10 years. This is unsurprising because ERP systems help companies manage, monitor, and automate core business processes. The expanding ERP market, however, means that organizations now have a wealth of choices, from on-premise deployments to cloud-based options and composable solutions.
This creates a challenge: How do companies find the best ERP system for their business? In this piece, we’ll provide definitions for the three ERP tiers — Tier I, Tier II, and Tier III — and offer suggestions to help your team choose an ERP system that offers both immediate benefits and long-term returns.
Tier I ERP
Tier I systems are designed to serve large multi-national enterprises. Historically, Tier I systems were assumed to be the “best” version of ERP because of their ability to handle large data volumes and complex transactional and reporting needs. Depending on business needs, however, Tier I systems may not be the best fit.
What Is Tier I ERP?
Tier I ERP software offers deep, multi-industry functionality for multi-national enterprises. For example, the same Tier 1 ERP system might be used by a global banking giant and a vertically integrated petrochemical manufacturer.
These solutions are a good fit for companies that have complex inter- and intra-company requirements, and Tier I tools come with the ability to scale across global enterprise operations.
Advantages and Disadvantages of Tier I ERP
Tier I ERP systems come with both advantages and disadvantages.
From an advantage standpoint, Tier I ERP software has capabilities to support multi-company enterprises with both centralized and localized services and business functions. Also, these systems tend to be supported by a broad network of global consulting firms.
Complexity and cost top the list of disadvantages.
These systems are designed for companies with broad and deep organizational structures. Because of the depth of functionality and by-design internal controls, it’s often hard for users to handle multiple system roles – a buyer, for example, would not be expected to handle the planning function. So, these systems might prove cumbersome and inefficient for companies with users who wear multiple hats.
Also, Tier I systems can be significantly more expensive to purchase, implement, and maintain than Tier II and Tier III ERP solutions.
Tier II ERP
Tier II ERP systems are geared toward mid-sized and enterprise-sized companies that need industry-specific functionality but may not require the breadth and scope of multi-mode and multi-industry functionality. And, because of their industry-focus, certain Tier II ERP systems might have better functionality in certain areas. For example, certain upper Tier II manufacturing systems have stronger MRP and production scheduling modules than their Tier I counterparts.
What Is Tier II ERP?
Tier II ERP solutions offer deep and broad functionality relative to a subset of industries – such as discrete manufacturing and wholesale distribution. They’re often used by companies with anywhere from one hundred to thousands of employees.
At Pemeco, we classify Tier II solutions into two sub-categories — upper and mid-to-lower Tier II. Upper Tier II ERP systems offers deep cross-functional multi-company functionality while lower Tier II solutions offers deep functionality in certain areas and perhaps less robust functionality in other areas. For example, an upper Tier-II system might support the central planning of vertically integrated cross-national supply chains while mid-to-lower Tier II solutions might be better suited to planning with a single legal entity.
Advantages and Disadvantages of Tier II ERP
Like anything, Tier II solutions have their benefits and drawbacks.
Compared to Tier I ERP, Tier II systems can often be implemented at a lower cost. The purpose-built nature of these systems also makes them a good fit for companies looking to address specific business issues with out-of-the-box best practices.
Potential drawbacks include limited functionality in certain areas, which can be problematic for companies looking to diversify business models. For example, many product-oriented ERP systems struggle to elegantly support recurring after sale service contracting, invoicing, and revenue recognition requirements.
Tier III ERP
Tier III ERP systems are developed for small to mid-sized businesses. This is the most competitive and least concentrated segment of the ERP market. There are dozens upon dozens of candidate solutions – from small, niche players to established solutions.
What Is Tier III ERP?
A Tier III ERP system is designed for small to mid-sized businesses. Apart from certain key areas, functionality is typically broad and shallow. Even though the systems might not have the depth of end-to-end functionality, it can generally flow transactions cross-functionally across the operational and accounting modules. Also, generally (but not necessarily), these systems are better suited to single entity companies or, for larger enterprises, for smaller divisions with the corporate fold.
Advantages and Disadvantages of Tier III ERP
Let’s discuss the advantages of Tier III ERP. First, Tier III ERP systems can often be acquired and implemented at a significant discount compared to their Tier I and Tier II ERP counterparts. Also, because of inherent system limitations, implementation complexity and risk are generally lower.
The drawbacks, of course, relate to functionality limitations. It’s exceedingly important for companies to consider their strategic requirements and to assess whether and how well Tier III ERP candidates support those needs. A company doesn’t want to buy an ERP system only to later learn that it doesn’t elegantly support mission-critical requirements.
Choosing the Right ERP System for Your Business
When it comes to selecting the right ERP solution, knowledge is power. The more information businesses have about current operational challenges, future state business requirements, short-term goals, and long-term strategies, the better equipped they are to find the right fitting ERP software.
When selecting ERP, we advocate multi-dimensional due diligence that covers what we call the 8 Dimensions of Vendor fit, which you can learn about here. By using a methodology such as this, you’ll position your company to make a well-informed decision based on an analysis of strengths, weaknesses, costs, benefits, and risks.