Harnessing technology is central to solving key business problems, including having the right enterprise resource planning (ERP) system in place. However, ERPs are not 'one size fits all' - like the Goldilocks story, one might be too big, another too small, but the third is just right. These are known as Tiers, and finding the one that suits your business best means understanding the differences. What you don't want is to be investing in a solution that acts as a sledgehammer, when all you need to do is crack nuts.
ERP Tiers are a guideline for organisations to narrow down their search for an ERP system. The criteria to classify which organisations fall under which tier includes company annual revenue, employee size, user size, transaction volumes, complexity, etc. And depending on which part of the world you’re in, these tiers can have different implications. For example, a Tier 2 company in the USA can easily qualify as a Tier 1 company in New Zealand, if revenue is used as a criteria. In general, there are 3 ERP Tiers:
ERP Tier 1
These are ERPs for some of the biggest companies in New Zealand, such as Fonterra, Fletcher Building or Air New Zealand, and include solutions like SAP and Oracle. Complexity and diversity of requirements are some of the characteristics of such organisations, with many different business units across multiple industries, and complex and hierarchical reporting requirements. ERP implementations in such organisations can last for many months – even years – and the rollout requires highly effective project management and planning, resources and of course, significant costs. Tier 1 ERP systems are highly complex, so they can meet the diverse functional requirements and scalable to even thousands of users, with access across any device. Substantial capital and operational investment is a typical characteristic of Tier 1 ERP systems.
ERP Tier 2
Tier 2: suitable for most mid-size New Zealand organisations. They include solutions like Microsoft Dynamics 365 Business Central and MYOB Advanced. Companies that have outgrown their current systems and are facing challenges such as growth in transaction volumes, too many manual intervention or standalone systems that do not integrate, will be looking to upgrade to a Tier 2 ERP system. These provide companies with the capability to automate their entire business operation, not just accounting. Similarly, larger organisations sometimes find their Tier 1 application too rigid, expensive and complex and they can get a better outcome with a Tier 2 ERP system. Tier 2 ERP systems typically have relatively broad functions to cater for all requirements of an organisation, including Finance, Distribution, Supply Chain, Manufacturing and Operations and even CRM. They also have integration capabilities via APIs (Application Programming Interface) to facilitate integration to external systems e.g. mobility and eCommerce applications. Rapid and cost-effective deployment is a key feature/requirement for Tier 2 companies.
ERP Tier 3
This is best suited to small businesses, where systems such as XERO, MYOB Essentials or Reckon will fit easily. In fact, there's even debate over whether Tier 3 solutions should be termed an ERP system, since just an accounting solution will suffice. Cost is a key factor and in most cases, a very short time frame (days/weeks) to implement. If these businesses need more than just an accounting system to manage their daily operations e.g. Distribution (Inventory, Sales, Purchases), they will look for add-ons to integrate with their base system. Hence, systems such as XERO partners with numerous technology partners provide Add-Ons to their system.
Deciding which tier would best suit your business means identifying your specific needs as relevant to the industry you're in. Many small businesses find themselves with the opportunity to grow, meaning the Tier 3 solution they may have been using or are contemplating, won't be sufficient to help scale the business. Similarly, medium-size enterprises may be using a Tier 1 ERP system that has become too 'heavy' for their needs.
Dr Peter Zámborský, Senior Lecturer in the Department of Management and International Business at the University of Auckland, says that typically, the New Zealand business landscape faces three challenges:
- Forecasting the changing context - the need to plan a strategy that identifies new business opportunities, with systems that are agile and flexible
- When consumers and business models are in a state of flux, companies need to think on their feet in order to pivot when necessary, in order to remain relevant, competitive, and to stay ahead
- The possibility of a global recession as well as the opportunity to grow means that New Zealand organisations will likely need to reinvent and restructure to ensure not just business continuity, but growth.
What Dr Zámborský is essentially saying is that businesses of all sizes must be flexible and have systems on board that can scale and facilitate growth. This is where a Tier 2 ERP system makes the most sense for many New Zealand businesses; they can scale up or down depending on the needs of a medium size organisations with some locations, but are not multi-nationals. Tier 2 solutions, while able to be tailored to the needs of a specific industry, are also far less complex to implement than Tier 1, and they can be supported in-house or by a partner - there's no need for a range of complicated hardware and IT teams.
The tiers play a key role in selecting an ERP vendor, especially in deciding which ERP system best suits your business needs now and in the future. Tier 3 vendors are traditionally specialised in Accounting and will not have the experience or knowledge to take the implementation to areas such as Distribution or Supply Chain. Tier 2 and Tier 1 vendors will be equipped with consultants / specialists that have implemented an integrated ERP system and will be able to advise on best practises in ERP.
Of course ERP vendors are updating their offerings so that the lines between them are overlapping, as they attempt to capture more of the market. It's important for organisations to work with expert partners when deciding which ERP solution to go with, and that's more true now than ever.
