How to Modernize Your ERP During a Downturn

Two years later, the perfect storm of pandemic-related disruptions is still a major source of irritation for manufacturers. Those disruptions have been major contributors to the inflation we are now experiencing worldwide. Will that inflation lead us into a recession? A lot of very smart people say it will, and some say it already has.

Modernizing the enterprise resource planning (ERP) system is usually the biggest lever that companies use to improve organizational performance. ERP is the de facto source of the organization’s operations. It’s the fountainhead of all data that enable analytical insights. However, in an economic downturn, organizations need to balance the benefits of ERP modernization against the costs. Monolithic and costly ERP implementations are generally not justifiable during a recession. Application leaders must be strategic and incrementally modernize ERP capabilities with a business-driven approach to optimize value.

Thinking of ERP in terms of broad components, the classic segmentation includes financial management systems (FMS), human capital management (HCM), enterprise asset management (EAM), and supply chain management (SCM). In an ideal environment, any company would like to be at the cutting edge of all these areas and update their ERP system across the board. However, under recessionary pressure, most organizations struggle to prioritize and sequence new capabilities that will deliver the desired results.

Most CFOs might back a finance-centric ERP implementation or modernization, ignoring the manufacturing-centric opportunities of ERP. But in times of economic uncertainty, finance and IT application leaders should instead take a flexible approach to their modernization roadmap. A two-tier ERP strategy, wherein the tier-two ERP tackles the manufacturing-related challenges, keeping the finance-centric tier-one ERP intact, can be a judicious choice for multinational corporations (MNC) or conglomerates with multiple business units—delivering an expedited time to value at lower cost and risk.

In the short term, the goal of two-tier ERP is to focus on updating the ERP in the areas of the business that need the most flexibility. This will typically be the parts of the business responsible for manufacturing—tier two. The core of the business, the tier-one financial-centric part, is much more complex and would require a larger expense to update its ERP. It also has less of a requirement for flexibility. Therefore, tier one is left untouched, running its legacy ERP system while the company expends its resources on the heart of the organization, tier two. At a later date, the tier-one system can be updated if needed.

Growing popularity of two-tier ERP systems

ERP has undergone several evolutions over the last three decades—from a monolithic, finance-centric framework to a composable framework—so it’s now a network of flexible, agile applications, data, and solution providers that can bridge the static, legacy ERP systems.

This creates a more flexible distributed architecture that can offer a buffer between the core business and other operational capabilities. Companies don’t have to pass up on enticing new developments in things such as supply-chain management software or other business functions.

The genesis of this approach happened during the economic downturn of 2008. As IT budgets were slashed, organizations were forced to do more with less. As large-scale ERP migrations ran into budgetary roadblocks, organizations focused on improving existing systems, including legacy ERP applications. Retaining the functionality of existing systems while migrating newer functionality to tier-two systems became a quicker way to unlock value and avoid the risk of failure of a big-bang, corporate-wide ERP implementation.

Two-tier ERP is a strategy often taken by large, multinational enterprises that use tier-one ERP for common core processes at the corporate level, and tier-two ERP for subsidiaries of the company to address any business-specific needs. Usually, the subsidiaries’ needs are less complex and differ from the parent company’s needs.

In such situations, where the subsidiary needs something less complex but more specialized than the parent company’s ERP, a two-tier ERP solution is a great alternative and creates a delineating line between the core or tier-one ERP, where most of the finance and HR-centric processes reside, and a second-tier ERP, which is fit for the purposes of the company’s subsidiary. This doesn’t mean the tier-one legacy ERP is cut off from the newer tier-two ERP. Via APIs, the tier-two systems can still communicate with the older system. Nothing is lost, but much is gained.

In the current environment, most manufacturers are dealing with a major reconfiguration of the supply chain, reshoring and near-shoring their manufacturing facilities. Consolidation through acquisitions is likely to accelerate during the downturn. In addition, most organizations will be dealing with multivendor enterprise systems throughout their operations. With a two-tier ERP strategy, businesses don’t need to view their headquarters and other sites as a collective whole. Instead, they can consider the needs of each location, along with the organizational operational requirements, to choose the best systems capable of easily working together to meet their diverse needs.

This course of action is particularly important when, for example, a large company acquires multiple organizations. Generally, these organizations come with their own legacy ERPs. To avoid supporting each inherited legacy ERP system, while also not disrupting the company’s core ERP system, the best course of action is to take a two-tier ERP approach. This allows manufacturing operations or disparate entities, departments, or subsidiaries to be on the same second tier using the capabilities of a new ERP, while corporate ERP remains with the same legacy finance-centric ERP system.

In today’s climate of diversification and exploring new market opportunities, it’s also possible that an organization could wind up supporting a business unit that operates in an industry outside of its core business model. In such a case, the organization’s existing ERP system probably lacks certain capabilities central to effectively managing the new business unit. A two-tier ERP system with specific industry capabilities installed at each business unit can help bridge processes and workflows between those units and the main organization.

While it’s natural to focus on the cost-saving advantages of a two-tier ERP implementation during a downturn, the advantages go far beyond cost savings:

• A two-tier solution allows subsidiaries to take more control of their enterprise system because of the relative ease of configuring these systems. A two-tiered infrastructure can be deployed quickly and cost-effectively. Generally, the time to implement and time to value are much shorter—a competitive advantage during an economic slowdown.

• Organizations must continually adapt to new threats and opportunities. Subsidiaries of large MNCs are subject to different competitive forces and are compelled to evolve in different, local growth environments. The two-tier strategy will allow subsidiaries to easily respond to local challenges.

• An ability to codify or automate a business process that powers competitive differentiation and lets the ERP structure adapt to organizational functions rather than the other way round. Organizations can at will adopt and adjust the business processes and workflows they consider the “secret sauce” of their business strategy.

• An opportunity to benefit from the comprehensive functionality and scalability provided by larger ERP solutions while also taking advantage of industry-specific capabilities.

• Selecting an industry-specific and manufacturing-centric second-tier solution allows production-level workflows, parts sourcing, inventory management, and production processes to be automated and optimized.

Selecting the right ERP solution for a two-tier strategy

Of course, not every ERP solution is well-suited to all manufacturing sectors’ requirements for a two-tier ERP system. Manufacturers should look for a two-tier ERP solution that can deliver comprehensive functionality, flexibility, and a low total cost of ownership. Organizations should look for two key things to make a two-tier ERP strategy work: First, the distinct industry needs of the plant must be built into the ERP system. Second, the system should be cloud-based, with the ability to integrate with other ERP systems and industry-specific applications, in addition to providing the flexibility needed to be quickly and easily implemented virtually anywhere, at any time.

Cloud-based ERP software offers significant benefits over software deployed on premises. With the right cloud-based solution, an ERP system can be implemented quickly and easily integrated with existing systems. It won’t require significant internal IT resources, is available anywhere at any time, and has truly global capabilities. It can meet the company’s specific needs rather than shackling the entire organization to a single, multipurpose ERP system. Business agility, risk management, and cost control can all be dramatically improved as a result.

In this time of uncertainty, companies should plan beyond surviving the recession and focus on strategies to thrive afterward. Every recession widens the performance gap between winners and losers. Now is not the time to neglect digital transformation, but to become more astute in investment in initiatives that generate more value for a lower cost.

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