Level 1, 2 and 3 ERP: what are the differences?
In the software sector, and more specifically in the ERP (Enterprise Resource Planning) segment, systems for classifying software and its publishers have always existed. One of the most common has been their classification into levels 1, 2 and 3, also known as "tier 1, tier 2, tier 3".
This broad classification scheme is probably the most commonly used system for classifying ERP solution offerings. The major tier 1 vendors are at the top of the ranking, and the lower tier vendors (tier 2 and tier 3), often specialized or recent, are at the "bottom of the ranking".
In recent years, however, changes in the ERP solutions market (due to factors such as globalization and technological advances) show that the old way of classifying ERP systems is being challenged, and is becoming less important to both publishers and software buyers.
In this publication, we'll take a closer look at this classification of ERP solutions into "tiers" and how this concept has changed over time with upheavals in the software market and the integration of new technologies such as the Cloud.How to tell the difference between ERP tiers?
Software publishers have traditionally assigned levels based on customer size and financial factors. The definition of technology levels varies slightly from one source to another, but the very short list of Level 1 ERP vendors is generally fairly easy to identify. Tier 1 vendors are the industry's "big fish", those whose names are most familiar in enterprise software, namely SAP, Oracle and Microsoft.
But why are these Tier 1 vendors recognized as such?
ERP classification criteria
Criterion 1: Customer size and financial aspects
The main reason why SAP and Oracle are recognized as Tier 1s is that they serve large "Tier 1" customers with significant revenues, worldwide operations and large market shares, among other financial criteria.
Tier divisions have traditionally been correlated with customer size, which is why, until recently, Tier 1 publishers have typicallyuntil recently, Tier 2 vendors have mainly served medium-sized companies, while Tier 3 vendors have mainly served smaller companies.
Criterion 2: scalability and functional complexity
Another way of distinguishing levels in the past was to look at the functional differences between offerings and see how this affected scalability. Level 1 solutions could traditionally scale better than most Level 2 solutions, due to the breadth of functionality required to cover the large needs of global enterprises generating a large number of transactions every day.
Tier 1 solutions would necessarily provide functional coverage that Tier 2 and Tier 3 solutions would not, as Tier 1 software packages were originally designed to meet all types of requirements for large multinationals.
However, for smaller, non-multinational companies, the complexity of such software and hardware was generally unsuited to their needs, and could add an unnecessary level of complication to simple processes. Because of this high level of complexity, Level 1 ERPs often required more complicated hardware and highly skilled information technology (IT) specialists.
As an inevitable consequence of the difference in scalability and complexity between the various third parties, prices have always varied considerably between them. Not surprisingly, Tier 1 solutions are usually more expensive than Tier 2 solutions, which in turn are more expensive than Tier 3 solutions.
Criterion 3: international customer service
Differences in capacity to act (global presence for some versus local presence for others) used to be a further distinguishing feature between publishers: Tier 1s were always more likely to offer their services all over the world, while Tier 2s were usually present in a limited number of countries or regions, and Tier 3s were generally only present at a local level and operated only in a particular country.
Why is this classification no longer as relevant as it once was?
Establishing these broad divisions between vendors can be useful in understanding how ERP vendors' products differ according to the scale in which they operate. But in reality, the situation is much more complex than it seems, and the boundaries between the different levels are very blurred in today's software and technology world. To explain this phenomenon, we need to look, on the one hand, at the history and development of ERP systems (and technology in general), and on the other, at the way small and medium-sized businesses have conducted their activities in global trade during the most recent upheavals.
In the early days, Tier 1s made their mark on the market by catering to the needs of large organizations, so that ERPs were basically prohibitively expensive and therefore affordable only to large companies that could spend millions of dollars on such tools. Tier 2 and Tier 3 solutions didn't even exist back then. They emerged in the years that followed, as technology progressed, enabling smaller companies to take advantage of software functionality for their accounting or other operational processes. But the boundaries between levels 1, 2 and 3 were still clear, and buyers and sellers knew which level they belonged to.
But nowadays, as market conditions have changed (due to globalization and the downsizing of corporate hierarchies ), the original criteria that determined the direct relationship between level and company size have almost completely disappeared.
Today, the needs of a small company are often the same as those of a large enterprise.
Business activities are now global, and even small companies often have an international reach, so the needs of a small company are often the same as those of a large corporation: factories and offices in various countries, multi-site and multi-lingual capabilities, easy access from anywhere in the world, mobility requirements, financial needs beyond accounting systems, real-time customer service management and data analysis needs.
As a result, third-party 1s are not only seeing the market opportunities that have emerged in recent years with smaller publishers, but are also selectively looking to position themselves in the market of the future.to position themselves on less complex products aimed at smaller customers, with specialized versions tailor-made for smaller companies. For example, many Tier 1 publishers now offer simplified versions of their products for targeted market niches, creating packages with limited functionality, while offering greater flexibility in terms of pricing, maintenance and support costs.
At the same time, the much denser segment of Tier 2 vendors has begun to serve mid-sized companies, and is seeking to penetrate the high-end market with products that are increasingly powerful, scalable and tailored to large enterprises. This has made it even more difficult to distinguish between Tier 1 and Tier 2 vendors.
Although these solutions have slightly fewer features, they are generally more flexible, more affordable, easier to implement and more user-friendly; and so they have become an alternative to Tier 1 solutions, even for larger companies.
Another factor to take into account is that many Tier 2 and Tier 3 publishers are privately-held, which means they are more flexible in business terms and less dependent on quarterly results and profits. Although this means less financial independence, it can nevertheless enable, on the one hand, long-term strategic planning and a faster software development cycle, with changes to features that customers need immediately, and on the other hand, a greater degree of flexibility.diately, and on the other hand, closer interaction with customers, including direct collaboration between the supplier's software development team and its customers. Such close relationships (often personal ones, incidentally) are also due to a smaller number of customers, which also means more time to devote to each of them.
With all the changes currently taking place in the business world, where the gaps between the levels of company size and functionality requirements are narrowing, and the scope of software is becoming ever greaterIn this context, it's not surprising that a small company might end up adopting a solution from a Tier 1 ERP vendor as it would from a Tier 2 or Tier 3 vendor, or that a large company might end up implementing a specific solution sold by a Tier 3 niche vendor.
Are there levels in the Cloud?
The emergence of the Cloud has had a major impact on the enterprise software market. Cloud computing and SaaS (software as a service) initiatives are changing the whole ERP implementation landscape, and blurring the boundaries between tiers even further. Software scalability is in theory no longer an issue thanks to cloud deployment, whatever level your ERP implementation belongs to.
For publishers, the Cloud makes it easier to offer their solutions to companies of different sizes, as SaaS deployment means solutions can be adapted to virtually any size. So a smaller company, with requirements that in the past would have been allocated to a larger company, may be able to obtain this functionality from a Tier 1 provider without paying the price of a Tier 1 provider's solution, as the provider can adjust the price as well as the solution. Before the advent of cloud software, this was not easily possible, as solutions were hosted on site and sold as units that did not scale easily.
Another factor to consider here is that attitudes to the Cloud have changed. Companies are becoming increasingly accustomed to the idea of outsourcing their data and IT capacity, and feel more comfortable with the Cloud and its specific features.s, so that their apprehension towards the Cloud does not affect their interest in software, and so more and more of them are adopting the Cloud at a rate never seen before.
But then, is the concept of "tier" still useful?
Certainly, but perhaps with a few reservations. Levels, real or perceived, give a useful rough idea of a vendor's place in the market and the capabilities of its software. But they're really only useful for determining the type of solution you should be focusing on when you begin a software selection process. Considering making a choice based on a tiered ranking could be a good way of making a first sorting among potential solutions, it's not too restrictive as long as it's at the very beginning of the process. Even if vendors don't rely on levels 1, 2 and 3, that doesn't mean you can't use it to see what suits you best. And if publishers still use tiered ranking, knowing what it means to them will help you learn a little more about the vendor and the type of products they have to offer you.
Cost can also be a factor that makes the tier concept more appreciable: some companies want the stability and assurance of a tier 1 and are willing to pay the price to benefit from its services, while others are willing to give smaller publishers a chance because of the cost factor or for specific niche features.
But in general, in today's software market, vendors don't like to be compartmentalized into tiers as third parties, and companies looking for software won't want to limit their choices to vendors of a certain tier either. But it's always useful to know what the terminology refers to, and it's useful to know what a Tier 1 ERP vendor is, and what their solutions consist of.
But the best advice we can give you is to take a close look at all the vendors and solutions that interest you. By taking a close look at a solution, you may discover advantages and obstacles that you didn't know existed beforehand, regardless of the level to which the solution belongs.
Play the game of thirds 1, 2 or 3... or not? That's the question
Software selection is already a complicated task in itself, even in an ideal situation; thinking in terms of tiers to make a choice (which software? where to start?) can only complicate the task.
If you're considering a software solution and are baffled by the various options on offer and how they match up with the functionality you're looking for, it might be a good idea to consult a software specialist or integrated software selection expert. By getting help from the outset (especially for those of you who are buying software for the first time), you'll have a clearer idea about enterprise software selection, and you'll also be able to take your first steps with guidance and impartial feedback where appropriate.
Article translated from French