SaaS and the Multi-tiered ERP Strategy

November, 2011

SaaS and the Multi-tiered ERP Strategy Over the past five years, Aberdeen has been monitoring the tendency of organizations to use Software as a Service (SaaS) as a deployment model for their ERP solutions. Furthermore, Aberdeen has been studying the reasons these organizations will be willing to consider SaaS. During this time, Aberdeen has seen a noticeable increase in the willingness to consider SaaS along with a decrease in the willingness to consider the traditional onpremise model. This year Aberdeen has found a new trend; Best-in-Class organizations are more likely to adopt multi-tiered ERP strategies for their ERP deployments across their enterprises. In a multi-tiered ERP strategy, the parent office may often feature an on premise solution, while using SaaS deployments to quickly get new business units up and running. This Analyst Insight explores the reasons that these organizations are adopting this strategy and how SaaS meshes with the multi-tiered strategy.

Standardizing ERP Implementations Aberdeen’s ERP in Manufacturing 2011: Defining the ERP Strategy found that top performing organizations are more likely to implement standards for their ERP implementations across their enterprise (Figure 1). ERP was originally seen as a one size fits all solution within a company that had multiple business units.

Percentage of Respondents, n = 104

Figure 1: ERP Standards and the Multi-tiered Approach 80% 70% 60% 50% 40% 30% 20% 10% 0%

Best-in-Class 72%

Industry Average

Laggard

59%

Analyst Insight Aberdeen’s Insights provide the analyst perspective of the research as drawn from an aggregated view of the research surveys, interviews, and data analysis Definitions √ SaaS or Cloud: The software itself is not licensed or owned by the end user; it is provided as a service, often on a subscription basis, and can be accessed from the internet. √ On Premise: Software is not bought and sold; instead it is licensed for use. It may be licensed to be used on a particular computer or by other criteria such as number of users.

Aberdeen Methodology 29%

33% 17% 7%

Standardized implementation of ERP across the (possibly distributed) enterprise

Multi-tiered ERP strategy with corporate standard, second tier ERP to support local business models

Source: Aberdeen Group, June 2011

More recently, there has been much discussion about managing multiple ERP implementations as a strategy in and of itself. Best-in-Class companies are 53% more likely than all others to have a standard ERP strategy. Furthermore, Best-in-Class companies are over two and a half times as likely as all others to have a multi-tiered ERP strategy. In a multi-tiered ERP

The Aberdeen maturity class is comprised of three groups of survey respondents. Classified by their self-reported performance across several key metrics, each respondent falls into one of three categories: √ Best-in-Class: Top 20% of respondents based on performance √ Industry Average: Middle 50% of respondents based on performance √ Laggard: Bottom 30% of respondents based on performance

This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies provide for objective fact-based research and represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc.

SaaS and the Multi-tiered ERP Strategy Page 2

strategy, there is often one standard ERP implementation for the corporate offices. Additional ERP solutions that may offer different functionality or configurations are implemented at separate locations. Best-in-Class companies are recognizing that one size does not fit all. For example, an ERP that does a great global financial rollup, may not be well suited to scale down to manage the needs of a specific assembly line. There may also be localization and compliance issues when using a one size fits all ERP strategy. These reasons make a multi-tiered ERP strategy attractive for organizations with geographically distributed subsidiaries. This is especially evident in organizations that are in the acquisition mode and need to integrate new units with existing operations. Laggard and Industry Average companies are still somewhat focused on driving one ERP system for all needs. Keep in mind that this doesn’t mean that organizations using the multi-tiered strategy feature business units that do their own thing when it comes to ERP. The strong majority of Best-inClass companies still have an overarching strategy that sub-organizations must align their ERP deployment with.

Percentage of Respondents, n = 265

Figure 2: Interacting Between Multiple ERPs

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Best-in-Class

Industry Average

Laggard 86%

48% 25% 17%

Process flows that may span different applications can be completed without consciously switching between multiple enterprise applications

Integrated business applications serve as a complete and auditable system of record

Source: Aberdeen Group, August 2011

This overarching strategy is important because organizations using multiple ERPs need to be able to transfer data from one system to the other seamlessly. Aberdeen’s ERP in SME 2011: Setting the Stage for Growth found that Best-in-Class companies are 2.32 times as likely as all others to have process flows spanning different applications that can be completed without constantly switching between multiple enterprise applications (Figure 2). For example, a corporate office could take an order for a product and then a remotely located subsidiary could ship the order. During this process, both ERP systems would communicate with each other automatically. The key benefit of a multi-tiered ERP strategy is the ability to implement solutions in different business units based on the needed functionality of those business units. While this saves the company money, it is only useful if these systems are able to communicate with the corporate standard. © 2011 Aberdeen Group. www.aberdeen.com

In the report ERP in Manufacturing 2011: Defining the ERP Strategy, Aberdeen defines Best-in-Class as the top 20% of organizations in the following operational metrics related to ERP: √ Reduction in inventory as a result of ERP √ Inventory accuracy √ Days to close a month √ Internal schedule compliance √ Complete and on-time shipments

ERP in SME Best-in-Class

68% 51%

ERP in Manufacturing Best-inClass

In the report ERP in SME 2011: Setting the Stage for Growth, Aberdeen defines Best-in-Class as the top 20% of organizations in the following operational metrics related to ERP: √ Days to close a month √ Days sales outstanding √ Percentage complete and on-time delivery √ Growth in operating margins over the last two years Note: SMEs are defined as those companies under $500 million in annual revenue

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Why are Organizations Willing to Consider SaaS? As stated, organizations with a multi-tiered ERP strategy are often in the acquisition mode or starting new subsidiaries. As such, these new business units need to be brought up to speed as quickly as possible. This is where SaaS ERP becomes an attractive deployment model. Data from Aberdeen’s 2011 ERP survey as of October 2011 finds that SaaS solutions allow businesses to be up and running faster than traditional on-premise solutions (Figure 3). The average time from installation to first “go live” milestone is 11.05 months for on-premise. This decreases to 6.73 months for SaaS solutions. In a multi-tiered ERP strategy, this is a distinct advantage for organizations attempting to enter new markets. Figure 3: SaaS Means Quicker Jumps Out of the Gate

Months, n = 553

On Premise

SaaS

11.05

12.00 10.00 8.00 6.00 4.00 2.00 0.00

6.73

2011 ERP Research Aberdeen's 6th annual ERP benchmark study is being held throughout the year and is aimed at quantifying ERP usage, identifying preferences for fully integrated suites versus point solutions, measuring Total Cost of Ownership (TCO) as well as the business benefits derived from Best-in-Class implementations. The survey also compares the performance of organizations using ERP to those without ERP. To take part in the survey, please click here.

Time from installation to first "Go Live" milestone

Source: Aberdeen Group, October 2011

Beyond the shorter amount of time that it takes to “go live,” there are several other reasons that SaaS solutions are attractive to organizations with multi-tiered ERP strategies. Aberdeen’s 2011 ERP survey asked respondents to select the reasons that they would be willing to consider a SaaS solution (Figure 4). Of course, many of the top reasons chosen involve cost. Figure 4: Positive Factors Influencing SaaS Decisions 75%

Lower total cost of ownership 52%

Reduces the cost and effort of upgrades

49%

Lower up front costs Perceived ease of implementation Seeking best fit solution - will consider any delivery model Strategy choice to focus internal resources elsewhere We have limited IT resources and no interest in building IT staff 0%

44% 41% 38% 38% 10% 20% 30% 40% 50% 60% 70% 80% Percentage of Respondents, n = 553


© 2011 Aberdeen Group. www.aberdeen.com

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A multi-tiered approach involves lower upfront costs. There are multitudes of startup costs that come along with opening a business unit or integrating a new subsidiary. A SaaS solution minimizes the cost to get up and running because there are no up front infrastructure costs. There are also minimal staffing requirements. Thirty-eight percent (38%) of companies indicated a strategy choice to focus internal resources into other areas of the business. By relying on SaaS solutions, businesses with limited IT staff can still receive the benefits of ERP. Coinciding with the perceived ease of implementation of a SaaS solution, these are compelling reasons that a SaaS solution makes sense in a multi-tiered ERP strategy. Still, organizations in the process of selecting ERP solutions should emulate the 41% of their peers that are seeking the best fit solution and will consider any delivery model for ERP. Of course, there are some hindrances that should be carefully considered when choosing a SaaS ERP solution (Figure 5). Sixty-seven percent (67%) of respondents listed security concerns as a reason they are unwilling to consider SaaS ERP. They may be wary of leaking internal financial data, or risking losing customer data to competitors. There is also the potential for data to become corrupt. These are valid concerns, but Aberdeen’s report Web Security in the Cloud: More Secure! Compliant! Less Expensive! found that, on average, on-premise solutions had 11 incidents of data loss or data exposure in the last 12 months. This is compared to 6 incidents for those that are cloud-based. The other top concern is downtime risk; or concern over predictable performance. Again, according to the Web Security report, on-premise solutions had 11 incidents of security related downtime. This is compared to 6 incidents for cloud-based solutions. So these top two negative perceptions may actually be overstated. Figure 5: Negative Concerns Influencing SaaS Decisions 67%

Security concerns Downtime risk - concern over predictable performance

36%

ERP is too basic and strategic to running our business

35%

We want to control our own upgrade process

29% 0% 10% 20% 30% 40% 50% 60% 70% 80% Percentage of Respondents, n = 553


The next most commonly cited concern is that ERP is too basic to running the business to “only” consider a SaaS solution. In a multi-tiered strategy this is not necessarily a factor. Organizations are starting to realize that SaaS ERP solutions are offering comparable functionality to on-premise solutions. Also, by using a multi-tiered strategy with on-premise ERP in the corporate offices, these organizations are still receiving the benefits of an on-premise solution. © 2011 Aberdeen Group. www.aberdeen.com

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Lastly, these organizations want to control their own upgrade process. With a SaaS solution, upgrades are often handled automatically. While there are many reasons to consider a SaaS solution, especially in a multi-tiered strategy, these factors should also be considered before committing to an ERP solution.

The Benefits of SaaS There are benefits to SaaS beyond simply lower costs. Aberdeen’s 2011 Manufacturing Operations Management survey found that there are several areas of an organization that can benefit from the new IT infrastructures provided by cloud computing (Sidebar). These areas cover a wide range of the organization. Areas such as supply chain appear to have more benefit because they are more likely to be distributed and have more to gain from being connected through SaaS. Beyond the question “who” in the organization receives benefits from cloud computing, the survey also asked “what” the respondents believe these benefits actually are (Figure 6). Unsurprisingly, the top benefit is the lowered cost of optimizing infrastructure. This is about getting the organization running to top performance without incurring huge costs. Figure 6: Top Two Biggest Benefits of Cloud Technology 44%

Lowering the cost of optimizing infrastructure

41%

Efficient collaboration across geographies 36%

Ability to respond quickly to business demands Don't know/ fully understand what cloud computing is

16%

Innovation and strategy improvements

16%

Creation of new business opportunities

12% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Percentage of Respondents, n = 163


Fast Facts Aberdeen’s 2011 MOM survey asked which top three functional areas benefit most from cloud computing: √ 67% Supply Chain Management (procurement, logistics, demand planning, supply chain visibility, demand optimization) √ 56% Demand Management (marketing, sales, partnerships/suppliers, customer support) √ 38% Production Management (industrial automation, process control, quality assurance, etc.) √ 33% Enterprise Management (financials, HR, project management) √ 21% Research and Development (innovation management) √ 10% Capital Projects

Beyond costs, there are other benefits that can have a large impact of the organization. First, a SaaS solution can help to enable efficient collaboration across geographies. This fits in with the multi-tiered strategy for organizations with geographically distributed business units. There is also the ability to respond quickly to business demands. In today’s 24 / 7 business world there is a tightening decision window for decisions to be made. Superior responsiveness means that organizations can quickly combat adverse events. These organizations can also take advantage of opportunities in order to get ahead of their competitors. Taking advantage of these benefits in the multi-tiered ERP strategy can lead to improved benefits from ERP. Beyond the benefits that organizations believe cloud technology provides are actual performance differences reported between organizations with either a single-tiered or multi-tiered ERP strategy. According to the 2011 © 2011 Aberdeen Group. www.aberdeen.com

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ERP survey there are benefits that organizations believe to be a direct result of ERP implementations (Table 1). Organizations using a multi-tiered ERP strategy also report generally improved business performance (See sidebar). By combining the benefits of cloud technology with the quantifiable benefits of a multi-tiered strategy, organizations can position themselves for future growth. Improved Performance with a Multi-tiered Strategy

Table 1: Measurable Benefits to be Derived from ERP Multitiered

Singletiered

Improvement in inventory turns

50%

36%

Decrease in stock to sales ratio

5%

3%

Reduction in operating costs

19%

14%

Improvement in complete and on-time delivery

18%

15%

Reduction in inventory

16%

11%

Improvement in internal schedule compliance

22%

15%

Improvement in cycle time from order taking to shipment

25%

14%

Benefit Achieved through ERP


Key Takeaways Best-in-Class organizations are realizing that one size fits all is not necessarily accurate when it comes to ERP implementations. Top performing organizations are looking to multi-tiered ERP strategies to optimize costs and functionality among multiple business units. This may be because the organization is in a phase where it is rapidly attempting to open new business units or purchase those units in other countries. As a result, the organization must be able to onboard new units as quickly as possible. SaaS ERP is becoming an attractive option in such circumstances for the following reasons: •

Faster time of implementation over on premise deployments

•

Limited demand for existing infrastructure

•

Perceived lower costs

√ 5.44 days to close a month for multi-tiered vs. 5.76 for single-tiered √ 42.76 days sales outstanding vs. 43.82 √ 91% complete and on-time shipments vs. 90% √ 14% growth in operating margins year over year vs. 10% √ 20% reduction in time to decision over the past year vs. 17% √ 43% change in sales pipelines as a result of marketing campaigns vs. 32% √ 94% internal schedule compliance vs. 89% √ 95% inventory accuracy vs. 94% √ 4.07 days cycle time from service completion to invoicing vs. 4.32

Organizations that are embarking on a growth strategy should carefully consider a multi-tiered strategy involving SaaS ERP. Of course, this is provided that the needed functionality and integration capability is available in the target solution. By involving SaaS in a multi-tiered strategy, top performing organizations can improve their efficiency and visibility across business units, while keeping costs low.


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For more information on this or other research topics, please visit www.aberdeen.com. To take part in Aberdeen's 2011 ERP research, click here. Related Research ERP's Impact on Finance Executives: Visibility Leads to Stability; October 2011 ERP in SME 2011: Setting the Stage for Growth; September 2011

ERP in Manufacturing 2011: Defining the ERP Strategy; July 2011 Web Security in the Cloud: More Secure! Compliant! Less Expensive!; June 2011 SaaS Trends and Observations 2010; October 2010 Author: Nick Castellina, Senior Research Associate, Enterprise Applications and Business Intelligence ([email protected]) For more than two decades, Aberdeen's research has been helping corporations worldwide become Best-in-Class. Having benchmarked the performance of more than 644,000 companies, Aberdeen is uniquely positioned to provide organizations with the facts that matter — the facts that enable companies to get ahead and drive results. That's why our research is relied on by more than 2.5 million readers in over 40 countries, 90% of the Fortune 1,000, and 93% of the Technology 500. As a Harte-Hanks Company, Aberdeen’s research provides insight and analysis to the HarteHanks community of local, regional, national and international marketing executives. Combined, we help our customers leverage the power of insight to deliver innovative multichannel marketing programs that drive businesschanging results. For additional information, visit Aberdeen http://www.aberdeen.com or call (617) 854-5200, or to learn more about Harte-Hanks, call (800) 456-9748 or go to http://www.harte-hanks.com. This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies provide for objective fact-based research and represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc. (2011a)


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