Subsidiaries and newly acquired companies are an IT headache.
Either the organization must roll out and maintain the corporate ERP system on the subsidiary or newly acquired company, or it must maintain two or more different systems and get those separate systems talking with the parent system. Both options are significant headaches.
Thankfully, there is a third option: using a 2-Tier ERP approach.
What is 2-Tier ERP
Operational integration between a parent organization and its subsidiaries offers a lot of benefits. If the backend systems of the subsidiary are integrated with the parent ERP system, there can be integration of master data, business processes, payroll, financial management, analytics, employee data, travel and expense management and other system integrations. These are substantial operational benefits, and they deliver on the original value proposition of ERP as an organization’s single source of truth.
The problem is getting to that integration.
If an organization wants integration or deep visibility into subsidiary operations, the traditional approach is extending the parent company’s ERP system to the subsidiary. This brings the desired integration, but at the cost of a typically expensive, time-consuming ERP rollout at the subsidiary. This parent ERP system also might be overkill for the subsidiary, both in terms of complexity and cost, because many subsidiaries only need a subset of the functionality required by the parent ERP system.
The 2-tier ERP approach is rolling out a smaller solution offered by the ERP vendor that seamlessly integrates with the parent ERP. Instead of having to extend the larger system to the subsidiary, the parent and subsidiary can each use a right-sized ERP system and have them integrate as deeply as if both operations were using the same system.
An example of this is a parent organization that runs SAP HANA and its subsidiaries using SAP Business ByDesign or SAP Business One. SAP HANA is built for large enterprises and used by the likes of BP and Coca-Cola. SAP Business One and SAP Business ByDesign, on the other hand, are faster-rollout, cloud-based systems that are built for SMBs and fast-growing SMBs, respectively. All three share a common core, however, and integrate with each other. And if a subsidiary needs a larger system later, it can easily migrate to SAP HANA.
Why 2-Tier ERP Makes Sense
There are many advantages from using a 2-Tier ERP approach for integrating subsidiaries with the organizational parent.
Subsidiaries often emerge from acquisitions, joint ventures and internal startups. With each subsidiary comes its own IT and software application landscape, and managing these multiple environments adds expense and complexity over time.
With a 2-tier ERP system, complexity is reduced because there is standardization across tiers and only one system must be maintained. The ERP system on the subsidiary is just a subset of the parent organization’s ERP system, greatly reducing complexity.
Subsidiary systems often use simple solutions such as Microsoft Office or QuickBooks, outdated ERP software, or homegrown solutions that have been built over time. These solutions, while functional on the subsidiary level, often introduce a separate set of business processes, standards and governance. That makes it hard for organizations to implement service-level agreements, drive efficiency through standardization and enforce policy and standards across the entire organization.
Because subsidiary ERP systems fully connect and integrate with the larger parent organization’s systems, there is no challenge creating consistency and centralized control with a 2-tier ERP approach.
Managing an organizational network effectively requires timely access to operational data from all subsidiaries. With visibility, an organization can take advantage of both financial and operational analytics, as well as meaningfully monitor key performance indicators.
This visibility is only possible when the backend systems of both the organizational parent and its subsidiaries are connected and sharing information. A 2-tier ERP approach provides this integration necessary for visibility, since the data from the subsidiary flows into the parent ERP system while still maintaining the right-sized solution for the subsidiary.
Organizations have invested considerable energy into developing backend software solutions, business processes and organizational services such as human resources, payroll and procurement. If subsidiaries are using different IT systems than the organizational parent, much of the economies of scale are lost because the subsidiaries are effectively running completely separate operations.
With a 2-tier ERP approach, organizations can take advantage of these economies of scale because all of the resources and capabilities of the organization parent can flow down to the subsidiary.
When subsidiaries operate and maintain their own IT systems, this requires more resources than using the same ERP system across the entire organization. Yet when a parent organization rolls out its larger ERP system to its subsidiaries, this wastes resources because the subsidiary does not need all the features of the larger system and the cost that comes with it.
The 2-tier ERP approach is far more resource-efficient because there are less systems to maintain, and a subsidiary only requires an ERP solution that fits its actual needs.
Finally, a 2-tier ERP approach significantly improves integration speed.
Typically, integrating a subsidiary with its parent organization requires rolling out the larger ERP system to the subsidiary, which takes time and upends business processes at the subsidiary. This is a well-known pain point with subsidiary integration.
A much faster way to integrate subsidiaries is the 2-tier ERP approach, since the subsidiary can more quickly roll out and adopt a right-sized ERP solution based in the cloud. In some cases, startups that expect to be acquired even adopt an ERP solution that works with the 2-tier approach preemptively, understanding this will make the integration process faster when they get acquired.
In almost all cases, the 2-tier ERP approach is significantly better than the alternatives when it comes to integrating subsidiary operations with a larger organizational parent. Yet because this 2-tier ERP approach is relatively new, the byproduct of ERP moving to the cloud, many organizations do not even know it exists.
If you would like more information about how the 2-tier ERP approach might benefit your organization, contact one of our ERP consultants at (801) 642-0123 or info@nbs-us.com.