Two-tier: systems of record and engagement

Up-and-coming enterprise software vendors these days frequently talk about the notion of 'two-tier ERP'.

The phrase was much in use at NetSuite's annual conference earlier this year. The vendor showcased several customers where its cloud-based system is brought in at subsidiaries or business units that need a more rapid, agile solution, while the main business runs on an incumbent system from the likes of Oracle or SAP. The 'rapid platform' (as some customers have taken to calling it) forms one tier, while the 'legacy platform' is the other.

I was reminded of this pattern at last week's Microsoft Convergence EMEA conference in Barcelona. No one mentioned the phrase 'two-tier' but it came to mind every time a large enterprise adopter of the Dynamics product family came on stage.

For example there was global beer giant Heineken, which has implemented the Dynamics NAV business platform to replace legacy systems in ten of its African operations — in the words of the company's former ad slogan, reaching the parts others cannot reach.

Star billing went to Carrefour, the world's second largest retailer, which has adopted Dynamics AX to carry forward modernization of various aspects of its operations. As its CIO Hervé Thoumyre explained:

"We are in a world that is changing. In retail especially, we are shifting from a traditional retail model into a much more iterative model, including all the channels that we have to integrate — of course the store but also the mobile channel, the e-commerce channel and any other channel that emerges."

To cope with this rapid innovation and change, these enterprises are modernizing their operations with a new generation of connected, agile systems — but these are introduced in a separate tier without displacing the core ERP systems that tie everything together back at HQ. As Kirill Tatarinov, executive vice president of Microsoft Business Solutions put it:

"For every one of those larger corporations there is typically a system of record that they spend hundreds of millions of dollars maintaining — and there is no financial benefit to replace it.

"To run their operations they need modern elegant solutions. We're giving them the tools to move into the future, preserving whatever investment they have in the past."

The engagement tier

The usual way to visualize these two tiers is in the classic shape of a top-down, hierarchical org chart. The top tier is occupied by the core system at headquarters, while the next tier consists of a series of more nimble, upstart systems at subsidiary businesses.

But there is another, more revealing way to look at the tiers: reverse them. Imagine the lower tier contains the core system, hidden behind the scenes at headquarters, while the upper tier exposes a layer of agile, connected systems to the outside world.

When you turn it around like this, it becomes much easier to recognize that the systems in the outward-facing tier have many characteristics of what business author Geoffrey Moore has termed 'systems of engagement'. They are not selected merely because they are cheaper and simpler to implement (though that's often the case). They are chosen primarily because they can offer the ubiquitous access, real-time responses and ad hoc flexibility that business people demand in today's connected environment.

Seen in this light, it becomes evident that the notion of two-tier is not merely an implementation choice for subsidiary operations and business innovation around the fringes of a big-company ERP system. It is the mechanism by which large enterprises graft more nimble systems of engagement into their organizations without having to rip-and-replace core systems of record.

Moore recently became an advisor to cloud colloboration vendor Box and has presented on the future of IT at recent Box events, including last week in London, where I saw him on my way back from Barcelona. Moore says that systems of record aren't going away — and indeed points out that we still have mainframes, so why shouldn't artefacts of the client-server era persist as well?

While that may be true, the two-tier model helps us understand how the role of traditional client-server ERP systems will shrivel as the burden of running operations increasingly shifts to more modern systems of engagement. In smaller organizations, the system of record will become just a set of modules within a larger system of engagement. In larger enterprises, it will increasingly withdraw from operational duties within a two-tier division of roles.

How the vendors stack up

If this is how the market is set to develop, it's interesting to review how each major vendor's strategy is shaping up to adapt to this new world. Here are a few thoughts.

• Salesforce.com: Dedicated to customer-facing engagement, Salesforce.com offers no transactional component at all (unless you add a Salesforce-native financials app such as FinancialForce.com). Its approach to the two-tier model is to buddy up with as many systems of record vendors as possible, including SAP, Oracle and Workday, which it has done with much fanfare this year. Microsoft is not on that list because of its own competitive offering. As Tatarinov put it in a Q&A session with analysts last week, "There is an establishment in the CRM world that we are working to dislodge."
• Workday: You won't hear Workday talking about two-tier ERP — it wants to be its customers' single core system of record. But it aspires to be an engaging system of record, with mobile, collaborative and analytic strengths. The two-tier angle comes when it plugs in other vendors' systems of engagement in functions such as sales and marketing, spend management and collaboration.
• Microsoft: The strategy with the latest generation of Dynamics products is very much focused on solving today's engagement challenges of agility, omnichannel and mobility. But it's a highly integrated, vendor-centric strategy that revolves around Windows services and devices. Microsoft will work with other vendors but it prefers to own both tiers wherever possible.
• NetSuite: The poster child for two-tier ERP, NetSuite is perfectly happy to be subordinate to the likes of Oracle and SAP in a larger enterprise. Its cloud credentials and its investment in ecommerce and CRM capabilities give it the ability to function as a system of engagement with a nimble system of record built in.
• Infor: Innovations including a UI makeover and the Ming.le social channel have boosted Infor's system of engagement capabilities. But like Microsoft, its on-premise background means that its customers may be slow to adopt these newer features.
• SAP: Reinterpret SAP's cloud strategy as a systems of engagement strategy and you can see ingredients taking shape in assets such as Successfactors, Jam, hybris and the Sales OnDemand initiative. There are still plenty of gaps that customers currently have to plug with third party platforms. But if HANA is able to deliver sufficient platform-as-a-service agility, there may even be the prospect of SAP transforming its Business Suite into a system of engagement. Trouble is, it's still very early in its evolution.
• Oracle: Systems of engagement have mostly been coming into the Oracle camp through acquisition of cloud vendors such as Taleo, RightNow and Eloqua. A lot still rides on the ability of Fusion to effect a transformation of the core application suite, but that by all accounts is a fragile vehicle. Acquiring NetSuite would not plug Oracle's two-tier gaps as well as an acquisition of, say, Infor or even Microsoft Business Systems. Now there's a thought: if Microsoft's future leadership hives off the likes of Xbox and Bing, would it make sense to merge what's left with Oracle? The FTC would probably rule out such a mega-merger so we'll never find out.

The move to two-tier models is driven by enterprises wanting to respond to demands from customers, partners and employees to be more mobile, more connected and more engaged. This depends on more agile automated systems and processes, which they look to technology vendors to provide.  The array of two-tier strategies on offer demonstrate that there's no easy answer — but those vendors that come up with the most effective solutions will find a ready market for their wares.

Disclosure: FinancialForce.com, Oracle, Salesforce.com, SAP and Workday are diginomica premium partners, Box is a diginomica partner. NetSuite contributed to the author's T&E to attend its May conference. Microsoft funded most of the author's T&E to attend Convergence EMEA 2013 in Barcelona.

Image credit: © Les Cunliffe - Fotolia.com