Outsourcing trends: Waiting on cloud, CIOs eye two-tier ERP model

As CIOs wait for public-cloud offerings to mature, they look to offshore providers for services that confer competitive advantage. First up: a two-tier ERP or hub-and-spoke model.

Cloud computing -- with its scalability and promise of cost savings -- is poised to turn traditional IT outsourcing models upside down, no question. Just ask TPI Inc., a global sourcing advisory firm that has kept a bead on outsourcing trends for two decades, and produces the quarterly TPI Index, an industry source for outsourcing statistics.

In a recent TPI survey of 140 of its global clients about trends in outsourcing, 78% said they are evaluating ways to incorporate the cloud into their IT service delivery strategies.

How quickly evaluation turns into action, however, is, well, nebulous.

"While they are talking about it, only one in 20 have actually put together a strategy for how to use it," said TPI partner Kevin Smilie, who leads the cloud computing practice at the Woodlands, Texas-based firm. For the next three years, enterprise strategy will be "all about private cloud" for core business functions, as companies wait for public-cloud offerings to mature, TPI believes. "The real tipping [point] in the market will be when someone actually brings a true cloud service for enterprise resource planning (ERP) that will give the enterprise the flexibility to configure without having to change the underlying systems," Smilie said.

Major outsourcing providers are moving to the cloud and quietly testing "creative combination models" with key customers, Smilie said. In lieu of a cloud option for ERP, however, another outsourcing trend also is under way: two-tier ERP. Enterprises believe this back-to-the-future approach will make them more nimble and give them a competitive advantage, according to Narsimha Rao, vice president in the Enterprise Solutions practice at Infosys Technologies Ltd.

Rediscovering the benefits of hub-and-spoke ERP

Customers of Infosys' Enterprise Solutions practice, whose revenue is over $1 billion and which has over 12,000 employees deployed globally, are bucking accepted ERP practices, according to Rao. Experts typically recommend that the most cost-effective, reliable way to go is a single, global ERP configuration with the fewest possible instances. Centralization brings standardization.

Infosys customers that traditionally have implemented large, single ERP systems across multiple locations and business lines -- Oracle or SAP, for example -- increasingly are opting for a two-tier ERP strategy, also called the "hub and spoke" model, Rao said.

"Instead of looking at just one large ERP [installation] to service for everything, they are considering a large ERP [system] for the core business and not-so-large ERP systems for subsidiaries or other geographies or certain operating units," Rao said.

Customers' reasons for going with a two-tier strategy are many, and they emphasize flexibility and cost savings. In some cases a particular location with distinct cultural and compliance requirements is served better by a best-of-breed ERP package. Sometimes rolling out the core ERP system to a small market can't be done in time, or may not be worth the effort or expense, Rao said. There is also a push for specialized systems for "micro verticals." A bank may have implemented a traditional customer relationship management, or CRM, system, for example, but will benefit from a specialized system that caters to its wealth-management and private banking customers.

These two-tier setups can take several forms, including one that uses a single ERP system with different "lightweight" instances tailored for individual markets, and one that adds a different vendor to the enterprise solution.

Integration is a big concern for customers deploying a two-tier ERP system, but the benefits of implementing a simpler application far outweigh the additional effort of integration.

Narsimha Rao, VP, enterprise solutions practice, Infosys Technologies Ltd.

One client -- the Indian subsidiary of a multinational-conglomerate manufacturing company -- needed a lightweight ERP application that catered to its size, location and particular business line, and that also would align to the parent company's overall IT and business strategy road map. The parent company agreed to implement Microsoft Dynamics NAV software for the subsidiary and integrate it with its core Oracle-Siebel ERP system.

And yes, integration is a "very important" concern for clients going this route, "but the benefits of implementing a simpler [ERP] application far outweigh the additional effort of integration," Rao said.

Gartner Inc. analyst Nigel Montgomery noted the trend in his recent report on the two-tier ERP strategy, pointing out many of the same drivers mentioned by Rao. The report warned, however, that companies considering a two-tier strategy "in the hopes of just saving on costs" should read no further. "Second tier does not mean second class," he stated. Two tiers require as much executive support as one tier, he said, and the strategy should never be led solely by the business or the IT department. "Successful companies create a cross-functional, cross-business, inclusive project team to drive consistency and acceptance, composed of their most respected, least dispensable employees," Montgomery said.

The two-tier trend, however, has yet to take hold in a big way, Montgomery said. In a recent Gartner-AMR Research study, roughly 70% of companies surveyed -- each with more than 1,000 employees -- stated a preference for a single global ERP system.

That said, as a result of mergers or acquisitions, or a push into a new market or legacy systems, many companies already operate under a multi-tier ERP model -- but with no strategic underpinning, Montgomery notes.

Let us know what you think about the story; email Linda Tucci, Senior News Writer.

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