Blog / Selecting the Right Business Management Software: The 3 Tiers of ERP Explained

Selecting the Right Business Management Software: The 3 Tiers of ERP Explained

Choosing the right ERP solution to grow your small to mid-size business can increase your productivity, profitability, and customer experience. You’ll need to start by identifying the level and type of ERP that best fits your business. Here we outline how to define and distinguish the three tiers of ERP to help you get started. 

Enterprise Resource Planning (ERP) solutions are centralized operational management software systems dedicated to keeping businesses worldwide running as smoothly and seamlessly as possible.  

With thousands of ERP options on the market, the right fit for your business should be as unique as you are.  

For those of you just getting to that stage where your start-up accounting and inventory software can’t keep up, all the factors that go into ERP evaluation and selection may seem foreign. Although it can be daunting, you know your business better than anyone and, with the right kind of help, can pick out the very best system to grow with you for years to come.  

A Brief History of ERP  

Some people believe that ERP is just accounting software, but that’s not true. Accounting software is just one part of the ERP system. Consider all the software products you use now, such as account and finance, inventory management, customer and sales administration, and reporting. They sit side by side with each other in their little boxes. The ERP system is centralized, more like how our brains function. It’s a set of neural pathways and receptors in a single package.   

Modern-day ERP is very different from its humble origins. As ERP took root in the manufacturing industry in the 1960s, it was called Material Requirements Planning (MRP). At the time, it was used to keep track of inventory, resolved balances, and basic manufacturing, purchasing, and delivery functions.   

This system grew in the 1970s to also include scheduling and production processes. In the 1990s, the Gartner Group became the first to call it ERP as it changed again to incorporate accounting, financing, and sales.   

Today, ERP connects every part of your business into one hub for your business’s ultimate information and management system.  

How Important is ERP to a Small or Medium Business?  

ERP is no longer a “nice to have” tool for a small to medium-sized business; it’s arguably a requirement to support everything from competitive viability, compliance, and effective business process management. ERP is important because it can not only save you money and help speed up business growth, but it can also help increase your lead generation and keep your operation running smoothly, so your customers are happy.  

With all the things it can do to help your business, it’s no wonder that ERP has grown to become a $95 billion dollar industry in 2021, used by companies of all sizes. 

As a business owner looking to gain traction in your field, the initial investment may feel discouraging. It’s important to remember that an ERP system is an investment in your business’s ability to scale over time, so it’s not something to be decided haphazardly. As you evaluate how a solution can meet the current and future needs of your business, keep in mind just how much you’ll be saving once your ERP system is working for you.  

Save Money  

ERP is at the center of everything for your business operations. Implementing a right-fit ERP should deliver an ROI whereby your business will recoup the cost in both money and time.   

Instead of having multiple training sessions for your employees and contractors to make sure they understand the systems you have, you’ll likely only require one or two with ongoing support as necessary. Having a centralized system will help create a standardized process of accessing information quickly and efficiently. In addition, consolidating your data into one system means that you’ll never have to worry about the hours it will take you to hunt for information that will help drive profitable decisions.    

With all this time saved, you’ll be able to grow your business without needing to add more staff, especially as your existing team will adapt and become faster at finding required information with familiarity.  

Reducing Human Error  

ERP also reduces the need for error-prone manual inputs, tracking, and reporting. Having one centralized database to enter and retrieve information improves speed and accuracy, saving your employees’ time and increasing their ability to accomplish other things that could help you earn more capital to grow.  

Better Analytics  

How would it feel to push a couple of buttons on your computer and generate a report in seconds rather than taking days for you to reconcile the data or wait on an IT team to manually retrieve the information? Analytics and other reports from an ERP system can often be accessed in near real-time. With this tool at your fingertips, you could grow your business faster than it ever has before.  

Modern ERPs also facilitate differing access levels for users, so only those that need to see the reports can generate them, giving you peace of mind and security knowing your secrets aren’t walking out the door.  

Increased Productivity  

Being able to properly support your team’s ability to be productive, accurate, and focused on opportunities is integral to achieving profitable growth. ERPs automate the most tedious tasks, freeing up hours of your employees’ time and increasing your labor ROI, so your teams can do more thoughtful and profitable work.  

Happier Customers  

Your employees who manage sales and customer relations will be grateful to know that most ERP systems have built-in tools for customer retention. Combining customer contact information, billing details, and order history quickly and precisely will enable them to readily answer customer questions and target your customer wants and needs accurately to improve lead generation and retention.  

The Three Tiers of ERP: Definitions  

ERP comes in three different tiers. Each of these tiers has incredible value depending on the stage of growth and future goals of your business. The ERP tiers, by definition, are divided by client size, client financials, how complex and scalable they are, and how much global support they can provide. ERP infrastructure can vary not only from tier to tier but from system to system. Selecting the right one will directly affect how quickly and effectively your business grows.  

Understanding how each of the three tiers of ERP is defined will help you begin to qualify your business into one and narrow down the types of solutions you should concentrate on evaluating in the beginning.  

Tier One  

Tier one is best suited for the more complex enterprise. Built for larger high revenue businesses with at least $500 million in gross sales, tier one ERPs are helpful for companies with many users who need a complex system to meet their requirements. Examples of these ERPs are systems like Microsoft Dynamics 365 Finance and Supply Chain (previously Microsoft Dynamics AX), JD Edwards, Orion, and Texada.   

It is common that businesses with tier two ERPs eventually graduate to tier one because they expand operations to several countries and require support for a growing multi-national system with intricate system requirements, not otherwise supported in tier two.  

Tier one ERP has an implementation time of 18 months or longer and requires at least a $1,000,000 project budget. It includes financials (general ledger/GL, accounts payable/AP and receivable/AR, cash management), cash planning, business intelligence, inventory, customer relationship management (CRM), job cost, fixed assets, manufacturing, and advanced warehousing.   

It is essential to make sure you get everything you need out of a tier one system before implementing it, as changes are time-consuming and expensive to execute after going live. Tier one also has the highest risk of implementation failure due to its complexity and cost, and if done incorrectly, it could result in large monetary repercussions and disruptive resource drains. According to a study done years ago by one of the Big Eight accounting firms, only 17% of ERP tier-one implementations are successful.   

It should also be noted that up to 50% of the companies that use tier one ERP services can use a highly advanced tier two system instead. So you shouldn’t use revenue as a measuring stick alone to determine if your business needs a tier one ERP solution. 

Pros:  

  • Can manage unique, complex requirements  
  • Capable of complete ERP functionality  
  • Can be used to manage multiple locations globally
  • Plenty of users can be on the system at once  
  • Most used by large public companies and many multi-national private organizations  

Cons:  

  • Generally requires at least $1,000,000 to implement 
  • Implementation time of 18 months or longer 

Tier Two 

Tier two is all about getting the most out of an ERP system, with 20–40% of companies using this tier, many of them in the small to medium business sector. Businesses in this tier typically have $25 million and $500 million in revenue. Companies that leverage tier two ERPs have moderate to complex requirements but don’t have as many users as tier one.   

Tier two ERP systems can scale to offer anything from just financials, inventory, and purchasing to full ERP functionality for supply chain management and manufacturing, but they generally do not cover multi-plant scheduling and manufacturing. As a business owner with a tier two ERP, at minimum, you’ll need a highly experienced bookkeeper with access to an accountant to make sure everything is on track as it should be.    

Tier two implementations can range from $25,000 to $400,000 and typically take between three to eight months to execute. Implementing changes to the ERP is typically less costly in both budget and time since tier two systems are more flexible than tier one. On the flip side, they are significantly more complex than a tier-three solution.   

Examples of tier two systems are Microsoft Dynamics 365 Business Central, Acumatica, Info, and NetSuite.   

Pros:  

  • Can manage moderate to complex requirements  
  • Many systems are capable of full ERP functionality  
  • A modest implementation time of three to eight months  
  • Track record of successful implementations  
  • Easier and more cost effective to customize than tier one  

Cons:  

  • Requires an experienced bookkeeper, accountant, or controller  
  • More complex than tier three systems 

Tier Three 

Tier three is both the most economical and highly commutable, which lends itself to be the most prone for significant audit and fraud risks. Because some of these ERP systems can be too flexible and allow ledger posts to be changed, these systems are the simplest version of ERP and only require a junior bookkeeper or you, the business owner, to run it. Many of these systems are primarily intended for financials and keeping track of expenses and orders.   

Tier three systems cost between $250 and $5,000 and represent 60–60% of a given market sector. Something like QuickBooks is a tier 3 ERP. They have different shortcuts and automation that tier one and two don’t have.   

If you’re looking into a tier-three system, you should know that you will not find a fully functional ERP and need multiple inventory management systems or rental management systems.  

Pros:  

  • Two to six-week implementation  
  • Somewhat budget-friendly  
  • Limited technical expertise required  
  • Low risk and modest payback  
  • Easier to learn than tier one and two  

Cons:  

  • Major audit and fraud risks  
  • Different systems required for business needs  

Finding a Proper ERP for Your Business  

There are several things to take into consideration when selecting an ERP system. It is a big step to growing your business, and you need to make sure you’ve made the right choice. An ERP Selection Criteria Checklist is a great starting point to making sure you have everything covered.   

It all starts with taking a deep dive into your business and outlining what your company and users need, including clarifying expectations, defining business goals and functional requirements.  

Finding the right partner who can help you see things that you don’t will be incredibly valuable as you navigate scaling your business with ERP.  

Here at Open Door, we have spent over 30 years helping companies in North America invest in the right technology. From making sure it’s a good fit for your business to ensuring that you know how to run it, we are here to help you. We want you to be happy for years with a system that can scale and develop with your business.    

Choose Wisely: 7 Ways to Ensure Your ERP System Lasts the Life of Your Business  

Find Out How Open Door Technology Can Help You with an ERP System  

Now that you know a bit more about ERP systems, the different levels of solutions, and how they work, you can see that while there are risks for implementing them, the rewards far outweigh them, especially for a small to medium business.  

Check out Microsoft Dynamics 365 Business Central delivered through Open Door Technology—a leading SMB ERP, in the cloud, with subscription pricing and seamless updates.

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