Types of ERP Vendors

Yaroslava DubenskaBlog, ERP, ERP Selection

Nowadays the ERP industry is evolving rapidly. Modern ERP systems involve various vital functions for a business (streamlined and integrated processes, lower cost of operation, improved reporting capabilities, data security, increased productivity, etc.). With all those multiple benefits an ERP system can bring to your business the most important step is to select a right ERP software vendor.

ERP vendors design their own solutions around processes based on industry best practices. A best practice is a business process that is generally recognised as more effective than others in a particular industry. When top managers of a company select an ERP package to implement it means they are buying into a particular vendor’s view of best practices and relying on the system to support their efforts and embrace these practices. The ability to match best practices to your business needs is what differentiates one ERP package from another and is a key contributor to the ultimate success of the implementation.

Typically, ERP vendors sell ERP systems in modules. Modules are individually purchased based on the needs of the company. Most ERP software systems are flexible enough that businesses can implement module by module, without purchasing and implementing the entire package in one go. ERP vendors use modules as pricing units, so the more modules a company implement, the more costly the system becomes. Companies do not have to purchase all modules available from the ERP vendor, however, implementing more modules leads to greater integration which in turn can lead to a greater success for a business.

How can we distinguish between three tiers of ERP vendors?

In the software industry, one of the most common classification of the ERP vendors is by tiers. Based on the company’s size and the ability to provide economical and business needs ERP vendors are classified as Tier 1, Tier 2 and Tier 3.

ERP vendors of type Tier 1 provide ERP software solutions for large multinational corporations. These Tier 1 Vendors offer appropriate support and service infrastructures for their customers all over the world. This type of ERP software also offers a large variety of process options. It is very flexible and designed to meet all the requirements and needs of your business. Tier 1 ERP systems are very costly due to their vast capabilities, which include being able to handle the operations of a conglomerate with multiple global subsidiaries. Due to the complexity costs of implementation and support, these ERP products have a high cost of ownership.

Tier 2 vendors sell ERP products for mid-sized businesses. ERP software solutions of that type are simple to implement, manage and support. Tier 2 solutions are often specified as vertical. This type comprises of at least 20 well-known competitive companies. ERP software solutions provided by this type of vendors have a lower cost of ownership and they propose lower annual license fees.

Tier 3 ERP vendors (or hybrid vendors) sell products that are designed for smaller companies. Their customers have few locations and less complexity, their solutions usually have the lowest total cost of ownership. Mostly they provide ERP systems for businesses with up to 20 users. Many ERP software solutions in this group are single location installations and built for a single vertical. They are situated locally and operate within one country or region. Tier 3 vendors allow frequent and faster software development and modifications.

Essential factors in the ERP vendor selection 

Structured approach. A key step in the selection of a new ERP vendor is to adopt a structured approach to the process. The set of practices shall be presented to the stakeholders within the enterprise before the selection process begins. It is vitally important to understand the method of gathering requirements, an invitation to tender, how potential vendors will be selected, the format of demonstrations and the process for selecting the vendor.

The total cost of ownership. Not all of the costs may be apparent in the vendor proposal, there may be hidden costs with the purchase of software. They can include upgrades to hardware, additional manpower, network costs, costs of software maintenance and customisation, etc. So, it is necessary to take them all into account to determine the total cost of ownership of pre and post-implementation process.

Involvement by top management. The decision on the selection of the ERP vendor must be made by top management and stakeholders of the enterprise. They should be involved in the project initiation phase where the decision-making process is agreed; assist in the gathering of requirements, attend the vendor demonstrations and have a significant participation in the final selection of the ERP vendor.

Focused demonstrations. Demonstrations by potential ERP vendors shall be simple and relevant to your business. However, it is important to understand that there is a considerable amount of preparation required by vendors to perform demonstrations that are specific to your business. It is, therefore, very important that vendors are treated equally in requests for demonstrations and it is incumbent on the company to identify sufficient demonstrations that will allow a right decision to be made but will also ensure that vendors do not refuse the selection process due to the extent of preparation required.

The selection process of Enterprise Resource Planning Vendors is a long and very important process with many factors to consider. As of today, there are hundreds of ERP software vendors in the UK and around the world. Companies interested in purchasing an ERP system should be aware of the many solutions available and consider different examples of ERP software vendors before picking one appropriate for the industry, company size and business requirements.

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