The Three Tiers of ERP Providers (Video)

How Deacom fits into the market segments of Tier 1, 2, and 3 ERP providers

In this whiteboard session, Jay Deakins, Founder and CEO of Deacom, discusses what differentiates the three tiers of ERP providers and how Deacom fits into these market segments. He talks about the typical customer size that each of the tiers are broken up by and what to look for in terms of functionality, scalability, and general services when searching for a new provider.

The full transcription of the video follows.

Hello! My name is Jay Deakins. I am the founder and CEO of Deacom. What we’re here to talk about today is the different tiers of ERP providers and where Deacom fits in that mix of Tier 1, 2, and 3 providers.

So it’s generally accepted that ERP manufacturers are broken into Tier 1, Tier 2, and Tier 3 providers. That’s kind of a generally accepted concept. What I want to talk about today is what makes that up. What’s the difference between a Tier 1, Tier 2, and a Tier 3 provider? And as somebody who might be looking for software yourself, what should you be looking for out of your potential provider.

So the tiers are defined as the revenue of the typical customer of the provider. So typically, Tier 3 providers are selling $0 – $50 million revenue accounts. Tier 2 providers are typically selling $50 – $500 million revenue accounts. And Tier 1 providers are selling, typically, $500 million plus.

Now you can make some arguments about where those tiers actually break… Some people would say Tier 1 is $1 billion plus… it doesn’t matter that much the specific number, conceptually though there’s a difference between selling to a company that has $10 million in annual revenue and a company that has a billion dollars in revenues. And sometimes there’s a different solution required to get there.

So the question becomes once you’ve broken that out, based on these revenue dollars, what are the differences from an ERP provider… what is it that differentiates a Tier 1 provider from a Tier 3 provider. Typically, that breaks down into three different things:

  • There’s the Functionality of the basic software package
  • There is the Scalability of the package
  • And there’s the General Services of the provider themselves

We’ll talk about all these in more detail as we go through.

So functionality is pretty straightforward. It comes down to what I refer as the “multi-functionality”. So that includes multi-facility, multi-lingual, multi-company; everything that as enterprises get larger they break into different bits and pieces.

Too, if you get a $10 million company, you’re going to be talking about typically, one country, one facility, one company – it’s a little bit simpler. As you move up there, it’s not unusual to have lots and lots of facilities and often times lots of companies that get in there. And you have to have functionality to deal with that.

There are very straightforward things known as multi-company balancing, where as you get into the large enterprises, where they have multiple companies together, one company may pay the bill for other companies out of the first company, but they want to keep everything balanced from a general ledger standpoint. The question is does the software you’re looking at have the functionality to handle that out of the box.

Scalability is also pretty straightforward. Again, with a Tier 3 company, it’s not unusual to have 5 – 20 concurrent users; and we normally break out the size of that based on the number of sales orders. So 20,000 – 50,000 sales orders a year is not an unusual number in there.

As you get into Tier 1 companies, it’s not unusual to have either hundreds of concurrent users or even thousands of concurrent users. And the same thing with sales orders – there might be millions of sales orders. And there’s just a basic performance question… Can the software you’re looking at handle scale with that, to handle that and still give you outstanding performance at those increased loads.

And the final portion of this just the general services of the provider. It’s the project management, the providers own internal QC processes, etc. Can they deliver this project on time and on budget?

So one of the things I always look at… the comparison I use is a Tier 3 provider is somewhat similar to being a single family home producer. There’s a lot of companies that can go build a single family home for somebody… a Tier 1 provider you might be talking about building a 50 or 100 story skyscraper, and there’s a different level of project management… there’s a different level of engineering expertise that’s required up there. So as the company goes, can they deliver those services.

So over the years, as Deacom has progressed, and we’ve built out our own practice, we basically started as a Tier 3 provider, we’ve grown now to where we’re a high Tier 2 provider, and low Tier 1 provider. We still have some customers who are down in the Tier 3 that are growing companies that feel like they need the functionality and the project management we have. But we also have companies up there in the billion dollars and multiple billions of dollars of revenues. So we’re basically playing in the low Tier 1, high Tier 2, with an occasional entry into the Tier 3 market.

So it’s interesting… it’s challenging that if you’re a Tier 3 provider of ERP software, it’s challenging to grow up and go through those services. We’ve had to work very hard, there’s a lot of work we’ve done over the years specifically designed to grow through those tiers. Conversely, it’s actually interesting that it’s hard for a Tier 1 provider to go down market. What you see is these Tier 1 providers have essentially built a battleship which works great out in the open ocean… Putting a battleship in a lake doesn’t work very well.

So as a potential customer what you have to look at is that if you’re dealing with a company that is scaling up, do they really have the functionality, scalability, and general practices to deal with us. And if you’re looking at a company that’s coming down, do they have the ability to be nimble enough and cost effective, or are we actually going to put a battleship in a lake.

So as you’re going out to investigate your ERP purchases, I think that might help you figure out which tier you should be playing in.