Conceptually, enterprise resource planning(ERP) is the same as it ever was, but pragmatically, it will never be the same. Gone are the days of the behemoth, on-premisesERP systems, or as they are now referred to,legacy ERP. Today, there’s a demonstrative shift from big ERP systems to componentized ERP environments.
Componentization is the breaking apart of these massive systems into smaller, functional components or modules, like financials, supply chain, management, and human resources. These separate modules can stand alone or be integrated into all-inclusive, overarching systems. Instead of having to upgrade and implement an entire system to gain additional functionality, a company need only incrementally upgrade and deploy a specific component.
The purpose of ERP has always been to maximize efficiency, increase visibility, and drive product innovation. Businesses still require these solutions from ERP as part of a reliable, integrated solution but now demand lower IT costs and increased flexibility. Business is becoming increasingly decentralized, so it’s not so much a shift in ERP but a shift in business needs and the accommodation of those needs. As business functions, facilities, suppliers, and personnel become increasingly distributed, ERP systems must be, as well.
The catalyst for componentization was the economic recession that began in 2008. IT budgets contracted and organizations had to do more with less. Because of the coinciding innovations in cloud technology, instead of deploying and implementing traditional ERP infrastructure, organizations started adopting a two-tier, or hybrid,ERP model. Two-tier ERP is a method of integrating multiple ERP systems simultaneously. For instance, an organization may run a legacy ERP system at the corporate level while running a separate ERP system or systems, such as cloud ERP, at a subsidiary or division level for back-office processes that have different requirements. To facilitate the adoption of the two-tier methodology, vendors increasingly opened core databases and application programming interfaces and provided customization tools, thus spurring the advent of self-contained, functional ERP components or modules.
The data from the second-tier cloud ERP or modules typically require normalization to integrate with the legacy ERP system at the corporate level. Although direct cost is associated with master data management to ensure consistency and no redundancy, by extending the life of the legacy system, the intention is to reduce the total cost of ownership (TCO) while meeting additional needs for flexibility and functionality. However, the shorter duration of implementing and deploying a two-tier ERP model can actually lead to increased TCO if the indirect costs, such as training, hiring staff, and vendor support, are not taken into to account, as well.
Nonetheless, componentization and two-tier ERP aren’t the end of ERP but another, progressive iteration of its evolution. By breaking up ERP into functional modules or components, the lofty goals of ERP are finally becoming practical and achievable. Whether it’s legacy ERP, cloud ERP, hybrid ERP, ERP modules, or components, the goal has always been the same: Provide an apparatus to help businesses do what they do better and smarter.
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