28 Jul Microsoft Dynamics NAV to replace SAP at a second-tier level?

What makes the two-tier ERP strategy a first-class solution?

To centralize and standardize IT infrastructure might seem to be the most rational strategy for a majority of global organizations. The concept of using one system such as SAP or Oracle across subsidiaries, across countries and even across various lines of corporate business is promising.  At first glance, it might imply cost reduction, streamlined implementation and better control, however since 2008, more and more global organizations have been moving towards two-tier ERP deployment strategy. The shift was definitely stirred up by the global collapse of the financial markets that made companies to seek for savings and refrain from rolling up their core systems such as SAP or Oracle to local subsidiaries that used other ERP solutions. The idea of migrating into a centralized system was replaced with efforts on improving the existing systems and integrating them with the core ERP system used in the headquarters.

Benefits and costs of implementing the two-tier ERP strategy. The thick arrows indicate substantial benefits/costs, whereas the thinner ones correspond to less important or ones which are more difficult to measure. The yellow dots stand for the elements in the case of which benefits compensate for costs.

Strategic shift

Many corporate organizations have discovered that implementing the two-tier strategy has become their critical growth factor. Such companies no longer “carve” in the existing ERP solutions such as SAP and Oracle to accommodate for needs of their subsidiaries, but they present a more comprehensive approach which involves the deployment of another uniform second-tier ERP system across subsidiaries. Microsoft Dynamics NAV offers high usability and flexibility in this respect. Basically, it can be used organization-wide i.e. as a core system in the headquarters and in worldwide subsidiaries, meeting their specific local requirements. However, it also perfectly meets the second-tier needs of companies using SAP or Oracle in their headquarters.

Such requirements focus on system agility and flexibility at a subsidiary level, combined with cost effectiveness.  Therefore, what global companies expect from the implementation of the two-tier strategy for their IT infrastructure is the need to smoothly streamline their business processes at the operational local level. Thus, the cost factor is also perceived from a wider perspective. Not only license costs are critical. The overall cost is measured based on how much the new system boosts the subsidiary’s performance indicators. However, as mostly SMB software solutions such as Microsoft Dynamics NAV are implemented as second-tier systems, the costs are likely to be lower than these of SAP or Oracle software.

The same but different

Extending the core ERP systems, such as SAP or Oracle, and imposing central solutions on local subsidiaries yields the risk of high expenses, extensive complexity and poor fit to the operational needs of local subsidiaries. What is needed at a local level, is a cost-effective tool that addresses the specific needs of local business. Local subsidiaries are confronted with specific legal and accounting requirements on a daily basis that from the perspective of the headquarters might be perceived as an additional burden to cope with within the corporate ERP systems. Accommodating for different local accounting patterns means breaking the rules that puts the best practices incorporated into the core system at risk thus generating a long decision-making process. The two-tier strategy allows splitting up the processes into globally and locally critical fields of interests and manage them separately within two systems such as SAP and Microsoft Dynamics NAV.

In global companies, the nature of business in subsidiaries is frequently completely different from that of headquarters. While headquarters manage financial consolidation, global marketing and operational strategies, local companies perform core business operations such as purchase, sales distribution, manufacturing and service. Their main objective is to respond to market needs and changes to generate the highest possible profit. At a local level, an ERP system should be a tool designed to match the scope and flow of local operations. With the flexibility of the two-tier strategy, it is much easier to react and seize all opportunities.

Global concerns

It is understandable that the two-tier ERP strategy evokes some doubts on the effectiveness of data consolidation, reporting and IT infrastructure maintenance. Besides, as a group of users might have to work across two different systems with different interfaces, the UX issue is bound to be argued.

Standardization and agility

Most of these problems might be handled through adoption a right model for a two-tier ERP strategy. Although the model involving the use of various systems from various vendors within the second tier is the most acceptable for local subsidiaries as it requires the least effort at a local level, it is definitely doomed to fail, as it breeds data and workflow inconsistencies as well as multiplied integration efforts across the organization.

It is different with a single-solution and single-vendor model. In implementing this approach a global company can achieve the right balance between standardization and agility. However, what is critical at this point is the choice of the system and system vendor.

Bird eye view

Within global companies some subsidiaries might be chief players, imposing their practices and preferences on the whole organization. It also applies to the ERP software being used across the organization as a second-tier solution. However, recommendations from “the strongest players”, do not always mean that the system is suitable for adoption. Thus, the second-tier model requires a bird-eye view of local operations to distinguish which software can fit in the needs of all subsidiaries and in which areas some standardization can be implemented. Such an approach enables process and data optimization and harmonization at the second tier level, allowing for some flexibility which local subsidiaries require to operate effectively in local conditions.

These assumptions lead to the conclusion that only a system that has been internationally proven fits into a second-tier model.  The basic requirement is that the solution should be free of the complexity of large first-tier solution, provide a comprehensive functionality and open architecture for easy implementation of local modifications and integration with the core system.

Perfect match

With their functionality, systems designed for medium-size businesses such as Microsoft Dynamics NAV, match the type and scope of operations performed in local subsidiaries, which translates into improved effectiveness of process flows. Leaving aside basic assumptions like ‘Microsoft Dynamics NAV is to be fast to implement, easy to use and open to modify’, there are other aspects that make it a first-class solution for a second-tier ERP deployment strategy.

What really counts

One of these aspects are licensing options. As subsidiaries are usually more prone to market fluctuations, the investment in software based on traditional ‘per user’ models might imply a high risk. Therefore, Microsoft Dynamics NAV subscription or cloud-based licensing enables the subsidiaries to optimize their IT expenses by adjusting the number of users and processes used.

The other aspect is how the system is delivered and maintained. As mentioned above, the implementation of a second-tier solution requires a comprehensive and methodological approach that enables to cope with such problems as master data management, uniform reporting and process standardization that we are discussed in one of our articles. Only after analyzing the common and specific needs of all subsidiaries, a proper plan of action and system design can be developed. In this respect, choosing one implementation partner with international roll-out experience can be one of the most critical issues. IT experience means the partner’s knowledge on how to integrate all subsidiaries within one second-tier system, limiting the scope of local modifications to the required minimum, and to make this second-tier ERP system communicate and function smoothly with the core ERP system.

SAP with Dynamics NAV in a global organization

Although the two tier ERP challenge is high, it is still worth-taking, especially for international companies using SAP that face the problem of deploying a uniform solution in all subsidiaries. Talking into account all aspects that have been described above, potential benefits such as cost-effective process harmonization, standardization and agility across a global organization speak for deploying Microsoft Dynamics NAV at a second-tier level. By implementing a uniform solution, global companies using SAP can cope with some common problems which are mostly due to: substantial discrepancies in sizes and business profiles of subsidiaries and cultural differences between countries where subsidiaries are located.

With Dynamics NAV, international companies using SAP at the first tier can easily eliminate non-standardized subsets within their organization. Some critical factors such as master data management or process and reporting standardization can be handled effectively to ensure that SAP and Microsoft Dynamics NAV operate together seamlessly.

A quite typical example of applying the Two-Tier ERP approach, that involves the headquarters and major subsidiaries with SAP as an ERP solution, and minor ones with Microsoft Dynamics NAV

Minor subsidiaries within a corporation using SAP

The concept of implementing Microsoft Dynamics NAV ERP as an alternative to SAP would surely be a result of discrepancies between subsidiaries within the group. SAP can be too complex and expensive a system for some of them. Let’s assume both that SAP has already been implemented and it has been standardized to some extent. This means that companies using SAP have standardized processes, data and uniform group reporting. In this perspective, a group of subsidiaries with no existing or planned SAP solution constitutes a non-standardized subset. Obviously, the corporation will attempt to standardize this subset.

Processes

To streamline the standardization, we offer the Global Template designed for SAP with its assumptions adapted to the requirements of subsidiaries where ERP Microsoft Dynamics NAV is to be implemented. Assuming that main subsidiaries use SAP solution whereas Microsoft Dynamics NAV is deployed in minor ones, we can presume that some of the processes that are specific to main subsidiaries do not exist in the minor ones. Consequently, not all SAP processes have to be migrated into Microsoft Dynamics NAV.

Master data

Most project efforts, however focus on master data management which is a critical success factor. Despite different solutions used at the headquarters and subsidiary levels as well as local discrepancies between subsidiaries, a uniform approach to master data management has to be adopted.

If companies using a SAP solution have adopted a standardized item numbering, it seems obvious that group numbering standards should be also applied where Microsoft Dynamics NAV ERP is to be implemented.

Chart of Accounts

This is the most typical area where the implementation of SAP standards is worth applying. Even if subsidiaries do not use any SAP solution for their daily operations, they are required to report all information to the headquarters. Thus, they are obliged to provide periodic balance sheets or Profit and Loss Statements. Obviously, financial consolidation processes will be much easier if all positing standardization matrixes based on a standardized global chart of accounts is similar in Microsoft Dynamics NAV and SAP.

Slightly different international project kick-off

These assumptions have to be incorporated into typical assumptions of an international project, for which we usually use the NGSRM methodology (NAV Global Standardization and Roll-out Methodology). Within international projects, we aim at the standardization of processes, data, functionalities and setup of an ERP system used in group subsidiaries. Therefore, the focus of the first two project phases is to analyze company requirements (the Strategy phase) in order to build a global, group ERP system based on Microsoft Dynamics NAV (Global Template phase). For a project with developed (analyzed) standards of data and processes, the Strategy phase is substantially reduced and the Global Template phase involves only a translation of SAP assumptions into the Microsoft Dynamics NAV “language”. If a corporate SAP solution has been standardized to a limited extent in all group subsidiaries, e. g. for only reporting standards, it is only the reporting standard that can be integrated into Microsoft Dynamics NAV. Optionally, the same BI (Business Intelligence) application that is used within the SAP can be added to Microsoft Dynamics NAV.

Group assumptions available without an analysis

Each group implementation of ERP Microsoft Dynamics NAV is preceded by a gap-fit analyses and identification of processes, master data, setup and functionalities that should be treated as global ones. These elements are used as a basis to develop a specific Global Template. They have to be distinguished from local requirements used e.g. by a single subsidiary. In principle, if needed, local elements will be added to the global ERP solution only when it is implemented in a local subsidiary. Therefore, group analyses (the Strategy phase) and building a group ERP system (a Global Template phase) is recommended, only if a bigger number of subsidiaries is involved in the Microsoft Dynamics NAV implementation process. For a small number of companies, such approach might be far-fetched and inefficient. However, if the chart of accounts, master data and processes have already been developed for an SAP solution and the headquarters decide to implement them in subsidiaries where Microsoft Dynamics NAV is to be deployed, the Global Template can be used as an almost out-of-the box solution.

From Microsoft’s point of view

For several years, Microsoft has been promoting Microsoft Dynamics AX as a target solution for some customer groups including international corporations, manufacturing companies, for South America etc. Microsoft Dynamics AX is also promoted as an ideal solution for the two-tier architecture. In this case, if large subsidiaries use SAP, Microsoft Dynamics AX is the most optimal choice for the smaller ones. Similar articles which provide evidence that Microsoft Dynamics NAV is also an ideal solution for this type of architecture were published by Microsoft several years ago. More information on this issue has been published in the White Paper: Microsoft Dynamics NAV – Solutions for Multi-Site and International Organizations. This document was published in 2007.

The fragment of the White Paper which promotes Microsoft Dynamics NAV as a second ERP solution in the two-tier architecture of global IT systems.

Read more about:

• Multi-Site and International Organizations
• Integration of Multiple Business Management Solutions
• Six Common Integration Scenarios