Plotting a path Through ERP Transformation Complexity

In today’s dynamic global landscape, where companies are expanding rapidly across multiple geographies, the complexity of managing diverse operations has intensified. Having once been deemed enablers of enterprise integration, traditional ERP systems are now increasingly seen as rigid and unable to keep pace with innovation and the nuanced demands of hyper-localization.

ERP implementations continue to be a once in a decade investment for companies, implemented to unify and streamline operations to improve efficiency and operational potential. With the advent of cloud computing, the integration of Generative AI (GenAI), and other technological advancements, organizations face a defining question: how do we navigate ERP transformation challenges in an agile, efficient, targeted way?
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‘Hybrid ERP’ strategy is a potential solution and it’s on the rise, combining the strengths of various ERP systems to meet the demands of today’s dynamic environment. This article explores the topic in depth, drawing on insights from a recent survey of 50 large companies and real-world examples, uncovering the key forces driving adoption, and revealing why it might mean future success for your business.

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A Historical Perspective on ERP Evolution

The evolution of ERP systems used by large multinationals reflects broader IT and business strategy trends. ERPs emerged in the early in 1990s, designed primarily to integrate and manage critical functions like sales, marketing, HR, finance, inventory, and planning. ERP systems at the time were largely monolithic, operating via a single global template and focused on process and data structure uniformity across business units and regions. Efficiency and consistency were primary goals.
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By the mid-2000s, companies recognized that greater flexibility was required to address regional differences, regulatory requirements, and market conditions. This led to multiple instances of the same monolithic ERP product being implemented, in a bid to balance global standardization with local adaptation. But by the late 2010s, firms began consolidating ERP instances to reduce complexity and costs. At the same time, there was (and continues to be) a shift away from monolithic ERP systems in favor of more modular, flexible architectures. This “breaking up of the monolith” enabled faster innovation, easier upgrades, and better alignment with evolving business needs.
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Recent years have seen ERPs integrate technologies like CRM, IoT, cybersecurity, but the recent rise of GenAI, machine learning (ML), cloud computing, and Big Data analytics is testing the very limits of traditional ERP architectures. As a result, many businesses are struggling to maintain agility and competitiveness while staying up to date.
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The ‘Why’ and the ‘What’

Hybrid ERP adoption is being driven by the demand for greater flexibility and the need to support diverse business models. According to insights from the recent BCG Platinion survey, approximately 63% of companies with revenues exceeding $5 billion are now opting for Hybrid ERP strategies. This shift indicates that decision-makers are becoming increasingly aware of the operational efficiency, scalability, and competitive advantage associated with hybrid setups.

In terms of the ‘what,’ a Hybrid ERP approach lets you deploy multiple ERP solutions simultaneously, with each tailored to the specific needs of a business function, geography, or market. The result is a more agile, flexible, responsive infrastructure towards the needs of various divisions, subsidiaries, or geographies.  Hybrid ERP strategies can take two primary forms:
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• Multiple Business Templates: Deploying distinct configurations of ERP systems for different functions or markets within a single global ERP system. Each template is a business model realized through the setup of distinct processes and data.
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• Different ERP Products: Using different ERP software solutions across various business units, with each tailored to specific needs (e.g. Best-of-Breed software for Indirect Procurement or Specialized Finance e.g. Treasury, Tax). These products are integrated to ensure seamless operation.

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Hybrid ERP allows organizations to achieve an optimal balance between standardization and customization. This dual approach enhances agility, reduces time-to-market, and improves control, making it an attractive option for large and complex enterprises.
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Drivers of Hybrid ERP Adoption

The shift towards Hybrid ERP strategies is driven by several primary factors:

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• Diverse Geographical Presence: Managing global operations with varying regulatory requirements, market conditions, and business practices within a single ERP system can be inefficient and slow. Hybrid ERP allows companies to implement region-specific solutions tailored towards its needs, providing necessary specialization and expertise. Over 55% of survey respondents cited geographical flexibility as the main reason for adopting Hybrid ERP.
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• Support for Distinct Business Models: Organizations constantly expand into new business segments with varying models, making a one-size-fits-all ERP solution impractical. More than 35% of respondents identified the need to support diverse business models as a key driver for Hybrid ERP adoption, enabling efficient and effective operations across different units.

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• Unique Needs of Business Units and/or Support Functions: Specialized business units such as R&D or specialized finance (e.g. Treasury or Tax) functions have unique requirements that standard ERP systems cannot yet fully meet. Hybrid ERP provides tailored solutions for these units, — with over 30% of respondents highlighting this driver as a one of the top reasons for adopting Hybrid ERP.
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• Organizational Agility and Integration Needs: Organizations that grow through constant Mergers and Acquisitions (M&A) or have complex corporate structures often find it difficult to integrate new entities into an existing ERP without significant disruption. Hybrid ERP systems offer the flexibility to quickly integrate new entities without disrupting the core ERP system, ensuring smooth transitions and maintaining business continuity during organizational changes.

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• Technological Advancements and Risk Management: The advent of cloud computing, AI, and big data analytics has transformed the ERP landscape, allowing for scalable, flexible, and cost-effective solutions tailored to specific business needs. According to our survey, 88% of companies are considering or already incorporating emerging technologies like AI and ML, while 66% would continue to adopt cloud computing. These technologies support the integration of diverse ERP systems, facilitating better data management, real-time analytics, and improved decision-making.

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Understanding the Trade-offs

On the one hand, implementing a Hybrid ERP strategy presents an opportunity to tailor ERPs to specific needs. However, these opportunities come with trade-offs that must be carefully considered. Enterprises will need to balance flexibility, hyper-localization, and strategic agility with increased customizations, data management challenges, and increased costs. The success and sustainability of a Hybrid ERP transformation hinges on getting this right.

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• Processes: Single-tier ERP setups are often praised for their ability to harmonize processes across an organization through global templates, ensuring uniformity and consistency across business units, functions and geographies. In contrast, Hybrid ERP systems offer a distinct advantage: they allow organizations to tailor processes to meet specific business, functional, and regional needs. One example is how this strategy enables the organization to undertake a more targeted approach, especially when it comes to complying with requirements only applicable to a region. This capability can be especially useful in markets like LATAM where such regulations are prevalent.
  
  However, this flexibility introduces the challenge of managing the complexity of multiple ERP solutions and/or templates. To effectively navigate this, organizations can implement robust governance and integration strategies, such as a federated governance model. This approach balances centralized oversight with targeted autonomy, maintaining global standards while allowing for the necessary adaptability at business unit, function, and geographic levels.
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• Data Management: Effective data management is fundamental to the success of any ERP system. Single-tier ERP systems naturally support superior data accuracy and consistency through a single source of truth, but integrating peripheral systems remains challenging and often leads to data silos and synchronization issues. On the other hand, when it comes to Hybrid ERP setups — integrating data across multiple ERP systems presents its own set of challenges. This necessitates meticulous data management and transition planning to maintain data accuracy, consistency, and real-time synchronization.
  
  To address these challenges, organizations can consider implementing a master data management (MDM) framework, ensuring that a unified approach to data governance spans all systems. Additionally, adopting cloud-based data lakes or data hubs can centralize data management, enhancing the accessibility and accuracy of information. Leveraging advanced data integration tools, combined with AI-driven analytics, can facilitate real-time data exchange and synchronization, significantly reducing the risk of discrepancies.
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• Change Management: Effective business change management is essential when implementing any ERP system, but the approach differs between single and hybrid setups. In a single-tier ERP system, the centralization of processes and data requires comprehensive training and change management efforts to ensure consistent adoption. This centralized approach, while rigorous, simplifies governance and standardization. In contrast, segmentations within Hybrid ERP setups lead to higher employee satisfaction, as users work with interfaces and processes that are more aligned with their specific needs. But a robust change management strategy is required to handle the complexity.

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Choosing the Right Strategy

Implementing a Hybrid ERP setup goes beyond selecting the right technologies — it requires a structured approach that aligns with an organization’s characteristics and strategic goals.

The challenge of integrating multiple ERP solutions across diverse business units, geographies, and functions calls for a comprehensive framework. This ensures a cohesive and successful transformation. Our solution to this is the Hybrid ERP Compass, a strategic framework designed specifically to help organizations align their unique characteristics with various ERP strategy options.
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Our framework focuses on two critical factors - business complexity, and the primary drivers behind ERP transformation. By assessing these elements, organizations can identify which of four key quadrants they fall into, with each organization type corresponding to an ‘ideal’ ERP strategy:

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• Operational Masters: These players are characterized by lower complexity, typically focusing on efficiency and centralized control across their operations. For instance, a manufacturing company that produces a limited range of products in a stable market might prioritize standardized processes and tight management oversight. A single-tier ERP system with a unified business template and product can be ideal for such entities. This approach ensures that operations are streamlined, and decision-making is straightforward. For example, a mid-sized food processing company operating in a single country could benefit from this setup, as it allows them to optimize their processes without the need for extensive customization.
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• Strategic Coordinators: This category applies to more complex organizations, the kind that require centralized control while being flexible enough to adapt operations in specific regions and business units. Consider a global pharmaceutical company that must adhere to strict regulatory standards, while also needing to cater to diverse market demands across continents. A multi-product approach with a single business template would allow the company to maintain efficiency through central oversight, while enabling necessary customizations for different regions. This strategy could also apply to a financial services firm with operations in various countries, each with its own regulatory environment but a need for a cohesive global strategy.
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• Agile Optimizers: Organizations in this category are typically focused on maintaining streamlined operations while positioning themselves for future growth. A retail chain with a growing online presence would serve as a prime example. Such a company may benefit from a single product with multiple business templates, allowing it to scale operations efficiently across different regions or market segments. For instance, an expanding e-commerce organization might use this approach to maintain operational efficiency, while customizing its processes to meet the specific needs of various customer bases. This could include localizing inventory management and customer service operations in different regions.
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• Dynamic Innovators: These are highly complex and dynamic organizations that require both flexibility and scalability to succeed in rapidly changing environments. A tech startup that has quickly scaled into multiple markets might fall into this category. Such a company may need to integrate various business processes, from research and development to international sales, all while adapting to different legal and market conditions. A hybrid ERP system with multiple products and templates would allow this company to remain agile and responsive to change, supporting diverse operations across geographies and business units. For instance, a global logistics company expanding into new markets while managing different types of operations (e.g., air freight, sea freight, and ground logistics) could also benefit from this ERP strategy. Such approach would equip it to scale efficiently while remaining adaptable to local demands.

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