Understanding Systems Integrator Behavior: Tier 1 vs Tier 2

Running a Request for Proposal (RFP) for your ERP Transformation program can be a daunting task. From preparing the RFP for publication to sifting through the volumes of data received in the responses, it can be difficult to identify the most important pieces of information that can help differentiate your Tier 1 and Tier 2 Systems Integrator vendors in an evaluation and allow you to make an informed choice.

By analyzing UpperEdge’s $53B staffing database, we have identified some key differences between Tier 1 and Tier 2 Systems Integrator (SI) RFP responses across all transformative ERP programs. Here are the distinguishing characteristics you should look out for when evaluating Tier 1 and Tier 2 SIs.

1. Tier 2 Vendor Bids Come in at an Average Discount of 30% on Overall Cost

On average, Tier 2 vendor bids come in at a discount of 30% on overall costs compared to Tier 1 vendor bids on the same program. So, for example, if a Tier 1 vendor bids $100M, we’d expect a Tier 2 vendor’s bid on the same scope of work to be anywhere from ~$60M to ~$80M.

2. Tier 2 Vendors Typically Propose Significantly More Hours of Effort

Compared to the same program, Tier 2 vendors estimate significantly more hours of effort than Tier 2 vendors. For example, if the Tier 1 vendor estimates 500,000 hours of effort, we’d expect a Tier 2 vendor to estimate anywhere from 530,000 to 870,000 hours of effort for the same scope of work.

3. Bid Discounts and Increased Hours of Effort Account for an Average of a 38% Discounted Blended Rate

Combining the 30% bid discount we see from Tier 2 vendors with the increased hours of effort from Tier 2 vendors, this leads to a 38% discounted blended rate (hours divided by fees) from Tier 2 vendors compared to Tier 1 vendors for the same program. Following with our program example, if a Tier 1 vendor’s blended rate is $200 per hour, we’d expect the Tier 2 vendor’s blended rate to be somewhere between $100 and $150 per hour.

How Should Organizations Use This Data to Inform Their SI Evaluations?

Based on this behavior, it might seem like a no-brainer to choose the most “cost- effective” option.  However, cost is only one piece of the puzzle when choosing an SI to partner for your ERP transformation.

One of the key drivers of the cost difference between Tier 1 and Tier 2 vendors is a heavy reliance on offshore resources, which may not be a great fit for every organization. Other important factors include functional or industry expertise of key SI resources, development estimating factors, accelerators or other differentiating methodology, and the ever increasing importance of generative AI.

As such, you should conduct a comprehensive competitive proposal assessment to ensure that you understand how your various SIs stack against each other. Consider the following questions to  understand how a Tier 1 or Tier 2 SI fits into your vision of your program:

• What is your organization’s comfort level with an SI that is heavily reliant on offshore resources?
• What expertise are you missing internally, and which SI is bringing the most experienced thought leaders in your weak areas?
• Which vendor’s estimation and approach will better protect you against future change orders, protecting you from ballooning costs once the program is in-flight?

Asking your organization and team these questions can help you consider some of the factors above without making a decision solely based on cost, leading to an SI selection that fits both your budget and your needs.

At UpperEdge, we help clients understand all of the variables that go into selecting a System Integrator to ensure a smooth and successful ERP transformation. Explore our Project Execution Advisory Services to see how we can help with your unique needs