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Blog Differences With Some Distinction

Differences With Some Distinction

Thursday, 29 March 2012 Written by Bart Thielbar

Understanding the Characteristics of Tier 1 and Tier 2 Providers

For many years, there has been an informal classification system in the industry that groups vendors as either Tier 1 or Tier 2. Although informal, the classification does have merit as a point of information to those who are considering purchasing products or services from particular vendors. No one should assume that Tier 1 is better than Tier 2, or vice-versa. In any given situation, either Tier of provider could be the best solution.

During advisory engagements we are often asked to explain the differences between Tier 1 and Tier 2 vendors. The assignment of a vendor to a particular class can, on occasion, be more of an art than a science.

To help those seeking to better understand the classification, we have prepared the following table that outlines some of the characteristics of Tier 1 and Tier 2 providers.


Dimension

Tier 1

Tier 2

Ownership History

Stable and long-term with only occasional major ownership transactions.

Major ownership transaction not uncommon.

Industries Served

Multiple vertical markets, including utilities.

Singular focus on utility industry.

Overall Business and Financial Performance

Usually strong. Presence in multiple vertical markets helps spread operational costs and capital investments and makes them less susceptible to the market vacillations of any particular industry.

Occasionally tenuous. Limited opportunity to spread operational costs and capital investments. Subject to the market vacillations of the utility industry.

Utility Customer Base

Primarily mid-to-large utilities, with major focus on IOUs, though also have some large municipal and cooperatives customers as well. Multiple commodity types (gas, electric, water, waste-water).

Primarily mid-to-small utilities, with relatively balanced distribution between IOUs, Municipals and Cooperatives. Multiple commodity types (gas, electric, water, waste-water).

Utility Products

Often market leaders due to on-going capital investments and sufficient operational funding for product support.

Occasional market leaders based on niche focus, though often market followers.

Delivery Model

Usually mature. Easily and often replicated with ability to leverage offshore resources.

Degrees of variance in maturity and ability to replicate. Use of offshore resources less common.

There are many false stereotypes related to Tier 1 and Tier 2 providers and I think we have heard them all. Some examples include:

  • Tier 1 vendors are always way more expensive
  • Tier 2 vendors might not be around in a couple of years
  • Tier 1 vendors are always less flexible
  • Tier 2 vendors will bend over backwards to get your business
  • Tier 1 vendors represent the “Cadillac” and Tier 2 vendors represent the “Chevy” or “Ford”

 

To pigeonhole any particular vendor based on a stereotype would be a great disservice to the vendor and the utility making the evaluation. A prospective purchaser should not be misled by these stereotypes because the experienced professional can readily find many exceptions to each of them.

The classification is simply one of the many points of information that utilities should consider when selecting a vendor. It should be evaluated, ranked and scored along side the other evaluation criteria and, of course, false stereotypes should be disregarded.