Overlapping Pressures Drive

March 12, 2008 by Sarah Z. Sleeper

According to AMR Research, 64 percent of U.S. SMEs will increase their IT budgets by 5.3 percent this year. Granted, it’s not exactly a stellar growth rate. But, in a market teetering on recession, any spending increase is news.

SMEs will spend the majority of their cash on efforts to boost the performance of existing applications. Faced with greater customer demand and increased competition, 56 percent will upgrade or extend customer relationship management (CRM), AMR reports. And 51 percent will upgrade or extend business intelligence (BI), performance management (PM), or other IT tools to help them innovate and grow business. A combination of outside drivers, such as increased economic pressure, and inside drivers, such as the need to cuts costs, will drive SME budget decisions.

What do you consider to be the most significant finding of your research?

Jacobson: Conventional wisdom has always been that SMEs will spend their IT budgets strictly to run the business. Well, our numbers show that SMEs are hoping to do that, but they are also incorporating growth into the equation. Companies are focused on how they can capitalize on new market opportunities and how they can expand the business. They want to know how to grow, versus just how to maintain their current positions.

Another thing that stood out is the notion that IT and business really are one item. When I look at the top business issues that drive IT investments, those business issues are essentially IT issues. And the same is true for large enterprises. I see business and IT coming together there too.

Did any finding surprise you?

Jacobson: Some minor pieces of the data surprised me. For outside pressures, globalization wasn’t as highly rated as we expected it to be. But it’s still a factor. Its effect was masked a bit by SMEs’ focus on the need to respond to customer demand. The issue of customer demand could be masking the fact that these customers are global and therefore actually part of the pressure from globalization.

Another thing that stood out was in the 12-month plan for application investment. There are few rips and replaces. People are looking to upgrade or expand their current application usage. They are going to turn to their incumbent technology provider, either directly or through a channel partner.

Define the three most pressing external drivers of SME IT spending.

Jacobson: They are customer-driven issues, competitive pressures and economic pressures. First, customers are where the rubber hits the road. If you’re an SME, odds are your customers aren’t consumers but other businesses to which you sell materials, subassembly or localized services. Those customers probably have unique technology requirements, especially with regard to looming regulatory compliance and traceability needs. SMEs need to respond to customers using technology that not only supports demand, but also enables shorter lead times and improved profitability.

That leads into competitive issues. Shorter lead times are being thrust onto SMEs in response to customer demand. Companies can gain competitive differentiation if their technology enables them to merge product supply processes with the capability to capture and respond to demand. At the same time, when they want to expand and grow the business, having the right technology can help. If an SME can’t afford to expand headcount, it can consider things like Web store fronts and e-commerce – which of course, open doors to new global markets and customers.

And finally, there are plenty of economic factors driving SME IT priorities. Some 31 percent of SMEs say they are concerned about customer confidence and consumer spending, and 18 percent have inflation on the radar. Our survey was done at the end of 2007. If we redid it now, economic pressures might be even greater.

What industries are feeling the most pressure to bolster IT capabilities?
Jacobson: Regulatory compliance has put a tremendous weight on process industries, especially chemical and life sciences companies. In life sciences the need is for validation and traceability. SMEs need to supply detailed batch history records and audit trails out of manufacturing. Each time there’s a design change or if I change the manufacturing process I have to go back and validate that for the FDA. If an SME can use technology to boost compliance, that can piggyback with faster production, faster response times and faster time to market.

For chemical companies regulatory requirements include the need to adhere to the European Union’s Registration, Evaluation and Authorization of Chemicals (REACh) initiative. It’s meant to track and restrict certain substances. What REACh means for small or midsize chemical companies is simple. They have to send money to register products with the central governing body for REACh. However the cost of registration might outweigh the profitability for a specific chemical. So, regulatory compliance needs can have a huge financial and IT impact on SMEs.

Also, professional services companies are looking for growth and expansion by using IT. Those firms are ripe for new enterprise system selection. If I’m a small financial services company, I’ve got consultants out in the field and they all have their own spreadsheets and their own way of tracking what they’re doing. I don’t know which ones are profitable or replicable. How do I centralize that? How do I get performance analysis to see where my costs are, where my profits are and where my opportunities are? For those SMEs, an enterprise system with a single version of the truth can help them grow and expand the business.

How do SMEs’ IT budget priorities compare to IT budget priorities of large companies?

Jacobson: Large companies won’t be halting most projects, but may halt non-essential projects or seek out BPO opportunities as a way to reduce any additional headcount. Many SMEs are in a position where they need to invest in IT to stay alive or maintain their current positions. If anything SMEs may increase IT spending in the long run. For instance, our survey showed that BI and PM spending will rise 2.1 percent from 2008 to 2010, and product lifecycle management (PLM) spending will rise 4.8 percent.

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