A new trend is emerging in the U.S. SMB software market. Providers of enterprise resource planning (ERP) applications and solutions for supply chain management (SCM) and customer relationship management (CRM) are competing increasingly with the traditional SMB providers for a larger share of this lucrative market.
In 2001, sales of enterprise systems to small businesses increased substantially (by 39%), while the market as a whole only grew 7%. Today, over 80% of midsize businesses with annual revenues of between U.S.Dollar 500 million and U.S.Dollar 1 billion operate a standard ERP system. The 2001 figure for manufacturing businesses in the SMB market as a whole – companies with annual revenues of between U.S.Dollar 10 million and U.S.Dollar 1 billion – was 43%. The proportion of the IT budget that SMBs with annual revenues of U.S.Dollar 250 million allocated to ERP software varied from industry to industry, ranging from 29% in pharmaceuticals to 44% in complex manufacturing operations.
High growth rates
The trend looks set to continue. A Forrester study of the manufacturing industry indicates that approximately 40% of SMBs are not only planning to invest in ERP systems but are also evaluating more sophisticated solutions, such as SCM, CRM, and e-business. As large a proportion as 78% of midsize businesses are proposing to implement SCM software in the next two years. Cost savings plus enhanced efficiency and competitiveness are the main drivers for this investment, but pressure from customers wanting to integrate vendors into their supply or value chains or to support electronic data exchange – for e-procurement, for example – is also an important factor.
A total of 31% of large SMBs have implemented SCM software to date: The majority of these – 67% – use inventory management, followed by procurement and sourcing. Forty percent are in the process of implementing order management, and over one-third are planning to deploy manufacturing planning. In terms of share of the overall IT budget, supply chain software is used most frequently in the consumer goods industry, while pharmaceutical, automotive, and semi-conductor manufacturers are the main purchasers of CRM applications. Electronic procurement is the number one solution in the oil and gas industry.
In addition to SCM solutions, small and midsize market companies are turning increasingly to CRM. AMR Research estimates the market volume of this sector at U.S.Dollar 44.1 billion over the next 10 years (2002-2012). Demand is greatest for lead management, sales force automation, call centers, and a common customer data repository. While businesses at the smaller end of the SMB market opt for the vertical CRM solutions marketed by midmarket ERP vendors, midsize businesses or divisions of large corporations more often choose integrated solutions from the major CRM or ERP providers, for strategic reasons.
The Western European market
Developments in Western Europe are mirroring those in the United States. Datamonitor is forecasting growth in SMB market volume for ERP, SCM, and CRM software from U.S.Dollar 2 billion in 2001 to U.S.Dollar 4.6 billion in 2005. This corresponds to an annual growth rate of 23%. A breakdown by applications identifies the following trends:
Because many SMBs already deploy ERP solutions – such as financial and payroll accounting functions – annual growth will level off in this market segment to around 13%. Investment in SCM applications will increase by more than twice this figure, to 30%. An annual increase of 34% is projected for CRM solutions, making them the frontrunners. With an estimated market volume of U.S.Dollar 1.87 billion in 2005, SMB spending on CRM software would overtake expenditures for ERP systems, which are expected to total U.S.Dollar 1.75 billion.
How much is actually invested and whether these investments achieve their intended purpose depends partly on the ability of the SMBs to develop an IT strategy. Gartner sees the majority of SMBs as concentrating almost exclusively on day-to-day business and on ensuring the efficiency of internal processes. Consequently, infrastructure and utility applications, such as HR or payroll accounting, tend to dominate their IT portfolios.
But without an IT strategy aligned to business objectives, companies do not have a sound basis for investment decisions, which often discourages sponsoring by company units or leads to false economies. Difficult economic conditions should prompt SMBs to invest not less, but more wisely – namely, in those applications that help make them more competitive. Gartner’s rule of thumb for healthy IT investment planning is to allocate at least 30% ofthe budget to frontier applications like e-business.
Small businesses with high expectations
Besides functionality, total cost of ownership (TCO) is a key selection criterion for a solution. TCO covers software and hardware, implementation, infrastructure, and operating costs, as most SMBs only have limited human and financial IT resources. Scalability of solutions is also an issue, as many SMBs pursue aggressive growth strategies. The solution must therefore be capable of satisfying complex future requirements as well as existing ones – for example, by supporting collaborative processes or providing ease of integration with third-party systems. Regarding scalability, ERP providers have a distinct advantage over the traditional SMB vendors.
It is still unclear which providers will eventually win the day and establish themselves as the dominant vendors in a market segment. A crucial factor will be whether the new providers of ERP, SCM, or CRM solutions can respond to the many and varied specific requirements of SMBs, and if so, how quickly. The heterogeneous nature of the SMB market and its segmentation by company size, industry sector, and region may entail a realignment of product, sales, or support strategy. SMBs want integrated products and services that reflect the size of the company and are tailored as closely as possible to their industry.
A long-term partnership with a single vendor is another key requirement. The indirect sales channels normally used by major software providers are not a good basis for building a relationship of trust. The prospects for success are better for vendors like SAP, who work with a network of partners. These partner companies, which generally operate on a regional basis, often have long-established direct contacts with SMBs. They are also familiar with the SMBs’ precise requirements, enabling them to offer solutions specially designed for this target group. Gartner recommends approaching the market on a segment-by-segment basis, rather than attempting to take it by storm.
Sources: AMR Research, “Midmarket ERP: It’s Not Just About ERP Anymore,” by Colleen Niven, May 2002 AMR Research, “Finding Success in the Midmarket,” by Joanie Rufo and Kevin Scott, February 2001 Datamonitor, “Midmarket Strategies – How to Successfully Deliver E-Business Technology to SMEs,” May 2002 Forrester Research, “Midmarket Opportunities for SCM Vendors,” by Jennifer Chew, November 2002 Gartner, “What SMBs and Their Vendors Should Be Thinking About in 2003,” by James Browning, November 2002 Gartner, “Vendors Shift Strategies to Succeed in the SMB Market,” by Mika Krammer, April 2002