Lundstrom focused on the emergence of a powerful middle market of IT customers. Unlike the huge, multi-billion dollar enterprises that were the biggest consumers of enterprise resource planning (ERP) and other IT systems in the past decade or so, the main consumers of today’s IT will be mid-size companies. The companies driving the market will have sales of $250 million to $1 billion, he says.
Technology vendors such as SAP have to be aware of key demands from their new, mid-size customers, Lundstrom says. The list includes easier and less-expensive integration than ERP systems of the past and lower long-term maintenance costs. Lundstrom spoke one-on-one with SAP INFO about what to expect as the tech sector enters a new “golden age” he says is on the horizon.
What do SAP and other vendors have to do to meet the demands of both large enterprise customers and smaller, mid-size customers today?
Lundstrom: There are really kind of two sets of demands here. First I think customers are beginning to treat software like a commodity. And as a commodity they want to be able to buy it, manage it and view it as they do other commodities. When businesses buy other commodities, whether they are liquid assets, components or raw materials, they have expectations of their suppliers. Those expectations are that quality improves over time, that efficiency improves over time and that the value that they receive improves on an ongoing basis. Software does not fit that model well. But customers will work very hard to force it into that type of economic model.
Vendors also face a challenge in how customers want to buy. New customers come into the market with very different requirements than global 2000 companies did in the past. Almost all the growth in business applications for the next 10 years is going to come as a result of vendors creating and providing solutions to people who have not traditionally participated in this market. Vendors have to create a set of solutions that are much less complex, much easier to implement, and really appropriate for smaller and mid-size business. The requirements of a $250- to $500-million business are dramatically different than the requirements served by the very large ERP suites. So those two sets of requirements together change the way SAP and other companies have to behave. They have to refocus their research and development dollars and reshape the products they ultimately ship.
What is the potential size of the emerging mid-market?
Lundstrom: We typically look at the mid market as companies from $250 million to $1 billion in revenue. Conservative estimates suggest that for every global 2000 company there are thousands of mid-market companies. The universe of companies that can buy very large ERP systems is on the order of 10,000 or 20,000 companies. Mid-range companies that can benefit from the same kind of capabilities are in the hundreds of thousands. So the mid market does represent a significant opportunity. The challenge for vendors is that it requires products that are easier to implement, lower in initial purchase price and easier to integrate. To successfully tackle this market, IT vendors need to start selling at 10 times their current sales volume, at 15 percent of their current list price.
SAP launched SAP Business One and mySAP All-In-One for small and mid-size companies. What is your opinion of SAP’s new products?
Lundstrom: I think it’s a good start. But software is only a piece of it for any vendor. There have been a tremendous decline in the price and an increase in the performance of hardware, which has led to tremendous increases in the capability of infrastructure. But what we haven’t necessarily seen is an increase in the productivity of software engineers or reduction of the cost of systems integration. Typically, systems integration and deployment costs can be 75 percent to 80 percent of the total implementation costs. As the market shifts, software must be packaged and delivered in a way that allows mid-market companies to afford it. SAP and other vendors are making moves in that direction.
Do you have some thoughts about SAP NetWeaver?
Lundstrom: SAP NetWeaver is a neat addition to SAP. It provides a lot of value to people who are quickly trying to build a Web-interface to existing SAP R/3 capabilities, data and functionality. Some customers look at SAP NetWeaver as essentially a platform to do development outside of SAP and as an integration hub for systems beyond SAP. But, it sill needs some work and it’s an expensive way for the average user to add Web access to their existing SAP systems.
What’s your take on the potential of China and India as IT growth hubs?
Lundstrom: China is a center of growth and the hope is that the whole region grows. Right now, there is instability as jobs move into China from the rest of Asia. That is going to create some turbulence. For every American manufacturing job that goes to China there are dozens of manufacturing jobs in Mexico, South Korea and the Philippines that go to China. So, I do think China is a hub of significant growth. I think vendors hope that growth disperses to include more of Asia. The opportunity there that Asia represents is a 20- or 30-year growth market for vendors to participate in.
How successful will ERP vendors be at capturing the small and mid markets and how does Asia come into play?
Lundstrom: The economic opportunity of Asia and the desire of ERP vendors to be able to sell solutions there will create a sense of urgency. But, ultimately ERP vendors have to keep building new products to serve the requirements of this new market.
How would you characterize today’s IT market versus three years ago?
Lundstrom: There was a certain enthusiasm for technology for technology’s sake back then. That is mostly gone. I think people still get excited about technology, but it’s much more tempered and it’s really viewed through a lens of business improvement. Technology is not going to generate any real excitement unless it’s associated with a significant business benefit. A few years ago, it was just unbridled enthusiasm for anything new. The bloom is certainly off that rose.
What new technologies do you see as up-and-coming that you didn’t highlight as much during the dot-com boom?
Lundstrom: Open source. In 1999 and 2000 we didn’t give it the prominence it deserved based on the impact it had. Now, analysts are fascinated by how quickly the open source model is working its way up the technology stack. There is also a lot of interest right now in open source databases. In general, open source is a model that goes well beyond operating systems. And it may well be one that we underestimated.