An International Outlook

Anderson states that IT software spending is starting to come back. He noted that in the late ’90s, software spending was running close to 15 percent, due in part to the Y2K conversion. In 2004, IT software budget increases worldwide are forecasted to be back up to 7.6 percent, with much of the spending projected to take place in the lower to upper midsize business market (100-1000 employees and $100 million to $500 million in revenue).
The North American SMB business application market, comprised of CRM, ERP, and SCM license sales, continues to outpace the sale of these same solutions to larger enterprises. Gartner Dataquest projects the SMB application software market to achieve a five-year compound annual growth rate (CAGR) of 3.43 percent through 2007, growing from $1.45B U.S. in 2002 to $1.7B in 2007.
Almost half of the SMBs surveyed by Gartner (47 percent) plan to increase spending in 2004; 28 percent will hold the line, while the remainder plan to reduce their IT spending. SMB spending is motivated by several factors:

  • Desire to add or extend lines of business
  • Compliance with regulatory demands such as Sarbanes-Oxley
  • Enhanced revenue generation opportunities
  • Reduction of operating costs
  • Exploitation of existing IT investment

The nature of SMBs

The typical SMB is run by the owner of the business, in one industry or vertical market. The SMB owner may view the business as an extension of himself or herself. There is a great deal of pride in the company, as well as a deep sense of ownership and commitment.
When it comes to IT spending, Anderson categorizes SMB owners as follows:

  • Leading edge: Technology-savvy individuals who are comfortable with and who actively use technology such as the Internet to leverage competitive advantage. About 15 percent of both small and midsize businesses are in this category.
  • Mainstream: Acknowledge and respect the need for properly applied enabling technology, but need help translating and mapping their business problems to solutions. This category accounts for 45 percent of small businesses and 59 percent of midsize companies.
  • Conservative: Cling to the status quo unless compelled to change. About 41 percent of small businesses and 27 percent midsize companies are in this category.

What drives SMBs to purchase business management applications

What would compel the conservative and mainstream SMBs, which account for 85 percent of the small SMBs, to abandon the status quo or seek guidance and support in the purchase of new business management software. Anderson sees a number of internal and external drivers that will affect SMB investments in 2004.
These internal factors are self-evident, but we’ll repeat them. But note that “stay current with new technology” is not on this list (more about that later). SMBs want to:

  • Attract new customers and keep existing customer base satisfied
  • Increase top-line growth by introducing new goods and services
  • Reduce costs
  • Stay profitable
  • Remain competitive

In 2004, the following external factors will influence the decision making:

  • Movement from make-to-stock to engineer-to-order and collaborative e-business.
  • E-commerce as another channel for customers and suppliers to communicate and collaborate. A recent report noted that less than one half of online business could actually take an order over the Internet.
  • Improved value and packaging. Previously, SMBs had to implement a large software suite to solve a single problem. Solutions are now componentized to solve specific problems or are tailored for an industry or industry niche.
  • Aggressive pricing and financing options that lead SMB owners to say, “I really can afford this product.”
  • Reduced total cost of ownership with improved vertical functionality. Off-the-shelf packages were “one size fits no one” and required significant customization that was often lost on each upgrade.

As one disgruntled SMB owner remarked, “I turned this thing on and now it’s eating up the company. All the money and resources that we throw at it and it’s still not satisfied. What’s the total cost? I’ll never know.” Now, solutions are better matched with specific business-process improvements.

What prevents SMBs from purchasing business applications

Although the internal and external factors seem compelling to those of us inside the technology bubble, SMB owners are apprehensive about our industry.

  • A shrinking vendor landscape leads to concerns that the vendor they choose today won’t be around to service their requirements tomorrow. SMBs also wonder about the commitment of tier-1 ERP vendors who are viewed as opportunistic or going into non-core business, which they will abandon when the core business recovers.
  • Lack of identifiable, quantifiable ROI.
  • No reference customers in the industry or geography for the product.
  • Past ERP failures, often highly publicized, that scare SMB owners from implementing what they perceive to be similar solutions.
  • Insufficient vertical functionality. SMB software products look good in general, but “I’m not general.”

SMB vendor trends

Anderson sees the following trends among vendors to SMBs in 2004:

  • Emerging business service providers (BSPs), as part of the trend to business process outsourcing (BPO). The target timeframe for this to really take hold is 2007-2008. This evolved BSP model will support:
  • Cross-application integration using XML-based web services
  • Wireless device integration
  • B2B e-procurement
  • Analytics and reporting
  • Going vertical as a calculated approach to target specific industries and sub-industries through either organic or partner solutions that extend a vendor’s core offerings.
  • Embedding customization tools that are easy enough for customers to use but powerful enough to develop add-on solutions
  • Integrating customer relationship management (CRM) in the business software solution (not an add-on or stand-alone solution). Currently only 20 percent of SMBs have anything that even resembles a CRM solution.

The shrinking vendor landscape

In 2001, there were 500 software vendors in North America. By 2004, 60 percent were gone. Between 2004 and 2008, another 25-30 percent will disappear, victims of the economy or acquired by competitors. SMB owners and managers fear that the vendor they choose today won’t be around next year, and those fears are valid.
Anderson uses the following categories to describe vendors:

  • “Megasuite” vendors are the big ERP vendors (Oracle, PeopleSoft, SAP) and Microsoft.
  • Focused vendors, also called niche vendors, typically offer a small number of vertical solutions or a focused set of functions that support domain-level business processes in service- or people-based businesses.
  • “No-man’s land” vendors are neither big players nor do they offer targeted products.

Vendor messaging for SMBs

The SMB market size in the US is 12 million small businesses and 700,000 midsize businesses. From the numbers, that’s a huge market. But it’s a fragmented, highly individualized, IT-averse market. Anderson advises SMB vendors to:

  • Make the business case. Don’t sell the technology. Instead, sell integration and business value using the technology.
  • Focus on “ease of everything”: Use, maintenance, integration and customization.
  • Discuss how business process integration and end-to-end, event-driven workflow and alerts improve productivity.
  • Close the perception gap between anticipated vs. actual ROI (the reality gap). Don’t exaggerate returns; instead, focus on how the solution solves business problems and pain points.
  • Discuss lowering total cost of ownership by leveraging and optimizing hardware and software.
  • Offer SMB and industry expertise as well as staying power and dependability.
  • Build up references and peer testimonials (“other leaders use this to do that”).
Brenda Mackay
Brenda Mackay