SMBs Likely to Lead the Uptick

Feature Article | March 8, 2004 by admin

It may not be accurate to call it a bull market just yet. But the economy is improving and analysts say enterprise IT spending will follow suit in 2004. IT spending growth will be about 5 percent this year, says Steve Butler, a senior analyst for New York-based eMarketer. “We’re not seeing extensive growth but we are seeing moderate or slight growth, which is a sign that the bottom has been hit and we’ve turned a corner,” he said.
That’s great news for enterprise resource planning (ERP) vendors and other IT vendors. They weathered a rough few years since the dot-com implosion, when companies dramatically cut IT spending in order to salvage their bottom lines. “Cost cutting has abated. We’re starting to see a small increase. The survey data indicates that companies are going to increase their IT spending budgets,” Butler said.
Small- and mid-size companies (SMBs) are likely to lead the uptick. “Large enterprises have done a lot of big IT implementations already. There’s still money to be made in upgrades and maintenance and modular expansion (of those implementations). But the new and bigger market is really the mid-size market,” Butler said.
That’s an idea SAP embraces. Its SAP Business One is designed to handle core business operations for growing companies, such as accounting, reporting, sales and distribution and purchasing, among other key tasks. More 2,500 customers around the world have implemented SAP Business One.

Renewed interest in business-to-business projects

“With millions of small and medium-size companies out there, IT sales into this market is a multi-billion dollar opportunity,” Butler wrote in his January 2004 report, “Trends in SMB IT and E-Business Spending.” ERP vendors, such as SAP, are likely to benefit by gaining new customers in the SMB niche. Butler points to data from International Data Corp. (IDC), which says 50 percent of IT spending growth in 2003 was from SMBs.
It’s a welcome change from the early part of the new millennium. As the economy tanked in 2001, SMBs that had been interested in enhancing IT systems either stopped or delayed projects. Now that the economy is picking up, there is renewed interest in IT, especially in business-to-business projects. “The buyers are ready for it. Over the last few years, vendors have tailored their products better for the small and medium business market,” Butler said.
And there is another, unique reason for strong IT spending by SMBs this year—a new U.S. tax cut for small companies. “Prior to 2003, they were able to deduct $25,000 in capital spending. Now it’s up to $100,000. That’s good through 2005,” Butler said. That figure, a deduction of fixed capital expenses from taxable earnings, could spur SMBs to spend on IT systems soon, rather than wait.

Analysis of IT spending trends

Many major research firms have updated their IT spending estimates for 2004. IDC, for example, says that IT spending will increase from $1 billion in 2003 to $2 billion in 2004. By 2007 spending will reach $4.6 billion, it says.
AMR Research says that in the third quarter of 2003, 47 perecent of companies it surveyed said they would grow their IT budgets in the next 12 months. That compares favorably with the 27 percent of companies who predicted IT budget growth during the same period one year earlier.
In-Stat/MDR estimates enterprise IT spending growth will be 4 percent this year. It says enterprises spent more than $234 billion on IT in 2003, up almost 4 percent from 2002. By 2008, In-Stat/MDR estimates that enterprises will spend more than $275 billion on IT, including products, services and human capital.
“For the next several years, enterprise firms are very likely to become much more strategic with their use of technology,” says an In-Stat/MDR news release. “They will look for solutions that improve their ability to manage existing resources more efficiently and services that will compliment or enhance existing IT skill sets.” Today, large companies account for 45 percent of all business-related IT spending, it says. By 2008, that number will dip to 42 percent.

In-Stat/MDR also expects year-to-year growth in IT spending to decline after 2004 through 2006, as large enterprises consolidate. The smallest companies, between 1,000 and 4,999 employees, will see better growth. By 2007 IT spending growth will pick up again, it says.
Gartner painted a less rosy picture, reporting that as of mid-December, “U.S. enterprises continued to spend below their budgeted levels.” The data comes from its monthly research note, the Gartner Technology Demand Index. “Fourth quarter spending does not show the strength needed to suggest a broadbased recovery across all categories of IT spending in early 2004,” wrote David Hankin, a Gartner senior vice president.
NOP World, based in the UK, says U.S. IT spending will outpace Europe’s in 2004. Germany’s IT spending growth rate of 5.8 percent, however, will be similar to the U.S.’s 6 percent growth rate. The UK’s overall growth rate will be 4.7 percent, while France’s will be just 2.6 percent.
According to analyses by the European Information Technology Observatory, on the other hand, the West European market for information technology, including telecommunications, should accelerate further with growth of 3.1 percent in 2004, resulting in sales of _ 609 billion for the industry.
For Germany, the association of information technology, telecommunications, and new media, BITKOM, expects growth of 2.2 percent. According to BITKOM, one in ten companies expects strong, two-figure growth. One fifth of providers of information and communication systems are expecting business to remain at least stable.

Who benefits most?

Butler says that executives who purchase or upgrade IT systems want good value and a proven return on investment in 2004. Especially because of the last few difficult years, companies will demand that vendors provide data-loaded case studies that make a solid business case for expenditures.
So, just what types of technology applications will be the hot sellers this year? “We’re seeing security doing very well, everything from anti-virus and e-mail protection to network security,” Butler said. And, storage systems will be in demand. That’s because of the sheer volume of digital content that companies produce these days.
Companies today are focused on infrastructure and how to better integrate their internal applications, says Butler. That could mean the installation of a new ERP system or software that ties an existing ERP to other systems. As companies try to squeeze as much value as possible out of IT, some will elect to tie procurement tasks to a customer relationship management (CRM) system, for instance. That focus will benefit SAP and other big vendors, says Butler.
“There’s also an interesting shift toward sales force automation (SFA). We already saw signs of it last year,” Butler said. When the economy was declining, companies were focused on retaining customers. Now they are beginning to look competitors to see what they’re doing with IT. Some companies will choose to add advanced SFA systems to their CRM suites to create a competitive edge over rivals. That will spur sales of SFA software, says Butler.

Security, ERP and CRM on top of the wish list

For its part, NOP estimates that security software will be the best seller in 2004, growing by 7 percent. Sales of Web-based applications will grow by 6.3 percent. Sales of broadband applications will grow by 5.6 percent, while sales of spam-filtering software will grow by 5.3 percent and sales of storage systems will grow by 5 percent. Butler highlights several distinctive aspects to IT spending in 2004. First, when they launched, many SMBs began operations using desktop applications made by Microsoft. As they grow, those companies will look for ERP and CRM systems that can work with their existing Microsoft-centric workplaces, increasing demand for systems that bridge platforms.
“Then there’s the upgrade cycle,” Butler said. That’s a simple necessity to upgrade existing systems. Scheduled upgrades could have a positive impact on overall IT spending in the first half of 2004, he says. Plus, as companies ramp up all business processes, many will want to have more flexibility and mobility. That will likely lead to more spending on wireless enterprise applications. Finally, hardware sales could get a boost too because if the economy continues to improve and SMBs and large enterprises start hiring again, that could lead to more spending on PCs and peripherals.

Sarah Z. Sleeper

Sarah Z. Sleeper

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