The Problem of Choosing ERP Software

August 18, 2004 by admin

The SMB market is constantly changing, very demanding and has changed dramatically in the last 10 years. Today there is a very fine line between the demands that SMBs face and those that large corporations have to tackle. Today, if you plan to be in the game of business, it really doesn’t matter if you are small or large. The rules are the same and the tools are as complex for one as the other. SMBs therefore are creating a demand for more and more complex solutions, but their budgets have not expanded with their needs. In fact, the opposite is the case. SMBs need more functionality than ever before, but have less money to spend.
So why did SAP, the business software Goliath, jump into the SMB arena? And what makes the German giant think it can succeed where others have regularly failed?

Moving towards the SMB market

Let me first answer the question of why SAP entered the SMB marketplace, for this is a relatively brief discussion. All of the major software players are looking for growth, and once you have penetrated and saturated the markets you serve, you have to look elsewhere. Many companies have turned to completely different markets or have diversified into products outside of their mainstream offerings. Whatever the strategy, it’s clear that the large software players have turned their attention to the numbers that the SMB market supplies. It is fairly obvious that, for every Fortune 500 company, there are hundreds, if not thousands, of SMBs.
These smaller companies represent the easiest source for growth. SAP, I believe, also sees the growth in these markets. However, there are two unique aspects to its strategy. First, the company is staying with its core competence. SAP has always been a business applications provider and will continue to be so on the SMB market. This alone is a huge advantage over Microsoft, for example, who is trying to make the transition from Windows to SMB applications, or Oracle who is going from database to business applications. SAP is seeking growth but is staying with what it knows, namely business applications!
Second, SAP has a ecosystem of customers and users around the globe. There are hundreds of large companies that have many small divisions scattered around the world. These smaller locations are often unable to cost justify the implementation of high-end SAP products and so these smaller opportunities are often lost to various low-end packages, which creates an IT dilemma for companies that then have many unique packages out in the field that they have to try to support and integrate into their corporate IT structure. SAP recognizes the unique opportunity of approaching this ecosystem with a low-cost alternative, but which contains all of the necessary tools and interfaces into the existing SAP corporate platform. So while Microsoft or Best Software might be going into several small companies at a given time, SAP will be installing hundreds of systems into various companies within their large, global ecosystem.
It is important to understand that SAP’s offering to the SMB market is not a “light” version of SAP’s larger applications. It has released an entirely new platform and launched a whole new division called SAP Business One. Business One is the result of the acquisition of an Israel-based company that was serving the SMB market in parts of Europe. SAP knew not to try to “downsize” its existing offerings, but to start with a fresh product that was developed specifically for the SMB space. The other unique aspect of the strategy is that it recruited its staff for this new division almost exclusively from the SMB software market rather than moving people around from within. The result is a team of professionals who know the SMB market and are armed with a fresh new product known as SAP Business One.
SMBs historically have been unable to predict and contain their IT infrastructure cost. They are faced with IT costs that rise unpredictably over time. Entrepreneurs hate unpredictability and therefore shy away from decisions where cost is unpredictable. The average small business is faced with IT costs that rise every year. Before you decide to challenge this statement, let me explain. Let’s first take a look at what drives the cost of an SMB software application.

Acquisition cost

Most obvious is the cost of the software itself. All software comes at a price, but at the end of the day, the playing field has been leveled. The market for SMB software has dictated the value so that most of the products available, while different in their pricing approach, do not vary tremendously from product to product.

Required platform

All software has to run on something. However, all applications are not created equal when it comes to the expense of the platforms required. I have seen companies that have required hardware upgrades almost every time they release a new version of their application. This is usually due to poor architecture in the application or inefficiency of the tools used to create the system. I have also seen products that have run efficiently for three years or more with no required hardware upgrades. This can definitely be a major area of concern when considering the overall cost of a system.

Maintenance costs

This is the ongoing annual cost of maintenance and support for the system. Most companies charge 17 to 20 percent of the purchase price per year.

Cost of implementation

This is the cost of actually getting the system live in the first place. Implementation costs can vary greatly depending on the application. Components of this cost are data migration services, systems integration, training, consulting, process engineering and project management.

Cost of customization

Of the hundreds and hundreds of business software implementations my company has performed, no more than a handful have not required some level of customization. This can be a large cost component of a system based on complexity, but also based on the power and flexibility of the tools available to a particular system. As technology has progressed, the cost of customization has come down, however this continues to be a major cost concern for SMB software buyers.

Cost of custom software maintenance

This is probably the single largest factor in determining the long-term cost of a system. It is one thing to customize an application, but another to keep that customization up to date. An SMB can continually invest in attempting to stay current with releases from the various products they use, or they can choose to freeze versions of the product in order to contain maintenance costs and disruption of the ongoing programming and testing. They often decide not to add any more customization to their systems. Unfortunately, this decision frequently ends up costing the company more rather than less. By freezing the versions, they suffer an opportunity cost from missing all of the new features which become available in the future. They also forfeit any productivity gains that could be achieved by customizing the system. So the cost of not customizing is often far greater than the cost of customizing.

Cost of system integration

As illustrated above, SMBs often need to integrate various systems. While companies would typically prefer to purchase a single turnkey solution that meets all of their needs, it is rarely practical, if even available in the first place. The average SMB has a multitude of systems that they access and is therefore faced with the challenge of manually reconciling the data between these systems or paying the cost (both initial and long-term) of integrating these systems.
In general, the issues listed above are the primary cost factors of automating a small or midsize organization. There is the obvious outlay of capital at the beginning of a project. This outlay includes not only the purchase price, but also the labor for training and system integration. The costs then fall to an amount that equals the on-going support cost of both hardware and software, plus any subscription fees and/or communication line costs. A short time after go-live, however, the cost starts to creep up as maintenance costs rise based on customizations required and various systems integration tasks.
So, as you see, there are many problems coming up for SMBs. But there is a solution. Why not have a look at the SAP Business One article in the “Solutions” category?

Daniel A. Carr

Daniel A. Carr

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