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Why small is big

10 February 2006  

It is no longer an option for smaller companies to be technology laggards they must embrace the electronic economy.

The small and medium-sized enterprise (SME) business software sector is going through a period of rapid change. Suppliers are converging on the market, which is expanding fast as new technologies are being developed and deployed. The reasons are simple.

The more forward looking and mostly bigger companies in all industries are moving towards near real-time, always-on systems — and they are taking their supply chains, partners and ecosystems with them.

It is no longer an option for smaller companies to be technology laggards — they must embrace the electronic economy. Ebusiness is by its very nature collaborative, and it requires the whole supply chain to participate.

SMEs are computerised, sometimes heavily, but many do not have the end- to-end, open, integrated systems that are capable of delivering enormous business benefits. This wave of implementation is now in full swing.

   
 

Forget the 'S'

The European Commission defines a small to medium-sized enterprise (SME) as having between 50 and 500 employees. Others say an SME should have sales of between €5 million and €250 million.

Those definitions suggest that many SMEs are far from small — they may have fixed assets of up to €75 million, and be publicly listed multinationals.

Nor is the market small: There are eight million SMEs worldwide, according to one supplier. In Europe there are 19 million businesses that employ less than 500 people.

Software suppliers view this sector as having enormous potential — most of these companies do not have the integrated, end-to-end IT systems that many large enterprises have or are building, yet their technology requirements are becoming increasingly sophisticated. In 2002, European SMEs spent $76 billion on IT. They are expected to spend $109 billion in 2006, according to analyst IDC.

 
 
   

   
 

SME buying patterns

The SME sector is not a market — it is a band that covers an enormous diversity of organisations with a great diversity of needs, budgets, strategies and competencies.

But there is a commonly held and not entirely incorrect view that most companies in this group do conform to a number of distinct buying patterns.

For example, when compared to large organisations, SMEs tend to:

  • have smaller IT budgets, both absolutely and in percentage of revenue terms, than larger organisations;
  • be less demanding technically, and buy technology only when it is proven;
  • be much more price sensitive;
  • use older, more closed systems, processes and data models;
  • demand much shorter implementation times for all systems;
  • communicate electronically with their partners to a lesser degree;
  • be willing to buy more from 'tier 2' or 'tier 3' suppliers;
  • rely heavily on just one reseller or implementation partner.

While all of these are true to a point, many analysts believe that the one clear differentiation between SMEs and larger organisations, at least from a technology point of view, will blur as they all become part of multi-organisation 'business-webs'.

 
 
   

   
 

Implementation times

SME business applications might generally be easier to install than larger systems, but customers should be under no illusion. Although it can be done faster, few new integrated systems are completely installed in less than six months.

And, as the chart below shows, it can take nearly as long just to choose the right system — even using the accelerated selection method put forward by the Business Application Software Developers Association.

   
 
APPS suite selection process for mid-sized companies
Source: BASDA
 
   

 
 
   

   
 

The SME business system

Most of the 30 to 40 vendors of mid-range business applications software are supplying, at least on the marketing level, much the same thing. The differences between their offerings primarily come down to complexity, scalability or platform.

At the core of all systems are the two to five modules of a midrange ERP (enterprise resource planning) system — a financial system, a personnel (or human resource) management system, and a manufacturing management system. These will usually be driven from one integrated SQL database.

In larger enterprises, these core systems can be multi-modular, and are often accompanied by a further range of modules — front office or customer relationship management (CRM), supply chain management (SCM), e-procurement, business analytics, distribution, product lifecycle manage-ment (PLM), warehousing and others. All of these are available to the SME market. However, few suppliers offer the whole range, with many relying on third parties to provide supplementary modules and integration.

Few SME ERP suppliers have yet moved to open up their data models, business logic and presentation layers, although this is now starting to happen. Integration with partners' systems is mostly through electronic data interchange or point-to-point interfaces.

A new wave of technology, however, is promising to have a dramatic effect on high-end and midrange ERP systems. XML, Microsoft?s .NET and web services are being used to integrate systems, both internally and externally; Java, .NET, and other component tools are being used to develop new applications faster; and business process management tools are helping businesses to extend the power of their systems across departments and across supply chains.  

 
   

   
 

The business driver and the payback

ERP implementations don't always succeed — but executives at those organisations that are successful are effusive about the business benefits. They often claim reductions in inventory, lead times, delivery times, headcount, working capital requirements and wastage; and increases in customer service, quality, agility and profitability.

Such dramatic improvements explain why so many businesses go through so much effort and spend so much money installing integrated systems. And, furthermore, the benefits multiply when supply chain operations and partners are integrated. Nine out of ten companies struggle with customer responsiveness, visibility, automation and data quality, largely because their systems and supply chains are not integrated, according to a report by business software analyst AMR Research.

Repeated studies have shown that the benefits from ERP at the high end can take years to come through, mainly because of the substantial levels of process re-engineering involved. A Meta Group study in 2002, for example, found that the average total cost of ownership for ERP was $15 million but the payback was only $1.6 million a year.

SMEs tend to experience fewer major problems. Their projects are smaller and less complex and the software, hardware and services required more manageable. However, while most managers speak enthusiastically of business transformation, few are able to produce tangible financial evidence in support of this.  

 
   


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