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Catering to Small and Medium-Size Enterprises

Written By: Joseph J. Strub
Published On: May 1 2004

Introduction

Unless you were fortunate enough to inherit one, most companies start out small and, if successful, grow larger. If you are part of a small or medium-size enterprise (SME), you already appreciate that the needs of small and medium-size enterprises (SMEs) can be completely different from those of larger enterprises. It is important to understand this distinction as an individual in a SME or a vendor selling software to SMEs. For the purpose of this article, SMEs will encompass companies with annual sales of $200 million (USD) or less and with less than 250 employees. The differences of SMEs can be demonstrated by a short example within the lifespan of single company.

A food processing company got its start by selling vegetables from a horse-drawn cart in the early 1920s. The popularity of the vegetables grew to where customers began clamoring for products year-round. Thanks to a bumper crop and ingenuity, the small company started preserving the vegetables so that they could be sold in the fall and winter seasons. Eighty years later, the company is one of the largest private label canning operators on the East Coast. After the first fifty years of operation, did the company need advanced forecasting and scheduling? Did the company need a warehouse management system? Even if the concept of enterprise resource planning (ERP) existed back then, could the small company afford one or support it? Probably not. The company needed basic software to help it run its growing business with few, if any, bells and whistles. Does the company need these tools today? To stay profitable and competitive, you better believe it.

The moral of this true story is that the needs of SMEs are different. Understanding the special needs of SMEs can help companies make what may be their first foray in software acquisition successful and serve notice to vendors that special tailoring may be needed when approaching this class of buyers. Accordingly, this article takes a look at three characteristics of SMEs and their impact on software acquisition and implementation. These characteristic are

  • Support
  • Functionality
  • Pricing

While there may be others, hopefully, as a user, you will be aware of potential pitfalls in software procurement process and, as a vendor, you will be prompted to re-think your strategies for SMEs. We will look at what you, as an SME, can do to minimize costs and increase productivity and what a vendor can do to make the process less cost-prohibitive.

Support

SMEs need more of it but usually cannot afford it.

The dilemma of software and implementation support is that SMEs need it the most but usually can afford it the least. Given this dilemma, what can an SME do? The support can come in several ways such as making modifications, piloting and testing the software, and training. The good news is that SMEs should require little or no modifications and should be committed to using the software as is, out-of-the-box. As said in other articles, including mine, this is easier said than done but should be the going-in proposition. Well, that was easy.

Consider scaling back the scope of the implementation. This might be accomplished by reducing or restricting the number of locations being included in the initial implementation. Heresy you say! The operations will continue, perhaps not as well as could be, at all locations. While you are not completely maximizing profits, this approach allows you get your feet wet before drowning in a sea of software. From the learning experience during the first implementation, your company should be more self-sufficient in the implementations at the remaining sites. At a poultry processing company, it took nine months to bring up the first two plants; the remaining nine plants were up and running in three months.

Scope can also be reduced by limiting the modules being implemented. Because of the tight integration, this can have drastic results if not managed properly and well thought out. To be honest, it would not be my first choice but it is an option.

While not necessarily a reduction in scope but rather a transfer of responsibilities, application service providers (ASPs) offer another alternative for lessening the ongoing support requirements. Updating the old service bureau concept through the use of current day technology of the Internet and superior network connections, ASPs represent a reasonable outsourcing model. This model provides customers access to program applications that might be too expensive or technically impractical to implement in-house. Traditional ERP vendors are considering this as a supplemental and cost-effective alternative for SMEs. While willing and able to trade custom code and custom processes for truly shared services, SMEs must understand what services and products are to be delivered—by whom and under what types of service level guarantees.

Training is another component that can cause implementation costs to explode. The easy way to train your personnel is to enroll all of them in vendor-led, off-site training classes. This, however, is surely not the most cost-effective approach, particularly when you add in out-of-pocket expenses for meals, travel, and lodging. Assuming that a day of training costs anywhere from $600$700 (USD) and training usually requires one to two weeks, it doesn't take long for the cost of training a modest project team to exceed $30,000 (USD). You do the math. We have not even added in the lost productivity while your employees are attending training. You would be mistaken if you thought that conducting on-site training will save you money. Vendors typically charge more for such dedicated services.

The most economical and effective way to approach the training issue is to adopt the train-the-trainer philosophy. Under this approach, you send a small cadre of project personnel to training with the explicit task that they must train their respective teams upon return. Not only should members of this group be subject matter experts, they also need to have an affinity for teaching and training. Bear this in mind when forming this nucleus group.

Be prepared for when vendor personnel arrive on-site. Have the project assembled, people briefed on their responsibilities, and assignments already finished. Have documentation assembled and updated. Have legacy data pruned and updated. Have executive management's commitment clearly defined and stated. Nothing is more irritating for the project manager than to have high-priced vendor personnel sitting idle while the company gets its act together. Don't get me started! What can a vendor do regarding the support issue? The cost of support is directly proportional to the rates of the vendor personnel assigned to the project. Typically, the smaller the company, the less complexity involved in the implementation. If this is true, a vendor may be able to assign junior personnel to the project at lower billing rates without sacrificing quality. Or, the vendor may be able to double up on assignments. Perhaps, assign a senior consultant to the project and let this person double as the project manager. However, be wary of the client who says, "We are plain vanilla and are going to use the software right out the box. We won't need much help."

As a vendor, you obviously need to look at the long-term relationship with the client. Is there the realistic potential of seven to ten years of maintenance support and future upgrades? Are more advanced tools such as advanced planning and advanced scheduling in the offing? These factors need to be factored into the support discussion to make the software acquisition and implementation experience successful and profitable for all parties. Nothing helps the next sale as much as a good reference from the last completed implementation.

Functionality

SMEs normally have to acquire more functionality than they need, want, or use.

Traditionally, vendors develop software that tries to solve a variety of problems for a reasonably large and diverse group of companies. The dilemma is that the requirements of SMEs are typically on a much narrower focus and involve less complexity. For example, most SMEs do not require multi-currency, consolidations, or inter-company eliminations. But the software they are considering will most likely support these functions. So what is the harm? The added complexity can cause implementations to take longer and incur additional internal and external costs.

What can SMEs do? Unfortunately, the news is not good. You can search for vendors that service your specific market and limited needs. However, the search may be long and fruitless. The nirvana would be for vendors to offer software with limited and specific functionality that can grow as the company grows. Understandably, the business model for vendors is to cater to a reasonably wide marketplace. To do this they need to offer a feature rich environment. This is where the money is to be made. This, however, is in direct conflict for SMEs need for a reduced functionality.

What can vendors do? The news on this front is getting better. As opportunities in the medium and large-size enterprises (MLEs) marketplace continue to shrink due to increased penetration, vendors are moving down the food chain to the SMEs. We are starting to see more vendors showing interest in the SMEs market with scaled-down version of traditionally larger ERP software (see Software Giants Make Courting A Small Guy Their 'Business One' Priority). As the sales become harder to mine, we should see more vendors pursue this reverse migration path. If you can afford to be patient, SMEs may be able to obtain the nirvana mentioned above. In the next section, we will explore a pricing algorithm that may make this easier to deliver.

Pricing

Regardless whether you use it or not, you're paying for it. Or, should you?

Pricing is similar in a lot of respects to functionality. You are paying for modules, features, or functions that, as an SME, you may not be using. As SMEs what can you do about it? Negotiate. Negotiate. Negotiate. There are several strategies that, as the procurer of software and services, you can employ. First, lower the initial cost of the software by extending the term of the maintenance contract. Typically, vendors are willing to accept less up front if they can realize a longer and steady revenue stream in the future. Secondly, vendors are more apt to discount services before discounting software. This discounting can be in the form of reduced billing rates, free training, and free days of support. Finally, if you are in an industry that the vendor wants to explore and develop, you may be able to enter into a joint development arrangement. As an SME, you provide the industry expertise while the vendor supplies the resources and technology expertise. A caveat would be that, as the SME, you must ensure that your trade secrets or competitive advantages are not available for public consumption.

What can the vendor do to minimize the pricing concern? Typically, software is priced based on the number of seats or, in layman's terms, the maximum number of contiguous users of the software. Seats are allocated by functional area; eight in finance; eleven in customer service; twenty in production; and one in IT—hey, somebody has to compute the winners of the football and soccer betting pools. By the way, this is also an area that you can negotiate with the vendor as a future source of revenue to further reduce the acquisition cost of the software. There should be at least one more pricing option. This option would be based on what you use and not what you get. Typically, enterprise software comes with switches that can be set based on need. As the SME, you set a switch whether you want to use multicurrency or not. You set a switch whether you are going to consolidate financial or not. You set switch as to whether you are going to use standard or actual costing. Based on a contractual agreement, these switches would be set at the "factory" to limit the functionality that is available. If later a company decides to use an unavailable function, say actual costing, a company would have to pay to have it turned on.

An argument could be made that less support would be required for SMEs who use less functionality. While not suggesting that maintenance charges be reduced as well, this source of ongoing revenue will help offset the reduced price of the software. What concerns SMEs most is the initial cash outlay for the software. Any way to reduce this outlay will be attractive to prospective customers. It is tantamount to a mortgage on a house. You want to keep the down payment as low as possible because, as you become successful and earn those big bucks, the monthly mortgage payments will be become less of hardship. So to as the SME grows and becomes more profitable, the future annual maintenance payments will be less of a burden.

This pay-as-you-go option is similar to other aspects of our lives. For example, this option is similar to the pricing for home cable for our televisions. If you have cable coming into your house, you already have HBO and other premium channels streaming into your home. However, if you want to watch The Sopranos or Sex In The City, you have to pay to have the signal unscrambled to view these programs. In others, the functionality is already in the software but, as an SME, you decide what you want to use or, as the cable subscriber, you decide what you want to watch.

Finally, the pay-as-you-go pricing option would give additional credence to the gradual, phased rollout of enhancements and the compartmentalization of future releases of the software.

Summary

For a long time vendors have been focusing on large enterprises and their needs. You cannot argue with their business logic and savvy. Unfortunately, the requirements can be overwhelming for SMEs both in terms of functionality and costs. Slowly as the opportunities in the large enterprise marketplace become scarce, vendors are aiming their marketing sights at SMEs and starting to cater to this marketplace. While the software development or, should we say re-development, process will take time, creative pricing could be achieved fairly quickly. Remember that some day, with your help, SMEs will become MLEs—medium to large-size enterprises.

About the Author

Joseph J. Strub has extensive experience as a manager and senior consultant in planning and executing ERP projects for manufacturing and distribution systems for large to medium-size companies in the retail, food and beverage, chemical, and CPG process industries. Additionally, Strub was a consultant and Information Systems Auditor with PricewaterhouseCoopers and an applications development and support manager for Fortune 100 companies.

He can be reached at JoeStrub@writecompanyplus.com.

 
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