Transition of "Value into Volume" Business Model
Enterprise resource planning: ERP. The three once-paranoid letters are emerging out of their value shell to reach out to the masses. All was fine, methodical, and elegant, until ERP vendors started aspiring to new customer acquisitions in the hundreds per annum. With the advent of ERP for small to medium businesses (SMBs), the numbers are mind boggling.
Product management researchers case-studying the transition of "value to volume" market behavior are having a field day. To what extent is the ERP selection phase and sales cycle shrinking, along with the implementation timeframes? Will the new ERP avatar be easy to learn, adopt, and maintain? There are innumerous questions that remain open for interesting debate. And the master query is a good riddle to crack: "Is ERP becoming commoditized?"
SMBs have been discussed in different media countless times. Cover stories such as "SMB Is Happening" and "The New Wave Called SMB" are most sought after. What do these SMB customers really want? Does the expanding number of companies in this segment make a difference in buying behavior? Is commoditizing ERP the only option for catering to this market?
The first step in commoditizing any product is to standardize. Common availability and greater awareness are also key characteristics of a commodity. Are ERP vendors ready with such an offering?
What Do SMB Customers Want?
What SMB customers want is driven by what they are. Every research organization defines SMB with respect to two main parameters: revenue, and employee size. The range of sizes varies in each region and market. We'll turn now to some of the defining characteristics of SMBs.
SMBs are like "owner-driven cars." The car starts in the garage and runs along corporate freeways—the ones that lead to global destinations. According to some research, trends in the US amount to an amazing 230,000 SMBs exporting nearly $182 billion (USD) annually, a whopping one-third of all US exports. The same trend is emerging in the rest of the world, most notably in emerging economies like China and India.
Enormous growth potential coupled with a changing environment makes for crazy drivers. Very few moments are available to SMB decision leaders to sit back and think.
As for owner-driven cars, resource constraints and limited risk-taking abilities are general characteristics of SMBs. Unlike large enterprises, SMBs operate in "resource sufficiency" mode.
Juggling "too many balls"
SMBs invariably perform under huge pressures, resource constraints, and tight timelines. Juggling too many balls is a common phenomenon in this business segment. For example, an accountant in a SMB organization may process sales orders to ensure timely deliveries. In certain circumstances, even production managers perform the same process. These factors lead to an absence of well defined user roles (for the reason that "fulfillment of tasks" is considered more important than a non-violated workflow rule); time constraints for adopting a new system; and continual resource constraints for operations.
Lack of IT Infrastructure
It is hard to find SMB organizations with a well-defined IT division. Though top management may be IT-savvy, they are hard pressed to find time for software evaluation and implementation. SMB customers in emerging economies face additional challenges such as only occasionally connected environments, due to bandwidth issues, and poor IT literacy among users.
In turn, these characteristics define the basis of the typical SMB needs regarding ERP systems, and we'll explore these next.
A Fully Functional ERP
The general demand is for a "fully loaded car with no fancy frills." It is a major buying decision, so it had better be good. Is there a "dashboard" control? Can the SMB decision leader determine the driving speed and also have a constant watch on fuel (resource) availability? Yes, one-screen control is vital when momentary decisions need to be made.
Most SMB leaders interviewed agreed that once their organizations choose an ERP system, they will use it for a minimum of three to five years. Growth rates being tremendous, a fully functional and scalable ERP system would be an ideal choice.
"Bought Microsoft Windows, used it as is." "Bought Office Suite, used as is." "Bought accounting software, used as is." ERP should also be usable as is. Configuration yes, but no customization. No fancy frills indeed.
Coexistence of Flexibility and Control
Task fulfillment is key, and hence the ERP system needs to be flexible. At the same time, one of the major drivers for ERP adoption is business control. These contradicting features of "flexibility" and "control" need to coexist. Key users need to have the flexibility for effective fulfillment, and control need to be exercised with respect to the rest of the users. For example, key users should be able to role-play to complete their peer's tasks when the situation warrants, and the system should keep track for business clarity. Role definition in a system thus need to be flexible in order to accommodate these requirements. Flexibility in the sequence of process elements is also needed. A typical need arises when tasks are fulfilled that are followed by procedures to be completed for better business practice and integrity.
Simplicity of Adoption
Can the customer push in a CD and self-install the ERP system? If the customer does not how to go about the setup, does the system incorporate a wizard with business questions to be answered in order to set the entire schema?
As the first IT adoption of any business is simple accounting software, can the ERP system identify and connect to the accounting software in use, and bring in all the data intact to the new screens? Is the ERP solution equipped to connect and talk to the complementary applications that the SMB has invested in?
When the basics are in place, a graphical screen that guides in exploring greater heights of ERP features is an ideal next step. This screen must allow a business user to configure best-in-class features with "drag and drops," relatively few clicks, and basic English. This will transform the customer's business systems into ERP within the constraints of an SMB.
Ease of Maintenance
Adoption is followed by usage and maintenance. While "ease of use" is a default software requirement, "ease of maintenance" is the new jargon being chanted by SMB customers who lack IT resources and infrastructure. Accordingly, there are various critical requirements that need to be satisfied:
- Can customers take backups from the ERP screen through a simple menu? It's better if the backup can be performed while the users are transacting.
- Is there a health monitor that helps in scheduling proactive maintenance calls (so that problems can be averted before they occur and halts the business)?
- Does the ERP solution have self-healing recovery for disaster situations, with the ability to quickly swing back in action for better business continuity?
- Is there a simple click-away backup restore process for emergency situations?
- Can the ERP system perform pull synchronization on demand from various remote locations? It's better if scheduled auto-synchronization happens in a "push mode" without user intervention.
- Is there a dynamic reporting tool that accepts visual drag-and-drop commands and produces desired reports?
- Is the ERP solution agile enough to configure and reconfigure the dynamic changes that haunt the business?
The million-dollar requirement of these SMB customers is that the ERP solution needs to be simple yet powerful, flexible yet with the capacity for control, and easy yet complex.
Affordable and Predictable
When deciding on ERP software, SMB decision makers are daunted by the hourly service rates quoted by vendors and partners. SMB decision leaders need "not only" an affordably priced solution, but also a predictable total cost of ownership (TCO).
- Is there a "product-based" service offering?
- Is there a standard tariff for license fees, implementation fees, and yearly support costs?
- Can the customer pick and choose the features and services as and when required, with the costs agreed well in advance?
- Is there a next-door partner to help in situations of service need?
An affordable yet predictable ERP will open up new horizons for SMBs to embrace ERP systems in growing numbers.
Are Vendors Geared towards Offering "Commoditized ERP"?
In simple terms, SMBs want a "commoditized" ERP system, meaning that it is simple to choose and fully functional, with dashboard controls; affordable and predictable; easy to adopt, adapt (to business changes), and maintain; connects to third-party applications; flexible but with strict control capabilities; and with next-door partner service.
What should be the ERP vendor's response to this "value into volume" game? The current efforts of these vendors to make a SMB-fit offering are yielding some results and perhaps some chaos. Let us take a closer look at ERP vendor responses by category.
Traditional ERP Vendors
Vendors such as SAP and Oracle fall into the traditional ERP vendor category. Traditionally catering to large enterprise customers, these vendor's solutions are percolating down to SMBs. Vendors in this category bring the experience of managing the most demanding customer requirements, the expertise of best practices, and deeper domain knowledge. The transition to the value-into-volume business model is more evident with these vendors. However it is important to understand some of their characteristic initiatives (or lack of initiatives) and market responses.
Traditional vendors do have a comprehensive full-functional ERP solution in the rack. They offer a SMB-fit solution and provide a value chain to scale to the comprehensive solution. They also offer third-party partner products integrated "out-of-the-box" to fulfill comprehensive solution requirements on a lower TCO. As far as affordability is concerned, ERP vendors seem to be geared towards satisfying SMB customers. Predictable TCO is offered by products such as Oracle's e-Business Suite, with a comprehensive tariff and a point price which includes license fees and implementation fees.
For instance, SAP has acquired 10,000 SMB clients for its Business One offering. As these SMB customers grow, options are open to move up the value chain by adopting SAP Enterprise solutions. SAP Business One provides dynamic reporting functionalities.
Oracle 10g Database SE1 addresses the "self-healing" and "easy-to-install" requirements of SMBs in the absence of a database administrator (DBA). Applications built on this platform tend to fulfill the SMB requirement of single-click system installation, according to a 2005 IDC white paper sponsored by Oracle Corporation titled "Oracle Database 10g Standard Edition One: Meeting the Needs of Small and Medium Sized Businesses."
Wizard-driven setups, and graphical tools to explore and configure are not commonly seen in this category offering, but traditional vendors are gearing up their partner ecosystems to address the next-door partner service requirements.
Incorporating business changes on the fly for a set of customers or transactions is unheard of in the traditional ERP world. Traditional ERP gurus suggest a detailed business process re-engineering (BPR) report before touching on such changes. However, SMBs aspiring to best practices often find it difficult to devote time for sitting back, analyzing, and adopting these aspects and practices.
Sage Software, Microsoft, and 3i Infotech are the kind of vendors in this category. They have been providing extended solutions to SMBs for some years now. Current volume levels achieved by some of these vendors have come about mainly through inorganic growth.
A visual modeling tool for explore-and-configure adaptive processes aspires to be "tomorrow's model-driven design," according to Bill Gates in his presentation at Convergence 2005.
Mid-tier vendors also offer third-party partner products integrated out of the box. However, unlike the traditional vendors, these applications are not an option to reduce TCO. They act rather as complementary products to bring about a comprehensive solution framework.
Like the SAP Business One offering, the mid-tier product Sage ACCPAC provides dynamic reporting functionalities. In terms of affordability, mid-tier products such as ORION Advantage from 3i Infotech offer one-point pricing that includes license fees, implementation fees, a micro-vertical schema, a database license, and server hardware. By and large, the affordability aspect of SMB requirements is well met by these ERP vendors.
Small Business Solution Vendors
Product offerings such as QuickBooks from Intuit, Peachtree from Sage, Tally, and MYOB fall under this category. These product vendors have emerged to respond to SMB customer ERP requirements.
Volume is synonymous with the small business solution (SBS) vendor's business model. Affordable price is well attuned to volume. Customers find easy to make their choice, based on the following reasoning: "there is this vendor who provided us with the accounting software we've been using for years; this vendor has come up with an enterprise-wide application; the simplest choice is therefore to adopt such a business application from the existing vendor." However, it is not as easy as it may seem. There are other unanswered questions such as product comprehensiveness, domain expertise, and product-oriented services.
SBS vendors are scaling up their product functionalities version-on-version to reach the comprehensive enterprise-functional levels. Some of them do have complementary third-party applications. Most SBS vendor products have a single-screen business manager that gives visibility and control to SMB decision leaders. These vendors have provided dashboard, single-click install, and explore-and-configure features in their smaller accounting applications upwards.
Many SBS Vendors do have a large partner network in place. While mid-tier vendor partners have a solution provider business model, SBS vendor partners are still in the distribution mindset.
There are, however, some common issues across the ERP vendor categories. Though the first step to commoditizing any product is to standardize, there seems to be a big lack in this respect. Common availability and greater product awareness are key characteristics of a commodity. This saves the customer's time and money. Simply choosing an ERP system requires conscious know-how of one's own business objectives; a product track record in a similar industry; a, test run in the shortest possible timeframe; knowledgeable human resources; and many other elements. Is there a way to choose an ERP system as we choose potatoes, in other words, as we purchase commodities? No ERP vendor seems to have cracked this requirement.
Most ERP applications support import and export of data in various formats ranging from Excel, CSF, and Access, to extensible markup language (XML). Although this gives the possibility of connecting to other applications, the process of data movement and of avoiding data duplication is still a challenge. There is no single drag-and-drop, click-and-connect solution built into an ERP that allows trouble-free connectivity without sacrificing data integrity levels.
And finally, allowing flexibility yet providing control is as perplexing for ERP vendors as a cold fire. We are yet to come across an ERP product that demonstrates both qualities to the fullest satisfaction of SMB decision leaders.
SMB are in need of ERP solutions. Growth, change, and "economies of speed" drive this business segment to have a system that provides greater business visibility and control. The requirements of SMB are perhaps unique, and emanate from their business nature, along with their inherent characteristics and constraints. Though idealistic, there is a crying need for a commodity called ERP for SMB.
ERP vendors have started becoming aware of this need, and are moving towards meeting it. While some of the needs are met in fragments through different ERP products, a single product meeting all these needs is not in the vicinity. Commoditizing a product means it must be simple for customers to make a choice. Such a product for SMBs needs still to emerge—at this point, vendors are moving in the right direction but yet to arrive.
About the Author
Shiv M. Kumar has over fourteen years of experience in the enterprise software industry, in the functions of product marketing, sales, and alliances. He can be reached at firstname.lastname@example.org.