Historical Relationships
The
fact that the lower-end of the enterprise applications market (also referred
to as SMB—small-to-medium businesses or SME—small-to-medium enterprises) is
the next frontier and a promised land for all enterprise vendors—small (tier
n), medium (tier 2), and large (tier 1) alike—has long not been news. During
economic slowdowns, the larger corporations will likely curb their IT spending
to a degree, whereas their smaller counterparts will all but completely recoil
from any spending during rainy days. However, with a recovery, one should expect
a built-up need for enterprise systems from companies that have weathered the
storm and now need to bolster their competitiveness and agility in the market.
Still, the vendor is not guaranteed an easy ride even if smaller enterprises
(which as a rule lag behind their larger brethren in terms of technology innovation)
are willing to go for a more sophisticated technology replacement that is, in
the best case scenario, beyond the rapidly outmoded two-tier client/server architectures,
or, and more likely, in the worse case scenario, beyond the all-too-common dispersed
islands of information on Microsoft Excel or similar spreadsheets,
Access-based reports and queries, or even the pads of paper
and the "post-it" notes of managers.
This has been proven by a number of trials-and-errors and through the subsequent strategy reiterations espoused by larger enterprise vendors during the last several years. Namely, several "creative" pricing tweaks (often at incredulously high discounts), software repackaging, hosting arrangements, channel strategy revisions, and so on, have resulted, with limited success for large vendors, in "tier-dropping" initiatives. For example, the practice of significantly discounting software (sometimes even giving the software away for free) in order to compete, knowing they will make up the profit margins on the implementation services side (typically through many multiples of the software license fees) have only left many smaller prospect wary of the large vendors' seriousness in the segment. Many prospects may still feel like the "hit-and-run" target of large vendors dabbling in the lower-end of the market because the once lucrative corporate end of the market has become too saturated. These prospects are left in the lurch as soon as the market improves and these vendors' attention reverts to the larger prospects.
Thus, look for a continued evolution of these applications by persistent and committed vendors, since over the last several years the market has seen a plethora of fixed-scope and fixed-price applications, pre-packaged vertical solutions, attractive support programs and hosting services with catchy names (e.g., "Fast Forward", "Select", "Accelerated", "On Board", "Genesis", etc.). All are aimed at making it faster, simpler, and cheaper for enterprises under a few hundred or even a few dozens of millions of dollars to use them. However, all of these typically have also implied some form of trade-off in the name of expediency. The forsaken features will have been functionality, customizability, platform options, solution scalability or extensibility. Also, these initiatives will have initially been the tier 1 vendors' attempt to extend their reach into the dispersed subsidiary organizations and remote sales or distribution sites of their major corporate clients. However, competitive pressures and the business reality have meanwhile led these vendors to fine tune their strategy and offering for independent smaller prospects in the market as well.
Unfortunately
for both vendors and users, small and mid-size enterprises, like their bigger
brethren, generally operate in a dynamic, competitive environment and have global,
multisite operations that are either wholly owned or that function in a complex
supply chain relationship. Consequently, all these companies need some level
of support for advanced collaborative functionality, scalability, supply
chain management (SCM), customer relationship management (CRM),
e-procurement/e-sourcing, and distributed computing environments, while businesses
in different industries have different requirements, laws, regulations, and
business practices that vary by geographic regions (for more information, see
Mid-size
Companies Have Full-size IT Issues).
On
the other hand, these enterprises yet have to accomplish these feats with less
(or completely without) IT staff and a much more limited budget compared to
their bigger counterparts. This demands a "zero level" of tolerance for errors
and a little time for tweaking technology to match their business needs and
for getting their staff members up to speed. These companies typically require
integrated basic functionality straight out of the box, while the integration
with Microsoft desktop applications goes without saying. Often, these enterprises
do not want to be too terribly bogged down into figuring out which switches
and parameters within a large overkill tier 1 application have to be turned
off, allowing just enough, manageable functionality remains available (see Catering
to Small and Medium-Size Enterprises).
Due
to the above difficulties of finding a subtle balance between simplicity and
leaving the room for future scalability and increased complexity of the business,
the first few iterations of tier 1 vendors' offerings for smaller enterprises
have had only a modest success. Still, "a patient man may win the day", and
the likes of SAP, PeopleSoft, Siebel
Systems, and Oracle will likely get it right eventually
through their deep pockets-backed perseverance, their brand recognition, and
repeated modifications and fine-tuning of their strategy to win the less chartered
lower-end of the market (see Software
Giants Make Courting A Small Guy Their 'Business One' Priority).
Although
many vendors have come with different tactics, one could notice two emerging
school of thoughts among large enterprise applications vendors seeking to capitalize
on the mid-market opportunity. Since these are much related to different ends
of the mid-market, it would be useful to arbitrarily demarcate these. The lower-end
of the mid-market, or the small-to-medium enterprises/businesses
(SMEs/SMBs) segment, could roughly be defined as companies with up to 500 employees
and with up to $200 million (USD) in annual revenue, while the upper-end
of the mid-market would be enterprises with up to 1,000 employees and up
to $500 million (USD) in revenues.
This
is Part One of a two-part tutorial.
Part
Two will discuss challenges and the lower-end.
The Upper-End
It
is in the upper mid-market that the tier 1 vendors stand the best chance of
more immediate success. Here they can still deploy a hybrid model of direct
selling (which has been their forte) and rely on partners for vertical enhancements,
industry domain expertise, implementation, and services. The overall strategy
is geared towards reducing complexity, total cost of ownership (TCO),
and return on investment (ROI), which have long been the key criteria
for the mid-market companies.
SAP's
approach to this upper mid-market segment comes through its industry specific
mySAP All-in-One solutions that are based on mySAP
Business Suite, and come with three deliverables:
1)
SAP Best Practices,
2)
SAP One Server Kit, and
3)
Vertical Solution Development Kit (SDK).
However,
neither is necessarily focused on specific business processes nor is granular
in nature, as SAP's development and go-to-market strategy at the high-end of
the mid-market and the divisions and subsidiaries of large corporations is based
on the idea that the needs of the SMB market are distinguished by industry sector
not company size.
SAP
has tried to assault the US mid-market several times before, with only a limited
success notwithstanding. The earlier attempts with former mySAP.com
suite's (meanwhile renamed into mySAP Business Suite) "lighter" versions have
not been as successful as anticipated, mainly because they would still require
more implementation resources and effort than most mid-size customers could
afford. Alternatively, if the pitched solution was a significantly scaled-down
and pre-configured version of mySAP Business Suite, without vertical functionality
and customization facility, one would have been hard pressed to justify going
for it rather than for traditional mid-market incumbents like QAD,
SSA Global, IFS, Intentia,
Lawson Software, MAPICS, Ramco Systems,
or Glovia to name only some. The latest upbeat results and
future outlook from some of these may speak in regard of tier 1 vendors' limited
success in their space.
Small
enterprises, like their bigger brethren, need some differentiation means in
the market, and that will not be achieved by implementing a cut-and-dry business
solution in a "cookie cutter", "me too" deployment approach. Thus, the part
of the mySAP All-in-One (formerly SAP SMB) initiative's initial
tardiness can also be written off to SAP's painstaking approach of certifying
industry solutions, although it has so far produced nearly 300 certified
business solutions (CBSs) worldwide. Thus, SAP has been earnestly engaged
in its channel partners' activities to ensure that they understand the needs
of the mid-size customers. Also, by borrowing the page from the book of some
of its more successful, smaller competitors, SAP has been providing the help
in co-developing CBS software add-ons that are vertical specific, down to the
SIC-code, a concept believed to have an appeal to the target customers. However,
SAP has stiff competition from several mid-market incumbents, which have a firm
grasp on the mid-market and a growing portfolio of pre-integrated vertical solutions
that may go further than SAP's, and consist of hardware as well as software
and services.
As
well known and much publicized, the major factors of success in business applications
for the mid market segment have traditionally been—flexible pricing, packaging
and deployment options; speed of implementation; vertical focus; interconnectivity
to other applications and legacy systems; product scalability and scope expandability;
casual Internet and wireless device accessibility; low cost business-to-business
(B2B) electronic connectivity; and a single point of contact, possibly with
a local consulting and implementation support. Therefore, most tier 1 vendors
including SAP seem to have captured (or at least tackled) most of these, partly
owing to finally breaking its product in more manageable components (which provides
for faster phased implementations and system agility) and Internet-enabling
it (which provides for easier deployability and user interface [UI] intuitiveness).
Their
solutions within ERP, CRM, SCM, enterprise portals, business intelligence
(BI), product lifecycle management (PLM), and SRM functionality provide
a wide scope of features, and very few smaller vendors can provide tightly integrated
applications of this magnitude under one umbrella. Furthermore, the likes of
SAP have the strongest product technology in terms of scalability, and support
for almost all industry relevant platforms and middleware standards. Web service
standards like XML, simple object access protocol (SOAP) and universal description,
discovery, and integration (UDDI) are already embedded within their latest product
releases, such as has been the case with SAP's latest NetWeaver
platform (see SAP
Weaves Microsoft .NET And IBM WebSphere Into Its ESA Tapestry). These
facts, bundled with their corporate viability and mind share, have encouraged
many small companies to opt for the offering, which has not been quite conceivable
until very recently.
Nevertheless, although leading application software vendors have long been keen on moving down market, they must prove that they truly understand the needs of the target market, that they can provide adequate comprehensive support, and that their applications are both cost-effective and palatable, with more than adequate functionality for midsize businesses. The sophisticated functionality of tier 1 solutions should be appealing to the upper-end mid-market customers, but this typically comes with levels of complexity and support that midsize businesses may still find overwhelming.
On
the other hand, if a midsize business already has some complex requirements
(e.g., multiple lines of business, internationally dispersed operations, etc.),
it should consider the upper mid-market offerings of large market vendors as
a step towards upgrading to the full suite down the track. Still, the "caveat
emptor" approach remains applicable, since although some preconfigured
solutions may provide the best of both worlds—as templates lower cost and complexity
and give mid-market companies a strong foundation to built upon, there is still
support for extensions based on each customer's need. Thus, customers should
make sure that they do not sacrifice functionality or customizability for the
sake of a quick implementation, since that may cost more in the long run (see
Fast-path
Implementations - Are They Good or Bad?).
This
concludes Part One of a two-part tutorial.
Part
Two will discuss challenges and the lower-end businesses.