IT vendors join the SME rush

What do you do after the big boys have had their fill? You go after the smaller players, which is what IT vendors and service providers are now doing, say Shipra Arora and Rahul Neel Mani

One mantra that marketing and sales managers at every IT vendor are chanting these days consists of all of three alphabets—SME. Small and Medium Enterprises (SMEs) are everybody’s favourite target market today and vendors are pulling out all stops in wooing this segment. Fact is, this is very much in line with global trends. Almost no vendor worth his salt can round off his growth plans without factoring in SMEs.

Pinning SMEs on their roadmap is a decision both hardware and software vendors have made to fend off what looks like a looming stagnation in the large enterprise market. Even as the debate over the long-term growth potential of the large enterprise market heats up, and vendors deny any threat of stagnation on this side of their business, the truth of the matter is that SMEs are clearly on their radar. Then there’s this report from IDC indicating that almost 60 percent of the IT market in India consists of SMEs. With other estimates putting this figure as high as 70 percent, it is a market the IT industry can hardly afford to ignore.

The business is real

Paying attention to SMEs is not an entirely new concept. Companies like SAP, Oracle, Cisco, Microsoft, CA and Legato have been focusing on this segment for the last four to five years. What’s new is the increasing reliance of vendors on business coming from SMEs. Estimates suggest that a growing proportion of incremental revenues and new deals will come from SMEs. For instance, almost 70 percent of the new deals (and 15-20 percent of total revenue) for SAP is coming from SMEs. Oracle says it gets nearly 40 percent of orders for its e-business suite from the SME segment. Legato also gets 40 percent of its business from SMEs. Cisco acknowledges that SMEs are the fastest-growing market for the company, above its large enterprise business. And although IBM, the grand pasha of IT, declines to disclose figures for its SME business, it maintains that the segment is a key area for the company in India.

According to sanjay jotshi, the challenges while dealing with SMEs include heavy investments in partner training, and working on processes that will ensure the right products and services get delivered to end-customers

CA says that its channel business, which reflects the health of its SME business, has grown by over 40 percent in the first half of FY2003 over the corresponding period in FY2002. Nortel, which considers SMEs its fastest-growing business in terms of volume sales, says that although right now the balance is in favour of large enterprises, there is likely to be a shift towards the SME segment. HP’s imaging and printing division, which sells to SMEs through its channel partners, is also bullish about the SME sector.

The SME business has gained prominence in vendor strategies in the last couple of years with vendors setting up specific teams for this segment. In some cases they even create a separate business unit within the organisation. There are also specific products being launched to woo SMEs. One product stream that has seen a flurry of SME activity of late is enterprise application software. Tier 1 enterprise application vendors in India have never been as engrossed in the SME segment—or never as vocal about it—as they are now.

It all started two months ago with SAP’s launch of ‘mySAP All-in-One,’ followed by Oracle with its ‘Oracle E-Business Suite Special Edition.’ Both these solutions are targeted specifically at SMEs. This signifies the high hopes that hardware vendors and those in the enterprise package software space have pinned on SME business. The growing rush of Tier 1 players into this market also means more fragmentation, and a tough time ahead for niche SME vendors and small local players who have been dominant in this space so far. Thus, the market is in for interesting and challenging times ahead.

Figures at a glance

Shirish Joshi feels that since SMEs may see more value in bundling and combination solutions, Cisco comes out with bundles that are more oriented towards what SMEs require

According to IDC, in 2002 SMEs comprised approximately 40 percent of the total hardware market in India, as opposed to 36 percent in 2001. IDC says that the SME portion of the total hardware market is estimated to be growing faster than the large enterprise market. In desktops, IDC says that in 2002 the SME market was worth 8,65,000 units, or almost 40 percent of the total desktop market. This is estimated to grow to around 9,24,000 units during 2003, a 38 percent share of the total desktop market. In terms of percentage growth, while the large business market for desktops is projected to grow by 33.6 percent in 2003, the medium business is expected to grow by 17.1 percent, and both the small business and small office by a little over 1 percent.

According to Frost & Sullivan, in terms of SME application software (ERP, CRM, SCM), the total size of the SME enterprise application market for 2002 was around $15.5 million, or almost 20 percent of the total enterprise application market. More specifically, the ERP market size stood at $9.54 million, CRM at $3.10 million, and SCM at $2.84 million. This however is still very low compared to the large enterprise market for ERP, CRM and SCM in India, which stood at around $59 million during 2002. IDC estimates the SME contribution at just 12-15 percent of the total enterprise application market. As per industry estimates, on the hardware front, the SME business may grow at around 20-25 percent over the next couple of years vis-à-vis the 12-15 percent for large enterprises.

Driving factors

What is driving vendors to unleash aggressive SME strategies? Says V Krishnan, general manager, consumer sales, HP-IPG, “The focus of vendors in the large enterprise market will be more concentrated in terms of driving volumes (meeting targets) and market share, while growth is primarily going to be driven by their small and medium customers.” P K Gupta, director for Strategic Development for Legato Systems India’s intercontinental operations puts it more bluntly: “Large enterprise businesses have already invested a lot in IT.”

Hardware

In the desktop market, growth in 2004 in the large business segment is projected at around 24 percent, as opposed to 25 percent for medium businesses, 33 percent for small businesses, and 19 percent for small offices. According to Ajay Sindhwani, senior analyst, IDC India, the dynamics of the SME segment are such that it is not able to weather a slowdown as easily as a large enterprise can, but it outpaces large businesses when the market recovers. “During 2003, it is projected that the market will still be in the process of recovery, and growth will not be very high. However, with complete recovery in 2004, the SME market is expected to grow quite fast,” Sindhwani says.

Enterprise applications

A Gartner study points out that the current inclination towards ERP is highest among organisations with an employee strength between 250-500, i.e. mid-sized companies, as opposed to large enterprises, as was the case till about a year ago. According to Tariq Farooqui, country manager, JD Edwards India, SME is the place to be if one is serious about ERP in India since at the enterprise level, i.e. the top 500 companies, almost everyone has already installed ERP. According to Gartner, the SME market for enterprise applications is growing faster than the large enterprise market in terms of volumes. However, the latter’s growth will still be higher in terms of value owing to the larger size of deals. “The reason why all vendors are taking the SME segment very seriously is because future growth is expected to come from it. There are less than 30 enterprises with more than $1 billion in annual revenue in the Indian private sector as compared to 1,500 in Japan,” reasons Pranav Kumar, research director, enterprise application software, Gartner APAC.

Alok Shende, industry manager, technology practice, Frost & Sullivan, comments on the SME opportunity in the enterprise application market: “The SME market is up for grabs. So when looking for the next growth driver for enterprise application vendors in India and across the world, it is here.” According to F&S, by 2004 the market size is estimated to grow to $10.2 million from $9.54 million in 2002 for ERP, $4.1 million from $3.1 million in 2002 for CRM, and $3.8 million from $2.84 million in 2002 for SCM, adding to a total of around $18 million.

Elaborating on the growth patterns in the SME enterprise application market, Arun Ranganath, analyst, software and services research, IDC India, says that the segment will have to settle for 15-20 percent growth in the short term of up to one year. However, in the long term, as this market matures, it will grow much faster.

No wonder then that SAP and Oracle, traditionally large enterprise players, are betting heavily on this market to rake in revenues, which in the last one to two years have been hard to come by from the large enterprise stable. According to F&S, the ERP market in the enterprise segment dropped between 2001 and 2002. Though not discounting the enterprise market, Oracle India managing director Shekhar Dasgupta concedes that SME growth is driving his company’s increased focus on this market.

Comments Bimal Raj, chief executive officer of Allied Digital, “The SME market in India is showing the fastest IT adoption rates. Unlike the large segment, where it is highly competitive and stabilised, there is a lot of room for value-based sales and service in SME.” Echoing his view, Sanjay Jotshi, director for Marketing & Channels at Nortel Networks India, says that large enterprise customers have a set of preferred vendors, and the focus for vendors in this segment is mostly on customer retention. Hence it is the smaller, newer organisations that are ramping up on technology and this is where growth lies.

The main factor driving growth in the IT budgets of SMEs is their increasing awareness of the scope for improving operational efficiency and effectiveness by using IT systems. According to R Dhamodaran, country executive, small and mid-market business, IBM India, SMEs are increasingly leveraging IT to gain competitive advantage. SMEs are today going in for some level of enterprise application usage like ERP, SCM, CRM, HRIS and sales/support automation, apart from regular office automation and e-mail communication. This is due to the scalability requirements of an SME, which beyond a certain point cannot be adequately met by traditional accounting software like Tally.

Licence revenues

The catch for software vendors will be licence revenues, which are increasingly dwindling in the enterprise business. Implementation revenues for these vendors are turning out to be much higher than licence revenues, as opposed to the SME-only focused companies, who are seeing new growth in licence revenues. According to F&S, large enterprise market growth is happening largely in maintenance revenues for enterprise application vendors. Ranganath voices a similar opinion when he says that the growth which is now taking place in the large enterprise space in terms of the enterprise application market is only value-addition and upgrades. Companies like Oracle, SAP and Peoplesoft are now looking for volumes, and the way for them to grow is to drive aggressive licence revenue growth, which, according to Shende, is there in the mid-tier segment.

Intensified competition

The growing interest of top-tier vendors in the SME market will further intensify competition. This is already visible in the new product launches and price slashing that this market is presently witnessing. Oracle’s E-Business Suite Special Edition comes with a price tag of Rs 26 lakh for a 10-user licence, with the option of a Rs 16 lakh package for 10 users for back-end accounting and financial management processes; the implementation time ranges from 10-40 days. mySAP All-in-One promises a 40 percent reduction in implementation time and 30 percent reduction in cost. Both the solutions include software, hardware, implementation and support. Soon after these launches, ESS, a traditional SME player, announced that it will be offering its solution, ebizframe, at a price of only Rs 3.5 lakh for Indian SMEs across industry verticals like auto ancillaries, garments, manufacturing, chemicals, retail, food processing and light engineering. Declares a confident Sanjay Agarwala, director, ESS, “With the big fish entering this space, the total size of the market will grow due to their efforts, which is good for them as well as for us.”

According to industry experts, even though there will be some amount of price slashing driven by intensified competition in the hardware industry as well as other software segments, it will not be as aggressive as that in the enterprise application space.

Market shape

Even though the overall SME enterprise application market size will not change very dramatically (from $15 million to $18 million), the churn that the segment will witness will be tremendous. F&S says that while the top three vendors account for almost 80 percent of the total large enterprise market, their share comes down to almost 43 percent in SME. Kumar believes that the ERP market will remain fragmented, and that there will be no clear winner in the short term. Due to the current low penetration of ERP in the SME segment, there is plenty of opportunity for growth for niche players as well as vendors who have historically focused on large enterprises. However, the market share of the top three vendors will start growing beyond the present 43 percent, gradually leading towards a consolidation in this space as well.

Vendor strategies

The key to success in this scenario will be to arrive at the best-fit—possible offerings for SME customers in line with their specific requirements. A lot will also depend on the vendors’ go-to-market strategy; They they are now evolving specific strategies for driving their SME business.

The differences in strategies, pricing, products, markets and channels are governed by the differences in the requirements of the two sets of customers. A large organisation will churn out data in much larger quantities, hence its need to protect the data will be that much more. These organisations basically look at purchasing solutions that address all levels of the organisation’s e-business requirements, and not just point solutions. They also have dedicated IT staff who are capable of deploying and managing these solutions. Thus, post-sales servicing may not be a big issue for them.

But requirements change when one deals with SMEs. One popular definition of an SME is that it is an organisation without an MIS department, and where the CEO is not IT-savvy. Says Manish Jain, deputy general manager for Internal and Management Audit at Polar Pharma (an SME), “We look at quality as much as we look at pricing in our decision-making process. Implementation and servicing are also vital since we do not have much of in-house expertise in terms of IT staff.” The company has only three IT people, out of whom only one is a hardcore IT person.

Single-box

Some of the most popular approaches for marketing to SMEs are in terms of single-box offerings with key functionalities, easy manageability, end-to-end solutions complete with services expertise, easy scalability to match growing requirements, and the best price/performance ratio. For instance, Nortel’s strategy is to push in more functionality into products so that customers get all or most of the functions in the same box, thereby pushing down the price per functionality. According to Jotshi, the company also has provisions that enables the addition of functions as and when the customer requires them. CA has come out with comprehensive solutions across the areas it addresses—security, storage, and information management—exclusively targeted at SMEs.

Companies like Legato and Baan cater to both their enterprise and SME customers through the same product offerings, which can be scaled up or down as per requirements. According to Ravi Kathuria, general manager at Baan for enterprise solutions, an SME will not remain an SME forever. “In our case, the same solution works as you keep growing. The feature of dynamic enterprise modelling supports continuous improvement.”

Discounting

Contrary to popular belief, there is not much discounting at the SME level. Observes Krishnan, “The maximum discounting happens in large enterprise sales since the volumes justify discounts. At the SME level, customers think in terms of what more they can get for the money they are investing, rather than discounts. Bundling works well here.” Shirish Joshi, country head, channels, Cisco Systems India & SAARC, opines that SMEs may see more value in bundling and the combination kind of solutions. Cisco does come out with bundles that are more oriented towards the kind of solutions that SMEs require. This kind of bundling works fine for the channel partners as well since it takes them the same time to sell the overall portfolio of products; with bundling, they make the most of their time.

However, this does not rule the possibility of discounts, which vary based on the requirements of the customer and the size of the deal. According to Alok Gupta, who heads the finance function at Wilhelm Textiles, an SME manufacturer of textile and leather interlinings, pricing and leasing options are the most important criteria in IT purchasing, along with discounts, product features and functionality. “Customisations and licensing policies in the case of software are also important aspects,” he affirms.

Channel and marketing strategy

There is nothing like ‘one size fits all’ in marketing today, maintains Ninad Karpe, CA’s managing director for India and SAARC. The marketing strategies of most vendors differ since there are differences in the needs, expectations and purchasing power of the buyers.

Channel strategy will be a key determining factor of the success of these vendors since SME-market products require more channel-focused marketing as opposed to those meant for large customers. “Since SMEs are spread across the country, reach is very important,” points out Joshi. Also, in a situation where the IT buying decision will essentially have to be taken by the CEO, what is needed is not just customer education but also proper implementation through the implementing partners. Companies like CA, Microsoft, Cisco, Nortel, SAP and IBM rely extensively on their channels to deliver to the SME.

Hence, vendors are very selective when it comes to choosing their channel partners. Insists Srinivas Rao, SAP India’s industry head for small and medium business, “Apart from industry knowledge, the partner should have the ability to be the one face to the customer and to offer a wide spectrum of services.” This is understandable, because SAP’s partners offer services like data cleansing and Web-based support service.

Challenges

The SME market is indeed emerging as a lucrative business opportunity, but vendors are also faced with challenges and issues when dealing with SME clients. These include issues like fragmented markets, lower levels of technology awareness, the need for hand-holding, much higher support requirements as compared to enterprise sales, and large-scale use of pirated software.

How do vendors ensure quality when they are working through so many partner organisations? Jotshi says it requires heavy investments in partner training, and working on the processes that will ensure the right products and services get delivered to end-customers. Kathuria further points out that there are also challenges in terms of justifying the cost to customers, especially since they do not have surplus funds like large enterprises. According to Gupta of Wilhelm, a major hindrance in the adoption of IT by SMEs is the initial cost involved; in other cases, there is simply resistance to change from the status quo to the systems/practices being offered.

Conclusion

Though the opportunities are evident, vendors are aware that the SME market is no cakewalk. Slashing prices doesn’t always get the customer’s attention. Although price-conscious, SME customers are today finding more value in selecting the right IT partners. What will matter over the years will be the deliverables, and the strategies vendors evolve around these deliverables. Meanwhile, wait and watch for what might turn out to be the next growth wave in the Indian IT industry.