News
8/21/2003
06:46 PM

Big Ambitions

Small and midsize companies have the same technology needs, and the same goals, as large ones



If you think small and midsize companies don't face many of the same challenges as their larger competitors, then you haven't walked a mile in Daniel Feldstein's shoes.

As VP of operations at Crestron Electronics Inc., a $150 million-a-year maker of audiovisual control systems, Feldstein helps direct the daily activities of a small but bustling business with big ambitions. The 500-employee company has hundreds of suppliers providing everything from high-tech chips to plastic moldings. Its two New Jersey manufacturing sites process about 200 orders a day, some of them comprised of hundreds of line items. And it sells some 500 finished goods to thousands of customers all over the world. "We're a small company with medium- to large-sized company problems and issues," Feldstein says.

Daniel Feldstein, VP of operations at Crestron Electronics Inc.

Crestron is a small company with big-company problems, Feldstein says.

Photo by Erika Larsen/Redux
There are plenty of companies in the same position, and such a dichotomy can make finding the right enterprise software difficult. Though their needs are complex, they've got millions of dollars less to spend on software and supporting IT infrastructure than large companies. Their IT shops may have only small handfuls of employees, and they generally don't have a lot of time to spend on software implementations. Yet many of them must compete with much-larger companies.

To overcome these constraints, small and midsize businesses are looking for enterprise applications that support the business processes they need now and as they grow, without integration headaches, complex training regimens, or massive support costs. Typically, they don't want to sink all their money into customer-relationship-management or enterprise-resource-planning apps as much as they want software that helps them track and follow up on sales leads or manage the order-to-cash process. They want partners who will be there every step of the way, from needs assessment to implementation and ongoing maintenance. Often, they want to outsource some applications, but they don't want to be burned, as some were when a lot of apps-hosting vendors went belly up a few years ago.

Most analysts estimate the IT market for small and midsize companies--which generally includes companies ranging from $50 million to $500 million in annual revenue--to be more than $300 billion. These companies will account for 54% of total IT spending this year, according to market researcher IDC. And their spending is growing fast: Their IT budgets are expected to increase 17% versus 1.3% for large companies, according to Forrester Research.

Why the amplified spending? For one thing, many small and midsize companies have done little to their IT infrastructures since dealing with the Y2K problem. The patchwork of systems that got some of them through that crisis may be running out of steam or may have become too difficult to support, especially if the vendors that created those applications no longer exist. Other companies struggle with the limitations of early stripped-down versions of big vendors' enterprise software. Smaller private companies often have more spending flexibility, too. "They don't have to answer to Wall Street," says Meredith Child, an associate analyst at Forrester.

Many small and midsize companies also are starting to take a more-pointed interest in strategic business-technology initiatives--including ERP, supply chain, and CRM--to create greater efficiencies and improve bottom lines.


blinn

Ferrotec USA needed enterprise software to help it grow globally, so it migrated to Oracle applications, Blinn says.

Photo by Jason Grow
Ferrotec USA, the U.S. subsidiary of Japan's Ferrotec Corp., knows how difficult it can be to develop IT services that deliver bottom-line benefits when key operational software has outlived its usefulness. Ferrotec's combined revenue tops just $150 million annually, but it operates on three continents. The low-end, standalone financial system it installed in the 1990s can no longer meet its needs. The company, a maker of magnetic liquids used in acoustical and other products, is replacing that system with Oracle applications. "We needed enterprise software that allows us to grow globally as well as meet requirements such as multicurrencies, multilanguages, and different cultures," says Rob Blinn, IT director of Ferrotec USA. "The applications we were running didn't meet those needs."

All the major enterprise providers have taken a closer look at how they sell to companies like Ferrotec USA (see story, Back In The Game). True, they've set their sights on this market before, but this time the dynamics have changed. The large enterprise market is stalled. Take a quick look at PeopleSoft's, Oracle's, SAP's, or Siebel Systems' quarterly reports, and the numbers make it clear: Growth is coming mainly from maintenance and service fees, not new licensing megadeals.

This time, the vendors say, they're more in tune with the small and midsize market. Many have revamped their applications to offer modular but integrated processes. PeopleSoft, for example, went back to its first 1,000 customers in this sector and documented the functions they used and, from that, built a blueprint for its products. These products now are configured by business processes--such as the procurement-through-payment cycle--automated based on best practices, and delivered on a fixed-cost basis.

Focusing on business processes can help small and midsize businesses become more efficient and adaptable to meet their large customers' demands. "They need to improve the processes involved with sell-side E-commerce, problem-resolution management, inventory availability, fulfillment, and the quality of products and services delivered," says Carl Lehmann, head of the midsize research practice and a VP at Meta Group.

Eric Parrott, senior manager of business systems at consumer-appliance maker Tilia Direct Inc., likes the fact that best practices for discrete manufacturing are built into SAP's applications. It's operating through the same retailers as bigger manufacturers do, and neither retailers nor consumers cut small manufacturers any breaks if, for instance, products aren't delivered on time. "The software is so sophisticated, so many business processes are built in, and you can go with the best way to do something," Parrott says. Tilia, a $200 million-a-year company, will wrap up its SAP deployment in January.

With best practices and processes built into the software, companies can limit the time and expense of implementations and upgrades. When Kvaerner Power Inc., an Aker Kvaerner subsidiary that makes power boilers and has $500,000 in yearly revenue, decided to upgrade its Oracle applications a few years ago and move to a hosted model, it redesigned all its business processes, taking only about a month using the software's built-in business practices, says IT director Woody Muth.

Not all small and midsize companies want to have another party host their applications, but neither do they have the time or business-technology resources to undertake conventional full-scale deployments on their own. "We have a small core of people in touch with everything the business does," says Crestron's Feldstein, whose company has an IT staff of 20. Large companies can usually assemble a core team of business-process owners to dedicate to an enterprise-applica- tion-deployment team, but in smaller companies, Feldstein says, "the business suffers if you take [those people] offline."

That's why most enterprise vendors have worked hard to strengthen partnerships with systems integrators and service providers that can further enhance their midmarket offerings with rapid deployment programs that cut the time and costs of implementing the technology. For instance, SAP counts a few hundred partners worldwide for its All-In-One business suite for small and midsize customers, ranging from brand names such as IBM to smaller services providers such as Osprey, a division of NIIT Technologies, which Crestron hired to implement a customized version of the All-In-One software for electronics manufacturers.

"Traditionally, the expense of [implementing] something like SAP would be beyond the reach" of companies such as Crestron, says Osprey president Tom Wilson Jr. "They could recognize the benefits, but it wasn't even a consideration."

The issue of who will be a trusted partner for an enterprise-applications deployment is clearly a concern for many smaller businesses. Crestron considered using a larger IT services organization, Feldstein says, but "it's hard to see larger companies' sincerity when all of their reference clients are huge conglomerate-type companies." One provider pitched Nike Inc. as a reference account. "They felt that telling me they did Nike makes me want to use them, as if I didn't recognize the difference in [required] skill sets--and as if they didn't recognize it, either."

Some global systems integrators admit they're not always the best bet. Without a certain scale, says John Matchette, a partner in Accenture's supply-chain practice, "it's difficult for us to put together a package that's mutually beneficial and economically viable for both of us." But other big providers say that trends such as business-process outsourcing using cheaper overseas labor will help them serve a price-sensitive market.

Of course, the same question may be asked of the software vendors. As the economic environment improves, will a large enterprise software company that typically deals in million-dollar license and maintenance contracts be as quick and consistent in its response to customers that net a $50,000 commission?

Up to now, large enterprise applications vendors would contract with small and midsize businesses, "and then pull back their commitments when their revenues improved with Global 2,000 businesses," says Meta Group's Lehmann. "It's expensive to address the small and midsize market if you don't have the proper channels, pricing structures, or applications."

Things may be changing, but past performance has left the door open for Microsoft to make inroads with the accounting and ERP software it acquired from Great Plains and Navision, as well as the CRM application it built. Microsoft has a devoted midmarket base, well-acquainted with its operating systems, office software, and application-development tools, but it's not a sure bet those same customers will flock to all its new applications.

Call-center operator Alta Resources picked PeopleSoft's CRM software to use internally, even though it runs Microsoft's Great Plains software, says CIO Dave Coe. "We looked at a lot of midmarket products for CRM, but from a pricing perspective, there really wasn't that much difference. So why would we use a midmarket product that had limited capabilities?"

Coe reserves judgment on whether Alta will remain faithful to Microsoft's accounting and human-resources software, too. The $50 million-a-year company has "a strategy that includes a lot of growth," he says. "We need our finance and [HR] applications to grow with us, so our strategy to keep the Great Plains software depends on how Microsoft handles that software."

Some smaller enterprise applications vendors are using turmoil caused by consolidation among the big names to try to win over midmarket customers. On the other hand, big vendors with deep pockets say they can put more dollars into research and development, and they can use their experience with thousands of customers to refine business processes and best practices built into their software.

Market dynamics--new competitive threats, declining sales to big customers, and a small and midsize business sector that's ready to spend--indicate to Meta's Lehmann that some of the biggest names in enterprise software have made a commitment to the small and midsize space "that's here to stay." Some business-technology buyers say it seems that way to them, too. Years ago, Kvaerner Power's relationship with Oracle was very different, Muth says. "They sold us the stuff and then it was bye-bye." But now, "the local salespeople have all contacted me and are really aware of what we're up against. They're paying a lot more attention to companies like us."

Ferrotec's Blinn agrees: "I feel like I'm getting the proper attention. I'm happy." But he expresses concern. "It boils down to this: Don't forget about the little guys."

It appears the enterprise applications vendors won't have any choice. After all, the little guys are today's big business. --with Jennifer Zaino

Illustration by Alison Seiffer

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