Big Ambitions

Beth Bacheldor
Information Week Aug. 25,2003

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.

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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.

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 . 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.
his 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.

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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."

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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