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Last Updated: Tuesday, 15 May 2007, 00:55 GMT 01:55 UK
Software giants move in on SMEs
By Tim Weber
Business editor, BBC News website

It's not quite David v Goliath, but it's pretty close.

Small firms used to dominate the lucrative market for software that helps small and medium-sized companies (SMEs) run their businesses.

Sage software screenshot

Now the big boys are moving in. They want a slice of a market that is worth more than $10bn a year and growing fast.

It is a logical move. Companies like Germany's SAP and US firm Oracle already dominate the market to supply enterprise resource planning software (ERP ) to huge corporations.

To grow they have to go for smaller customers, not least because the world's emerging economies are "mid-market driven", dominated by rapidly growing SMEs, says SAP boss Henning Kagermann.

And then there is Microsoft, which is pushing its range of ERP software yet again, now under the Microsoft Dynamics brand.

Bracing themselves for the onslaught are market leaders like UK firm Sage, US-based Intuit, and many smaller players.

'Sticky customers'

Selling ERP software is a difficult business.

It is complex. Making it fit in with the workflow of a company is a challenge at the best of times.

No wonder that firms tend to use the same ERP software for seven to 10 years, says Sage chief executive Paul Walker.

Henning Kagermann
SAP boss Kagermann bets small firms will generate strong growth

Big companies run it even longer, 10 to 15 years and more, reports Mr Kagermann.

Furthermore, this software doesn't travel well.

Quite apart from language issues it needs to be customised to fit specialised industries, and localised to meet national rules and regulations.

"In France our products are very French, and in Spain they are very Spanish," says Mr Walker.

It's also a fragmented market. Sage, for example, has 5.4 million SME customers worldwide, 700,000 of them in the UK.

And SMEs, says Mr Walker, are "very sticky" customers. Once they have settled on a supplier, they are very likely to stay with it.

All that makes it difficult for big companies to gain a foothold.

Local or global?

So what's better: A big application backed by a global giant or locally developed software?

Sage is a proponent of the second model.

SAP and Microsoft, says its boss Paul Walker, have one model that has to fit all.

Sage screen shot
It may look complex, but software is key to run a business

"But if you are a French company with 100 employees in a particular market, we have a product that fits that country and that market" - even though it may share common components with other Sage software.

Mark Thompson, managing director of UK-focused ERP software firm CedarOpenAccounts, based in Cobham, agrees. Companies like his are much better placed to "personalise our product" for specific industries.

"If you make your decision based on the scale of the supplier, you buy Oracle or Microsoft. But if you make your decision based on your market, and how your supplier knows this market, that's where we win over Oracle or Microsoft," says Mr Thompson.

Development costs

The big players dispute this and question the viability of the "local is best" philosophy.

Small software firms simply can't afford the escalating cost of continuous software development, says Klaus Holse Andersen, corporate vice president at Microsoft and in charge of Microsoft Dynamics.

"The cost of developing ERP software just keeps going up, and forces [small software firms into] consolidation," he says.

Sage may be a case in point. The company has expanded its reach by buying many smaller rivals over the past few years, and now has 13,400 employees.

Chris Pang, ERP expert at consulting firm Gartner, says that "a lot of consolidation is going on, with vendors trying to extend their reach geographically or vertically [into new industry sectors]."

After all, even Microsoft's offering is the result of a string of acquisitions.

Have partner, will sell

The decisive factor in the battle for market share, though, may be the quality not of the product but the sales channel.

To SMEs, says Mr Pang, "the vendors [are] the external IT department".

SAP Business One sales report
SMEs have to get to the bottom line

Sage, for example, relies on 20,000 partners to sell its products.

The company targets mainly firms with 20 to 50 employees, putting it in direct competition with SAP's Business One product.

"Truth is, they [SAP] don't have many partners to distribute this product," says Mr Walker - a contention disputed by SAP boss Henning Kagermann.

SAP is well-known for tailoring its products to industry needs, and says it works with partners to customise its products for SMEs.

The need for a big sales channel may favour Microsoft. It has thousands of partners customising its software for corporate customers.

"We can develop the platform, we can localise it," says Mr Andersen. "But to make the last mile work, you need partners who build the vertical [industry-specific] customisation that needs to be done."

He cites the example of Maritech, an Icelandic firm that customised Microsoft Dynamics for the frozen fish industry and sold the solution to 700 customers.

User-friendly

Microsoft's biggest trump card, though, is the success of its Office software.

Dynamics closely mirrors the look and feel of Office, and is tailored to different corporate roles: to sales people it will look like Outlook, to accountants like Excel, while casual users are offered a web portal.

CedarOpenAccounts boss Mark Thompson (whose software targets firms that are too large for Microsoft Dynamics) calls it an "unbeatable" solution.

Getting big

SAP also promises Office integration, and fields another argument: If a company wants to grow fast, the software provided by smaller companies may not scale that easily.

"If a firm says, I want to have 2,000 staff in two years, then yes, we don't have that offering," acknowledges Paul Walker at Sage.

It's a problem faced even by Microsoft, which uses SAP to run its own operations.

In real life, though, says Mr Walker, "it's a very small percentage of our customers that grow that fast; we lose less than 100 companies a year to churn because they grow beyond our reach."

Software as a service

But do small companies need to have a full IT infrastructure on-site in the first place?

At catering firm Authentic Food, for example, business controller Parminder Basran had to train his IT staff to the level of certified SAP developer.

Salesforce.com screenshot
ERP software does not have to run on a firm's own servers

For some ERP applications it might be easier to use ERP software as an online service, using the data centres of firms like Netsuite and Salesforce.com.

The value of this market is expected to triple during the next five years, according to Gartner.

Even SAP is getting in on the act. Codenamed A1S, it's new on-demand software for SMEs will launch this summer.

Henning Kagermann says that he expects to have 30,000 customers by 2010.

At Microsoft, Klaus Andersen has mixed feelings. He sees "definitely a trend" towards software-as-a-service, but is convinced that many customers will not want to store vital corporate information on servers run far away by another firm.

Mr Kagermann calls it "out-tasking", where companies move certain non-core functions outside their business.

Sage CEO Paul Walker
Sage boss Paul Walker says Microsoft is his main rival

At Salesforce.com, European co-president Lindsey Armstrong says the big players simply fail "to grasp that the landscape has changed".

Companies don't want to be lumbered with the same software for years, she says. On-demand solutions allow for "specialisation and constant innovation and upgrade".

Henning Kagermann is not convinced. "You can't be black and white here," he says. "You have to give businesses choices."

"For some firms or functions software-as-a-service will be best, for others on-site solutions provide the fit."

Three-horse race?

With products like SAP's A1S not on the market yet, it is difficult to predict the winners of this battle.

Paul Walker at Sage believes that most software giants will find it too difficult to sell to small companies. Their names are associated with software for huge corporations - with one exception.

"There is no question that today Microsoft is our biggest competitor - at least in the United States," he says.

But Microsoft's Klaus Andersen questions the viability of the Sage approach.

He sees a three-horse race, where his company competes with Oracle and SAP.

But while all firms - big and small - jostle for position, the ERP market just keeps growing.


SEE ALSO
Do small firms need big software?
02 Apr 07 |  Business
Oracle ups pressure on rival SAP
21 Mar 07 |  Business
The $60bn software battle
13 Apr 05 |  Business

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