Strategic software planning for SMEs

The small and medium enterprise (SME) market is of growing interest to IT vendors across the spectrum. But, in truth, little is known of this shadowy group of companies beyond that it is expanding rapidly and represents great potential for IT-related sales.

Unfortunately, no definitive database of sub-enterprise level companies yet exists, making it difficult to investigate trends, such as strategies SMEs use to ensure adequate software provisioning within narrower financial constraints than their larger counterparts.

In an attempt to strip away the mystery, ITWeb hosted an online survey aimed at gathering information on SME software strategies. The disappointingly low number of responses underlined how difficult it can be to pinpoint members of this sector.

However, South African IT research house BMI-TechKnowlege was able to provide some analysis on software provisioning from a general study of SMEs to provide some guidelines, and other anecdotal information was made available by IT providers with SMEs already on their books.

Most SMEs do not have large software budgets, which dictates the strategies they follow.

The smaller the business, the more likely decisions are to be made with business needs rather than IT needs in mind.

Rick Parry, MD, Progress Software

"The IT industry has an appalling track record on delivery," laments Rick Parry, Progress Software MD. "SMEs in particular are extremely cautious about IT spending, particularly as a result of all the expensive mistakes made in preparing for Y2K.

He says most companies still see IT spending as a "grudge purchase" and are much more focused on return on investment (ROI) than before Y2K.

"The only way an SME can be assured of ROI is to find a solutions vendor that understands that SME`s particular line of business." As an example, he cites a North American lumber company that, in preference to major software brands, chose a Progress Software partner that had already developed a solution specifically for lumber companies.

"A lumber company works differently to almost any other kind of business, and therefore an industry-specific solution is likely to deliver a better ROI than any famous-name vanilla product."

Parry says the value proposition of a standards-based development platform is that it makes it easy for partners to build on a common base to specialise in software solutions for specific verticals or niche markets. "Only developers who understand an industry are able to translate technology into business value."

With a plethora of vendors and software choices, some may ask why SMEs should even bother with software strategies when they can buy what they need off the shelf.

"This would be a fatal flaw for any business," cautions Keith Fenner, AccTech Systems business solutions and development manager. "They must consider a whole host of options when looking at their tactical and strategic planning," he emphasises.

"There are some `no-brainer` decisions such as using Microsoft for office automation, but there are other options that should be explored to consider reducing cost of ownership."

Fenner explains that SMEs do not share the same benefits as larger organisations. "The shortage of finance and staff skills makes strategy even more vital to ensure envisaged benefits are actually delivered, because technology investment has become an intrinsic part of business management."

"SMEs do not have large IT departments and expert skills on hand to configure and customise software," says Steven Cohen, Softline Pastel MD. He believes that "easy to use, affordable, off-the-shelf packages that can be implemented in a short timeframe are preferred".

This view is widely held and supported by BMI-T`s research. "The off-the-shelf approach dominates the SME sector, with only 13% of respondents not following it," says Anita Mathews, BMI-T deputy MD. "Buying best-of-breed is the primary approach for 71% of the 267 respondents and a secondary approach for 16%."

Keith Mullan, M-Five Software Hansa business solutions MD, says off the shelf is ideally suited to small companies with up to five users. "However, as companies grow in size, their needs will become more specific, requiring greater degrees of configuration."

A common argument in favour of off-the-shelf software is that design methodologies are based on best practices.

The variety of common business applications software available on the market has naturally seen a decline in the number of custom-developed applications, particularly for the SME market. The consensus seems to be that custom development is too expensive and difficult to maintain.

Most clients are not interested in `lite` versions of software. Often the needs of SMEs are as complex and demanding as those of their peers in large organisations.

John King, outsourcing business development manager, Faritec

"In seven years working in the mid-tier space I have yet to see bespoke [ground-up] development," says Ben Swartz, Symetrix MD. "Smaller companies really cannot cope with the associated open-ended budgets and deadlines."

Mullan concurs that bespoke development is hardly ever economical for SMEs. "The only bespoke development undertaken by M-Five Software is for large-scale industry projects such as franchises."

Swartz says buying off-the-shelf solutions enables smaller companies to make use of top developers` skills and global IP to acquire a 60% to 80% "fit", with little additional development required.

"I can`t understand the logic of bespoke development or developing in-house solutions when there is so much risk involved," comments Swartz. "The only time it makes sense is when business requirements are extremely uncommon or specific."

SME market psychology is another factor vendors have to take into account when targeting this sector. Faritec found that the term "customisation" was not well received because, for many SMEs, it had negative connotations of not being able to secure future backup and service.

"Sales immediately increased once Faritec decided to move to software that was `configurable` by default to meet individual needs without requiring any permanent `customisation` of the product," says John King, Faritec outsourcing business development manager.

Deon Scheepers, Atio Corporation technology solutions director, says his company also favours the configuration approach. "Any one of the components of our solutions are off-the-shelf, but we add value by integrating and configuring these components to meet business needs based on actual workflows."

Swartz reflects that sometimes even small businesses are not able to understand business needs, and consequently are unable to choose the appropriate software. "The need for outsourced partners will remain," he observes.

"Outsourcing is the answer when companies need to get extra functionality from basic software deployments," he says. "Outsourcing companies have the expertise and experience to bridge the gap."

Scheepers endorses the outsourcing approach for SMEs. "A solutions-based approach helps avoid interoperability problems and delivers better business value," he says.

"Smaller companies need help in looking at market trends and thinking in terms of convergence, integration and expansion to avoid increased total cost of ownership (TCO) through buying disparate software systems that can`t adapt and scale to changing business needs."

Scheepers says SMEs can derive better ROI by considering the possibilities of convergence. "Network and storage management, PABX, messaging, faxing, call centre, database and CRM solutions are all software-based, and convergence in this space can only add business value to SMEs."

Jimi Lutz, Dimension Data subsidiary 3Fifteen development director, offers a fresh perspective. "Due to the large number of programmers in the market, there has been a proliferation of small software development companies, that are undertaking bespoke development at heavily discounted prices."

Lutz says these small companies are able to develop solutions some SMEs perceive as offering a competitive advantage at a lower price than off-the-shelf solutions. "While Microsoft`s CRM solution may be priced for the SME market, many of these companies are unable to afford the required supporting infrastructures and applications."

However, Swartz declares: "Now is the time for off-the-shelf solutions - bespoke development is ludicrous as a business proposition for SMEs."

BMI-T research supports this comment, with reports saying as much as 42% of SMEs do not use the bespoke or "build" strategy in software development. For 25% of respondents, development of solutions to fit company needs was a secondary approach.

As Softline Pastel Cohen`s points out: "The downturn in IT spending over the past few years, and slowing growth in the high-end of the market has forced many vendors to look for new opportunities in the SME space."

This has resulted in several big vendors stripping down the enterprise versions of their software and offering so-called "lite" versions to the SME market at reduced prices.

"While many software vendors are refining their offerings to target SMEs more accurately, they still fall short in terms of affordability and flexibility," says Willie Bezuidenhout, Computer Associates (CA) (Africa) business technologist. "Like corporates, SMEs are now having to address modern business processes like HR and procurement."

There has been some uptake of the lite versions due to the apparent ease of upgrade and the fact that the SME market is notoriously price-driven, but that is beginning to change. As the market matures, SMEs are beginning to look beyond price at business value and ROI.

"Most clients are not interested in `lite` versions of software," says Faritec`s John King. "Often the needs of SMEs are as complex and demanding as those of their peers in large organisations."

King says the release of stripped down versions of enterprise products has not been successful. "Faritec has seen an exponential growth of its full managed business intelligence (BI) service since introducing a new pricing model that enables SMEs to access full functionality of the BI offering by spreading the cost over a contractual period."

Another strategy Faritec found to be unsuccessful was removing all reference to the underlying technology. "We learned very quickly the SME market is not only price-driven, but also brand-driven," says King. "By reintroducing the underlying brand of Business Objects, the SME market`s faith was restored in our offering because they knew it was backed by a large, reputable, international brand."

Although it is still early days, Oracle is reporting good take up of its lighter version of Oracle 10g, known as standard edition one, or SE1. Since its launch, SE1`s pricing and licensing has been revised to allow for the use of two processors instead of the original one.

Oracle claims 60% of the SME market has standardised on Oracle because of perceived reliability and scalability. "We feel confident to take on Microsoft in the lower end of the market," says Tim Payne, Oracle director for technology marketing.

Microsoft enjoys high brand awareness with a large installed base, and perhaps it is for this reason the company has released ERP and CRM solutions aimed specifically at SMEs.

"Commoditising the ERP and CRM space will drive down the costs of licensing, implementation, consulting and maintenance," says Thomas Hansen, Microsoft SA small and mid-market solutions and partner group director.

"Emphasis is on SMEs, particularly with the new CRM products," says Hansen. "There is much opportunity in this market with CRM penetration at only 20%."

According to Microsoft, its Small Business Server suite of products, like the SME ERP and CRM solutions, have had a positive reception.

"There is a significantly high level of software piracy in the SME market, but as software vendors make piracy increasing difficult, SMEs are turning to the lower TCO offered by open source software [OSS]," says Cassim Parak, e.com institute MD.

As far as OSS is concerned, the BMI-T research found that most companies had either not heard of OSS, or did not know much about it.

Only 12% of respondents reported that they had tried some OSS products, and a mere 2% of companies surveyed said they depended on OSS.

However, some vendors feel this is beginning to change. "Business people are getting educated," says Nols de Wet, Obsidian systems marketing director. "Small companies are running increased risk of crippling fines for running pirated software and are turning to OSS because they are realising it is unnecessary to pay more for the same functionality."

According to the Business Software Alliance (BSA), if piracy is forced down by 10% in the next four years, over 3 000 jobs could be created and the economy could receive a boost of R12.8 billion.

De Wet says today`s graduates are entering the business world with more computer knowledge and are not as easily fooled as those who were not exposed to computing at an earlier age. "There are an increasing number of people who recognise that OSS fulfils business needs at a much lower cost.

"OSS is good news for the whole IT industry, not just SMEs," says De Wet. "OSS will put everyone on an equal footing, which means only those companies delivering constantly good service will survive."

Clearly an OSS evangelist, De Wet says making the decision to switch to OSS is really choosing between the pain of the security weaknesses and the pain of getting used to a new, but more secure environment.

The BMI-T report concludes that although companies in the education and private healthcare, insurance and retail trade sectors are using OSS, the overall number is still low.

"The change will not come in a wave," says De Wet, "but as skills develop and interest increases, there will be a gradual swell of OSS that will hopefully reach a critical mass in about a year`s time, leading to the demise of proprietary software."

Faritec`s experience makes it clear that although SME needs are similar to those of larger companies in terms of software functionality, financial needs are quite different.

Parry agrees that when it comes to SMEs, it is a totally different marketplace. "SMEs are not looking to buy any particular technology, they are looking for value and as little hassle as possible, and to squeeze value out of existing IT investments."

This realisation has led Faritec and other companies like MIP Holdings to develop more suitable business models. "If a strategic software purchase is unaffordable, the fundamental business model is wrong," states King. "Faritec has solved the problem by spreading cost over time and building support, training and maintenance into the price."

Although this eliminates large up-front capital investment by the SME, few vendors or service providers are able to source the funds required to make such a service-based model available.

The benefits to SMEs are obvious. "The service-based model reduces TCO by up to 30%," emphasises King. "The service provider carries the licensing costs by maintaining a pool of licences, which means SMEs can access services only when required, such as budget time, effectively moving into the `on demand` space."

Says Parry: "The smaller the business, the more likely decisions are to be made with business needs rather than IT needs in mind." Unfortunately, says Jane Thompson, EOH KPMG Consulting executive director, SMEs tend to confuse business needs with alluring software features.

Like Faritec, MIP Holdings has developed a service-based model to suit the needs of SMEs by avoiding the need for huge up-front payments, but takes it one step further by linking payments to service delivery. "We have developed a risk-based billing model," explains Richard Firth, MIP Holdings CEO.

The model is based on the concept of a contractor in the building industry, where the customer has a single point of payment and the contractor or service provider assumes some of the risk.

"In this billing model, payment is based on pre-identified key performance indicators (KPIs), which means customers are charged based on the level of service they receive," explains Firth. "This guards against poor service delivery, because the service provider is paid only for the value delivered, calculated in terms of the KPIs."

"SAP has a global commitment to SMEs," says Patricia Martins, SAP Africa`s SMB manager.

Martins agrees with King of Faritec that SMEs` needs are often as complex as big business, although volumes may be lower.

One of the biggest challenges facing SAP is the perception that its solutions are too expensive for SMEs. "We are hoping to change that perception with the help of local case studies expected at the end of June," says Martins.

Avoiding the pitfalls of software provisioning appears to be largely about education, but for those companies that have not opted for a managed services approach, based on years of experience and market research, there is the option of integration, which is designed to make IT resources available to those who need them.

"Uncoordinated software acquisition usually results in a grid of complexity with different methodologies, which is difficult and expensive to control," says Fraser Kyne, Citrix field product marketing manager.

However, Kyne explains that where no coordinated software strategy has been followed, there are access infrastructure solutions to remove the obstacles between employees and IT resources and increase security through specialised access control.

Access infrastructure software could be viewed as the ultimate "get out of jail free" card for all businesses, including SMEs, with regard to software strategies. According to Kyne, once an access infrastructure is in place, the adoption of a carefully thought out software strategy becomes less important, if not irrelevant.

Kyne says that having an access infrastructure frees the business from software decision-making constraints. "It means never having to regret software decisions, providing a methodology that makes all future changes possible."

In-house or bespoke development is likely to be undertaken only by the higher end of the SME spectrum.

Andrew Lindstrom, chairman, BSA

When it comes to formulating a software strategy," says Andrew Lindstrom, BSA chairman, "companies need to decide what they want to achieve, what they have, and where they would like to see the business going."

CA`s Bezuidenhout says the key challenge for SMEs is to select software that meets specific needs without the price tag and complexity associated with "big business" solutions.

Lindstrom summarises that, in general, off-the-shelf solutions will meet the needs of smaller SMEs. But he cautions that, as complexity increases, this becomes less of an option.

Bezuidenhout observes: "Fortunately, the increasing functionality and popularity of low cost, open source software will provide some answers, as will hosted (outsourced) applications, which are becoming increasingly prevalent in the SME space."

Finally, Lindstrom says that, for now, larger companies in the SME space are more likely to employ a combination of off-the-shelf solutions, specialised configuration of standard applications and Web-based outsourcing solutions. "In-house or bespoke development is likely to be undertaken only by the higher end of the SME spectrum."