The small to medium-sized (SME) market is an extremely attractive target for enterprise software application vendors, according to an executive report just published Datamonitor, ‘Mid-market Strategies: succesful delivery of eBusiness technology to SMEs’.
The SME sector represents a still relatively untapped opportunity in areas such as enterprise resource planning (ERP), customer relationship management (CRM) and supply chain management (SCM). However, the report cautions vendors not to underestimate the struggle that lies ahead, saying that those lured into to the mid-market by the significant revenue prospects it presents should be prepared to have to fight very hard for market share.
Yes it is worth it – ERP, SCM and CRM expenditure by SMEs in Western Europe will more than treble from $2bn in 2001 to $4.6bn in 2005, a CAGR of 23%
The SME market is extremely attractive sector for software application vendors in search of new sources of revenues. This is due to saturation of the top-end of the software market, lower penetration of enterprise applications in the mid-market hence a source of untapped revenues and sales potential, and reduced presence of legacy applications, which facilitates technology implementation and integration and potentially favors the use of single software providers.
Mid-sized enterprises have generally been slow at embracing eBusiness technology. However according to Datamonitor, technology adoption will accelerate in the next year. This will be driven by growing awareness amongst SMEs of the efficiency gains technology can bring to their processes, technology offerings becoming more suited to SMEs specific needs and falling prices as competition between software vendors and service providers for ownership of mid-market customers intensifies.
While spend by large enterprises on ERP, SCM and CRM applications is expected to remain flat in the foreseeable future, the SME market is expected to experience significant growth. Datamonitor expects the Western European SME market for ERP, SCM and CRM applications to increase from $2bn in 2001 to $4.6bn in 2005, an average annual increase of 23%.
The greatest opportunities within the SME enterprise applications market lie in the CRM space
While ERP applications are generally the first area of enterprise application investment for SMEs (as the first priorities are often in financials, payroll and HR), the greatest opportunities within the SME enterprise applications market are expected in the CRM space. Datamonitor predicts that the Western European SME market for CRM applications will rise from $580m in 2001 to $1.9bn in 2005, a compound annual growth rate (CAGR) of 34% compared to 13% for ERP.
The large software vendors that have been targeting the North American SME market for some years are now adjusting and rolling out strategies to penetrate into Europe. This still relatively untapped market will prove difficult to succeed in, however, given strong national differences and the presence of local providers with a history of strong relationships with SMEs.
Vendors lured into to the mid-market by the significant revenue prospects it presents should be prepared to have to fight very hard for market share
The SME sector is marked by intense competition between both large vendors and incumbent mid-market players. Despite the opportunities this sector presents, the resulting price competition is making it a very difficult marketplace. Already some mid-market players such as JBA (JBA.V) and SAA (SAA.V) have suffered heavily, while other vendors such as QAD (QADI), Globia and Baan (BAAN.F) are having difficulties.
Mid-market application vendors have already built strong trust relationships with SMEs. With SMEs being generally more conservative regarding technology adoption and investment, the ability to generate trust is the key element that will make the difference, a challenge for new-comers to the market.
Mid-market customers are extremely demanding. They require cheaper, simpler products with fast implementation times and quick payback, backed by strong support. Generally struggling themselves in a competitive market where margins are tight, they cannot afford to invest heavily in technology solutions, services and systems integration. They are only interested in introducing a new technology if it can demonstrate clear and fast improvements to business and rapidly impact the bottom-line.
Software represents only a relatively small proportion of SMEs’ IT investment. It has to be borne in mind that software is competing against other areas of IT investment. It represented 20% of SME IT spend in 2001, whereas PCs accounted for 40%, networking solutions, printers and servers for 12% and services for 18%.
Martin Atherton, Datamonitor’s eInfrastructure analyst comments:
The intense competition in the marketplace, combined with the convergence of enterprise application groups (to be reflected in mid-market players’ portfolios of products and strategies as well) will certainly catalyze future merger and acquisition activity.
While the mid-market is very fragmented at the moment, a key question is whether a major global vendor will be able to establish itself as the mid-market leader in areas such as ERP or CRM. Indeed, the struggle is worth the returns, but vendors are going to have to fight very hard to secure the top spot.
For further information on the report, please visit http://www.datamonitor.com/all/reports/product_summary.asp?pid=BFTC0721