Targeted Functionality

In 2003, it seemed as if software vendors viewed the mid-market as low-hanging fruit that was ripe for the revenue picking. Despite aggressive marketing, most software offerings targeting the mid-market did not exactly take off. In the following Q&A, Mike Dominy of The Yankee Group reflects on the past year and offers future insight into the tricky mid-market sector.

How does The Yankee Group define the SMB market? Is it the same as the mid-market?

DOMINY: The Yankee Group defines SMB as organizations with two to 2500 employees. The mid market is a bit different. That market lies between the SMB and the large enterprise market. Companies in this segment typically have annual revenues between $300 million and $1 billion. The mid market is unique -- especially in the consumer goods industry -- because these companies must surmount the challenges that large consumer goods companies face, but do it with smaller IT budgets.

In 2003, SAP, Oracle, Siebel and other large vendors designed new applications that target the SMB and mid markets. Why would companies in these markets find the offerings from tier-one vendors compelling? How did this SMB strategy pan out for the big vendors?

DOMINY: Smaller enterprises find these offerings compelling if a trusted channel partner delivers (sells, implements and services) the solution. The further down market a vendor goes, the more it must rely on channel partners.

The application vendors that focus on the large enterprise market, Siebel and SAP in particular, have forged relationships with Microsoft and other channel partners to penetrate the smaller enterprise markets. Specifically, SAP has relationships with several channel partners with strong relationships in the SMB market.

The large application vendors' SMB strategies have not been as successful as they had hoped. Despite extensive marketing, we did not see significant penetration in the small and mid-sized markets. This was not a huge surprise since developing the channels in the smaller enterprise markets takes time. Vendor consolidations in the tier-one market also diverted vendor attention away from the SMB and mid markets.

What impact does Microsoft have on the SMB market?

DOMINY: Microsoft is a huge force in the SMB market, not only from an infrastructure perspective, but also in the area of ERP and supply chain management. Microsoft's ERP applications (Great Plains and Navision) and its relationship with small to mid market ERP vendors, such as Epicor and Exact, have increased Microsoft's presence in the small and mid markets.

How can tier-one vendors be more successful in the SMB and mid markets?

DOMINY: Large application vendors can be more successful in the smaller markets by more narrowly defining their solutions, making them much easier to implement and use. In particular, vendors that wish to penetrate the consumer goods mid market must deliver specific consumer goods functionality without requiring extensive internal or external resources. Targeted functionality must include: trade funds management, promotions planning, sales forecasting, and inventory planning.

What is your interpretation of IBM's SMB and mid market strategies?

DOMINY: IBM's OnDemand initiative appears to address several key mid market issues. Smaller enterprises often require comprehensive functionality found in applications offered by vendors such as Siebel and SAP. However, these smaller enterprises want to leverage existing IT investments and avoid additional license fees and systems integration costs. OnDemand has the potential to address both of these requirements by delivering leading application functionality via the Internet. By the end of 2004, IBM's success or failure in the smaller enterprise markets will become clear.

What were some of the other key trends and takeaways in 2003 as it relates to the SMB sector?

DOMINY: Another key trend in the SMB space during 2003 was the increased level of electronic integration with large customers. Many large retailers have initiated supplier enablement programs designed to eliminate paper-based exchange of business documents. During 2002 and 2003, vendors such as ADX and SPS Commerce helped retailers and their suppliers move from mail, phone, and fax-based exchange of electronic documents to EDI and XML. Related to this trend was the continued adoption of the AS/2 standard as well as UCCnet.

Any recommendations for SMB's IT initiatives for 2004?

DOMINY: Small and medium sized consumer goods businesses should continue to demand highly tailored solutions that address functionality requirements inside the enterprise and enable them to manage the escalating B2B integration and communication requirements being mandated by large retailers and other customers. The ability to exchange transaction data and information easily with business partners will be a differentiator in the SMB and mid markets in 2004 and beyond. As large enterprises require more partners to share information electronically, companies with stronger B2B capabilities will win more business.

What can we expect to see in 2004? Will more large vendors try to enter the online arena and offer inexpensive IT packages with low, monthly fees, etc?

DOMINY: In 2004, vendors with Internet-based applications that deliver best-in-class functionality such as Red Prairie, Manugistics, and Manhattan Associates will push further into the SMB and mid markets. Smaller enterprises -- especially in the consumer goods industry -- will jump at the chance to enhance their supply chain capabilities without massive implementation investments.

Meanwhile, large vendors will scrutinize Siebel's and IBM's results before significantly changing their SMB and mid market strategies. Providing technology through a monthly per user fee is dramatically different than the tier-one vendors' existing business models, making it difficult for them to shift revenue without disappointing investors.

The Bottom Line

It appears unlikely that SAP will change its partnering strategy, while Oracle will likely leverage its outsourcing business as a way to penetrate more of the small and mid sized markets.