Choosing your destiny

Resource-constrained organisations are digging their own hole when it comes to costly business applications.



commentary Resource-constrained organisations are digging their own hole when it comes to costly business applications.

I previously spoke about the problems with the small and medium business (SMB) nomenclature and the importance of focusing on flexible and low-cost design to address the resource constraints faced by organisations.

Both vendors and customers alike have built up a symbiotic relationship in which the vendor supplies products that require ever-increasing levels of complexity.
The reason this is so important is that benchmarking data from Gartner shows that information technology in general are more expensive to smaller organisations.

We know that overall IT spending, both as a percentage of revenue or total costs, is inversely proportional to an organisation's size. But these disparities are even more pronounced when we look at the total cost of ownership (TCO) for enterprise resource planning (ERP) deployments.

For example, Tier 2 organisations (organisations between US$200 million and US$1 billion) ERP TCO has been 138 percent higher than that of Tier 1 enterprises (those above US$1 billion). Tier 3 organisations (those below US$200 million) are incurring 150 percent higher TCO than Tier 2 enterprises and 253 percent more than Tier 1 organisations! This has been happening in spite of the fact that that all companies have a surprisingly similar pattern of capital versus operational spending.

When we look at staff allocation in IT departments, the picture becomes clear. Across nearly every function the number of staff required decreases as a total percentage as the organisation size increases. There is one noticeable difference -- application maintenance and development. Here staff levels increase 41 and 36 percent respectively as organisation size goes up, meaning business applications don't scale like other technologies in an IT portfolio.

The worry for smaller organisations is that application maintenance and development full time employment percentages of larger organisations might actually be what are required of these products. What stops small organisations from staffing such functions appropriately is the necessity to staff other critical IT functions.

What naturally follows is a "value latency" in business applications, which can be addressed only after additional resources are applied. It can be argued that the cost structure associated with the applications themselves is the problem.

Both vendors and customers alike have built up a symbiotic relationship in which the vendor supplies products that require ever-increasing levels of complexity, in response to the requests from a number of IT specialists working within large organisations.

Business users in these organisations are also guilty. A pre-occupation with the functional aspects of business applications has resulted in sourcing strategies that put an undue weight on feature breadth. Too often this eliminates perfectly adequate, low-cost low-complexity Tier 2 solutions from consideration.

Furthermore, a near-habitual desire to customise the products once purchased provides the fuel to justify the behaviour of vendors and IT departments. All parties appear joined in a silent conspiracy of inefficient consumption.

Increasingly there are alternatives -- whether it's the new solutions Tier 1 suppliers such as SAP, Microsoft's entry in the business applications market, hosted applications like salesforce.com, or potentially even open-source solutions like SugarCRM or Compiere. But here's the thing.

Unless the customers are prepared to make reciprocal changes in their behaviour around sourcing, deployment, and around their maintenance practices, nothing is going to change for the resource-constrained organisation.

Brian Prentice is senior analyst at Gartner and focuses much of his industry research and analysis on the trends affecting the uptake of business applications by organisations with revenues below US$1 billion. He can be reached at brian.prentice@gartner.com.

This article was first published in Technology & Business magazine.
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