SMBs post big potential for tech vendors

Low IT adoption among India's smaller companies will create growth opportunities for vendors in the years to come, says analyst.
Written by Sol E. Solomon, Contributor

Small they may be but the Indian SMB (small and midsize business) segment plays a key role in driving the country's industrial development, according to industry watchers.

Although SMBs have a critical impact on promoting entrepreneurship and employment generation in the country, IT adoption among them is still relatively low, Rajdeep Sahrawat, Nasscom's vice president, said in an e-mail interview. He noted that in terms of employment creation, this sector is second only to agriculture, employing about 14 million people.

According to Sahrawat, there are some 3 million SMBs in India, accounting for 50 percent of private sector employment, and between 30 and 40 percent of value-addition in manufacturing. SMBs contribute almost 50 percent of industrial output and 42 percent of India's total exports, he added.

Compared to their global peers, however, these businesses, which constitute more than 80 percent of India's total number of industrial enterprises, are still at a relatively basic level in terms of the use and deployment of IT, he said.

Manish Bahl, manager of custom research at Springboard Research, said although SMBs contribute around 60 percent to the country's total GDP (gross domestic product), their spending on IT accounts for 35 percent of India's overall IT spending.

"This highlights the huge potential growth opportunities for vendors in the years to come," Bahl said in an e-mail interview.

He added that the level of technology adoption among India's small businesses (SBs), with up to 99 employees, differs from that of midsize businesses (MBs) with 100 to 999 employees. "While SBs are aggressively investing in the basic computing infrastructure, MBs are looking at boosting their IT infrastructure for increased revenue growth and competitiveness," he said.

However, heightened competition--both locally and abroad--and a market structure that is increasingly becoming customer-oriented have resulted in a rise in IT spending among some Indian MBs.

One interesting trend which has taken momentum is the demand for customized solutions by SMBs. Today, enterprises look for products and solutions specifically designed to meet both their and their customers' needs.

Manish Bahl, manager of custom research, Springboard Research

Bahl explained: "As a result, the demand for IT is witnessing a gradual transformation from hardware to a solution-oriented portfolio, as matured companies have started looking for enterprise applications such as enterprise resource planning (ERP) and customer resource management (CRM).

"One interesting trend that has taken momentum is the demand for customized solutions by SMBs. Today, enterprises look for products and solutions specifically designed to meet both their and their customers' needs," he said.

According to Nasscom's Sahrawat, while IT investments by Indian SMBs have been growing steadily, their IT deployments are often not aligned with their critical business processes. This, he said, leads to a general dissatisfaction over the returns on investment of their IT purchases.

"Therefore, the appropriateness of IT adoption is more relevant rather than merely the quantum of IT investment," he noted.

Vertical SMB approach
Nasscom, which is India's trade body and chamber of commerce for the IT-business process outsourcing industry, runs an initiative called Cluster Development Program, that aims to increase IT adoption among SMBs across vertical industries. The program is part of Nasscom's Domestic IT Market Development Initiative.

"Given the huge heterogeneity of this segment, it is important that the right clusters are identified so that early successes can provide a 'lighthouse' effect", Sahrawat explained. "It is equally important that before designing any recommendations for a cluster, the business characteristics and IT adoption challenges of each cluster are well understood."

Nasscom's current initiatives also involve the auto-component clusters in Pune, Chennai, and India's National Capital Region, a general manufacturing cluster in Hyderabad, and an engineering cluster in Jamshedpur.

"Nasscom is also championing technologies like SaaS (software as a service) and cloud computing, to provide affordable IT solutions for the Indian SMB sector," said Sahrawat.

He noted while India's government is cognizant about the need to increase the competitiveness among Indian SMBs through enhanced technology adoption, it does not have specific initiatives for increasing IT adoption in this business segment.

Given the relatively poor understanding of India's SMBs about the value of IT adoption, and their lack of knowledge on how to go about deploying such initiatives, Sahrawat suggested some ways in which the government could help SMBs in this area, including:

  • impress awareness that IT investment and related policies will enhance the productivity of individuals and firms;
  • create an escrow fund with tax money that an SMB can withdraw only for new skill building and skill upgrading programs;
  • establish a fund for enabling investments in IT by SMBs, similar to India's Technology Upgradation Fund (TUF) established for the textile industry;
  • provide special benefits by way of reduction in import tariffs, low interest loans, among others, for Indian firms that are innovative and have a focus on the domestic market; and
  • enhance capacity building for IT skills in the vocational education institutions.

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