The prognostications of a vast untapped enterprise application market with small and medium enterprises (SMEs) have forced the vendor community into re-engineering the ways they have traditionally done business.
Revising sales models to include significant contributions from third parties is proving most challenging, because the economic drivers that have forged partnerships in the past are not valid in the SME market. The changes needed to build a new class of channel partners will require SMEs to modify assumptions traditionally associated with business application sourcing.
Meta trend: During 2004/05, post-"go live" ERP organisations will focus on total cost of ownership, value delivery, usability, continuous business improvement, and targeted extensions (e.g., supplier relationship management, channel management). ERP vendors will offer enhanced post-implementation services to maturing ERP customers. During 2004-07, ERP vendors will redouble their efforts to penetrate the mid-market, competing more aggressively with Microsoft and a shrinking set of small ERP vendors. By 2007, ERP vendors will embrace Web services to support inter-enterprise integration.
Targeting the market for SMEs has become something of a mantra in the current IT industry. Whether it is voice, middleware, or servers, vendors across the spectrum of IT products are considering what they believe is an untapped market for their wares. However, the opportunities that exist to exploit this market are in many ways a result of neglect. Both product design and go-to-market models have evolved throughout the years on a steady diet of very large sales into resource-rich and cost-immune enterprises. As such organisations seek to digest what they own and question the way they ended up with their current state of affairs, the vendor community has been left with little choice but to -move downstream." With SMEs now more necessity than nicety, all four P's (i.e., product, price, place, and promotion) of the market mix are being reconsidered.
Enterprise application vendors are now starting to realise that success in the SME market is predicated on the reduction in demand for professional services.
As Meta Group highlighted in previous research, the factors that unite SMEs are cost and resource constraints. Furthermore, our report, Deriving Value From 21st Century ERP Applications , identified that professional services were, on average, 40 percent of total ERP implementation costs -- the single largest component. By comparison, software licence costs were 25 percent. As the application vendor community has sought to tap into the SME market, it has also been pressed to find ways to reduce the costs associated with the service implementation components of such projects. The methods of doing this have been two-fold.
First, from an architectural perspective, vendors have been seeking ways to design products for heavy configurability and low customisation. Second, vendors have considered fixing the price of ERP implementation by working with their systems integration partners to lock down a specific set of deliverables. Oracle, Siebel, and PeopleSoft have all been pursuing this approach. Enterprise application vendors are now starting to realise that success in the SME market is predicated on the reduction in demand for professional services.
At the same time that the demand for services is under pressure, the availability of offshore service providers is on the rise. We predict that 40 percent of IT operations will be moved to offshore facilities by 2007/08 and that 50 percent of corporations will establish facilities and move wholly-owned operations to offshore locations.
By the end of the second quarter, we expect experienced on-site/offshore teams with proven methodologies to take 10 percent to 12 percent of all midmarket ERP implementation projects.
It is the dual dynamics of reduced demand and margin for services associated with the SMB market that strike at the very heart of the economics that have traditionally bound enterprise application vendors and their partners. Although the new licence sales and ongoing maintenance fees they generate account for the bulk of the vendors' gross margins, it is the services fees that do the same for their partners. The margins from hardware and software product sales are generally incidental. The application vendor community is facing a dilemma. It needs partners to support its sales efforts to SMEs. However, what they have traditionally offered as an incentive -- large professional service fees at high margins -- is mutually exclusive with market requirements.
There is essentially only one solution available to vendors. They need to allow third-party partners to augment their revenue streams with sales of products that they build themselves and that extend on the vendors' offerings. These are exactly the same types of relationships that many of these same vendors have established with suppliers of databases, application servers, or rules engines (e.g., Siebel and Microsoft/Oracle, Siebel and Tibco/WebMethods/etc., SAP and IDS Scheer). This -independent software vendor" approach will prove challenging to many vendors that have never set explicit boundaries on the extent of their development efforts or examined the procedures necessary in adjudicating the process for moving partner-developed functionality down the stack.
Not only will such changes prove challenging to the vendor community, but also many in the existing partner community will not be able to modify their businesses properly. The successful partners will be those that recognise that the shift from systems integrator to independent software requires a fundamental assessment of their internal processes. Therefore, SMEs will need to augment intelligent IT sourcing processes with three major partner selection criteria:
Bottom line: SMBs will not only have to factor in the competency of a vendor's channel partners as key criteria in package selection, but also have to do so on modified criteria. Equally important as professional service skills will be the partner's competency and commitment in developing and maintaining products that extend the vendor's core product platform.
Business impact: By taking a holistic view of vendor and partner as the ultimate product provider, SMEs will increase the likelihood of obtaining value from their investments during the long term.
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