The Discreet Charm of the SMB

As a rule, finance executives at small, Midwestern companies tend to be less guarded and less politic than their counterparts at large, East Coast companies. It's not entirely clear why that is. Some believe it's because smaller companies usually are closely held, and therefore less subject to shareholder and regulatory scrutiny. Some claim it's because quotes from executives working in Muskegon or North Platte rarely show up on the front page of the Wall Street Journal. Others insist it's a prairie thing.

Ask a question of a finance manager at a small manufacturer, though, and it's likely you'll get an honest-as-the-day-is-long kind of answer. No pausing, no editing, no deferring to general counsel.

Hence, when Dave Stout, international controller at Walworth, Wisconsin-based Miniature Precision Components Inc., says, "This is a huge event for us," you know he's not embellishing. The huge event is MPC's rollout of a new enterprise resource planning program—the first change in the company's ERP software in 30 years. Management at MPC, which makes molded-plastic auto parts at its five factories, believes the software will (among other things) help the company generate faster, more-accurate price quotes for the Big Three automakers. "It's going to trim our administrative costs and improve our profitability," predicts Stout.

That's big stuff for the smallish MPC. So, too, is the $500,000 or so the company paid Paso Robles, California-based vendor IQMS for the licensing rights to the software, which is called EnterpriseIQ. While large deployments of enterprise software can cost millions of dollars, $500,000 remains a sizable investment for a company with annual revenues of $150 million.

Given the stakes, it's not surprising that small to midsize businesses (SMBs) in droves have held off replacing their ERP systems for many years. But with the economy gaining steam, and with lots of business customers now asking suppliers to automate their order and inventory systems, SMB spending on ERP packages appears primed for a rebound. AMR Research, for one, foresees a 10 to 12 percent bump-up in ERP software investments this year by companies with revenues of $50 million to $250 million, and an 8 percent increase in ERP spending by businesses in the $250 million­to­$1 billion range.

By comparison, AMR figures spending by large companies on new ERP software will remain flat. "We didn't see an [ERP] buying boom by midmarket companies in the mid-1990s," explains AMR Research senior vice president Jim Shepherd. "So there's a real sense of pent-up demand."

Marquee ERP vendors, which tend to salivate at the phrase "pent-up demand," have begun to move down into the SMB sector. "There are only so many tier-one companies," explains one analyst. "But there are thousands of tier-two and tier-three companies."

Last year, market leader SAP AG demonstrated its rising affection for the lower tiers, substantially ramping up its main midmarket initiative, called mySAP All-in-One. A few months earlier, rival PeopleSoft came out with 13 new midmarket applications geared to businesses with $50 million to $500 million in revenues. And Oracle—which may see its hostile bid for PeopleSoft as a way to grow in the SMB market—is readying the U.S. launch of Oracle E-Business Suite Special Edition. That stripped-down ERP package is aimed at companies with as few as five users. "The faster we can come up with midmarket solutions," says Jacqueline Woods, Oracle's vice president of global pricing and licensing practices, "the better off we'll be."

This growing vendor interest is good news for SMBs. Certainly, the looming specter of the Big Three ERP players puts added pressure on niche vendors to close deals—and fast. As Larry Austin, MPC's vice president of finance, notes: "Some of the vendors we talked to had real hungry looks on their faces."

Fine Young Cannibals
Publicly, representatives of smaller ERP software vendors deny they're in panic mode. Certainly, CFOs at tier-two and tier-three companies should not expect the kind of absurd price breaks vendors offered after the enterprise-software market tanked in mid-2000. "The period of deep discounts is over," claims Tom Westerlund, vice president of solutions management at Alpharetta, Georgia, software maker Mapics Inc. "There aren't any unnatural acts [being committed] by the vendors that have survived."

Still, analysts and consultants say savvy shoppers can wrangle good deals from ERP-software salespeople. Typically, the list prices for ERP apps aimed at smaller businesses range from $100,000 to $500,000, including the core license fee and per-seat charges. Established vendors eager to break into particular industry sectors, or fledgling vendors looking for anchor tenants, will usually offer the best deals.

Industry analysts say less-prized customers can work discounts as well. "This is still very much a buyer's market," insists AMR's Shepherd. "The customer always looks at three or four products, and there's a great deal of functional overlap of products. Every deal is contended."

Potential buyers can use this overlap to their advantage. For example, analysts say a customer should never whittle down the short list of vendors too quickly. Likewise, a possible buyer would be wise to keep mum about which vendor is the front-runner to win the contract. In short, play vendors off one another. Says Austin of the beauty pageant at MPC: "We kept three vendors in it right to the end."

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