Falling prices are encouraging SMEs to upgrade both their hardware and software, enabling them to tackle more complicated tasks and processes, writes Stephen Pritchard
Smaller companies are the first to feel the cold wind of recession and, so convention has it, the first to see the green shoots of recovery.
In the US - the world's largest IT market - there are between 8.5 and 9m small and medium enterprises (SMEs), employing anywhere from just one person to a few thousand staff. And, after a distinctly chilly patch, they are starting to spend again, including on information technology.
"For the first time in four years, we are seeing an absolute increase in dollar spend by SMEs," says Frank Muehleman, head of the small business council at computer manufacturer Dell.
This change comes even after a period of sustained falls in the unit costs of PCs and associated technology.
Mr Muehleman says that companies are being driven to spend both by the need to accommodate more powerful software, and because cheaper hardware allows them to carry out more complex IT tasks.
"Small businesses are also finding that they need to migrate their legacy systems," he says. "They are finding that running their business with Excel spreadsheets does not scale," he says.
This translates into increasing interest from smaller - and especially mid-sized - companies in technology that had been the preserve of the larger enterprise, such as supply chain or customer relationship management software, or high speed communications links and powerful servers located in data centres.
There is no shortage of vendors keen to sell more to smaller firms. In software, Henning Kagermann, chief executive of SAP, the enterprise software company, has said that the SME market would be one of its priorities for 2004.
Microsoft, through its acquisition of Great Plains and Navision, has made a concerted effort to move away from simply selling server and desktop software to small businesses, by adding more scalable applications to its portfolio.
According to Meta Group, the US-based analysts, merger activity among mid-sized software companies, and competition among the larger vendors, will result in better software for small and medium businesses.
By around 2005 to 2006, there will be more vendors focusing on SMEs in their specific vertical markets, Meta says.
Software will be easier to use, more flexible, and better suited for faster implementation. This is an important issue for smaller businesses, where growth is often a focus and waiting 18 to 24 months to roll out software is impractical.
Carl Lehmann, a Meta analyst, points to competition from Microsoft, in particular, as a source of pressure on other vendors to invest more in products for SMEs.
Better prices for hardware are helping stretch SMEs' budgets further. "There is no question that affordability has improved," says John Brennan, worldwide head of small and medium business at Hewlett-Packard. "You can now buy a server with all its software for $999. Affordability has shifted tremendously."
And, although companies large and small welcome lower prices for IT, the way cheaper systems affect them differs markedly. For companies in the mid-sized and enterprise categories, cheaper computing gives the promise of doing more with less.
For a business at the larger end of the small company market, it might allow them to expand their IT-driven activities. For a micro business, it might open the door to doing things that they simply could not have done at all before.
For very small companies, perhaps with fewer than 10 employees, falling hardware prices allows them to introduce dedicated servers instead of relying on make and mend solutions, such as a spare desktop PC, or simple peer-to-peer networking. Companies at the next rung in the ladder are using lower costs to move to more professional IT set-ups.
This is partially because lower prices mean that they can, but it is also because a heavier reliance on IT means that they must.
"If you look at the dependence being placed on IT systems, SMEs need to make sure they have a proper data centre, not a data centre under a table or one that is growing like Topsy," says Richard Porter, head of technology development and integration at Deloitte, the professional services firm. "They need to put it all into a well-managed facility."
But greater dependency on IT brings with it greater risks, greater costs, and a need for greater expertise. Mr Porter suggests that businesses need to build a certain level of expertise in-house, preferably at an executive level.
Not all smaller businesses, though, can afford to invest significant sums in people, even if hardware and software is significantly cheaper than three or four years ago.
BDO Stoy Hayward, a professional services firm, provides strategic IT advice to smaller businesses in the form of a "CIO in a box", an adviser who sits alongside the client's in-house IT manager and provides both expertise and often, much-needed board level clout.
"Companies will usually only be able to employ a CIO as they grow," points out John Dennison, a partner in BDO's IT services division.
SMEs are considering other ways to both increase their IT expertise and stretch their budgets. Small firms are more willing to rent software or services from an outsourced supplier. Better and cheaper networking technologies make this a realistic option even for relatively small businesses.
"There is a greater acceptance of remote services and a greater acceptance of outsourcing," says Jacqueline Woods, head of software licensing at Oracle. "In turn, outsourcers can offer services more cost-effectively, using Linux and cheaper hardware."
Less radically, the search for better value is prompting more smaller companies to buy direct from hardware manufacturers or software publishers, rather than from traditional local resellers.
This trend is perhaps most marked in geographies such as the UK and Ireland and the US, but direct sales of IT equipment are growing globally.
And smaller businesses are increasingly willing to split advice and purchasing when it comes to IT decision-making.
"Advice, assurance and purchasing does not have to be through the same vendor," says Deloitte's Mr Porter. "For SMEs, it is more a question of having the right people around them to make it happen."
What customers and experts say
- Roger Williams, SME specialist, PA Consulting Group
"A lot of larger company IT investment has a large amount of me-too about it. Companies think that because a competitor has CRM, they should have it too. When you talk to SMEs they have a much more wily view of investment. They say 'show me the money, where is the value?' and that is a far more important part of the decision-making process. They are more sceptical about [vendors'] promises and like to make decisions themselves, or take advice from other SMEs through formal and informal networks."
Colin Simpson, IT director of brewing and pub company Fuller Smith and Turner, London
"Our last period of intensive investment was in the run-up to Y2K, but our investment is now set to climb quite a bit. We are replacing our EPOS (electronic point of sale) system for our 120 pubs and hotels, because maintenance on our old system is coming to an end. We want to link our shop floor system to our Strategix Software ERP system, and we will need to invest in product traceability, probably through RFID. But we remain fairly severe when it comes to working out the cost-benefits."
- Michal Rogatko, marketing director, Kross, Europe's second-largest bike manufacturer, based in Poland
"Our IT spending in the last two years is at least 40 per cent higher than in the previous two years. But price is not the major factor that makes us invest in IT. It is the functionality, the chance to lower the operational costs, to improve internal procedures and communication, and to serve customers better. However, falling prices make all that accessible for a larger group of companies. Today you cannot even think about entering any market without IT."
- Jeff Wiseman, VP technology and informatics at Locus Pharmaceuticals, US drug design company
"Our spending on IT has been pretty constant, because we are heavy users. But it is definitely better value. The machines keep getting faster. The cost to do a job is the same, but we can do it faster. Even so, reliability versus cost is very important. As a high end computing company, we have 1,000 boxes running, and their lifetime is three years. That means we have one failure every day. That hurts because the software is not built to handle that. So (un)reliability has a hidden cost."
