Money in the MiddleBy Larry Dignan | Posted 2003-05-12 Print
Companies with less than $500 million in revenue are getting attention for their technology spending this year.Terry Simmons, chief information officer for RSR Corp., doesn't get a lot of visitors from Seattle at his office in Dallas.
But it's amazing how many new friends you make when your technology budget is expected to increase 10% in 2003. Microsoft sent three employees to RSR, a private metal recycling company with revenue north of $100 million, to chat about the company's technology plans and priorities. They were even cordial when Simmons revealed his biggest priority in 2003 was building a customer portal using Novell software.
"There's been a lot more interest from technology companies," says Simmons, recalling the February visit. "I thought I'd never see Microsoft sending people from Redmond here."
Major software suppliers, including Microsoft, are eyeing so-called "mid-market" companies as a meal ticket to growth in a period of relatively stagnant spending on technology. Granted, it wasn't Bill Gates who dropped by, but Simmons will take advantage of his newfound popularity, if it helps RSR. "I'll take whatever benefit I can," he says.
Middle-sized companies, defined by Gartner Inc. as those with annual revenue between $50 million and $500 million, are spending more on technology relative to their larger brethren. According to Gartner, these companies, which may have as few as 100 employees or as many as 1,000, are expected to see 2003 technology budgets rise at about a 4% clip, double the best-case scenario for large companies. Much of the spending goes to software projects that will improve planning, customer service and day-to-day business processes.
If you lump such projects into a category called infrastructure software, as Gartner does, you see the difference. Spending on such software is expected to rise 14% to 15% among companies with 100 to 1,000 employees, compared with 1.9% among companies with 5,000 employees or more.
Bill Farrell, chief information officer for Wilmington Trust, a regional bank based in Wilmington, Del., is another man popular with vendors. He's implementing customer management software and upgrading lending systems.
He's even considering bids to replace 2,500 less-than-4-year-old desktops with Windows XP-powered versions. He declined to give specific figures but says his budget has been up three years running.
"We thought it was a great opportunity for strategic investment," says Farrell, noting this year's budget is "flat to up'' after two years of sizeable increases.
Technology vendors such as IBM, Cisco Systems, Siebel Systems, PeopleSoft and even SAP have all begun to focus on smaller companies as one of the few markets (next to the federal government) still spending more money each year.
To wit: PeopleSoft unveiled new products and pricing plans designed to attract midsized companies in April. For instance, the company will offer licenses for PeopleSoft applications, training and implementation services at a fixed price, regardless of the number of users.
Other technology giants are in on the act. Oracle recently rejiggered its e-business suite pricing, lowering the minimum number of users for which a company must pay. IBM completed a rollout of less expensive, or "Express," versions of its WebSphere, Lotus, Tivoli and DB2 products in February to appeal to companies with $500 million in revenue or less.
Although PeopleSoft and companies like IBM have a longer history selling to middle-sized companies, technology executives at these firms remain wary about their newfound popularity, noting that they expect large vendors to forget about them when the bigger fish start spending again.
Executives at mid-tier companies also are tough customers. More focused on software that supports their existing business processes, they are wary of integration costs and buy only software as they need it, preferring to grow in steps. They also want proof that a return will be generated on their investment, and that they will get good service along the way.
Those requirements often mean going to a smaller software vendor or an industry specific technology player. "One of the great opportunities a company our size has is to be more focused," says Farrell. That's why, to technology executives at medium-sized companies, names such as Pivotal Software, Onyx, J.D. Edwards and Lawson carry more clout than Siebel, Oracle, PeopleSoft and SAP, analysts say.
Mika Yamamoto Krammer, a Gartner analyst, says executives at mid-sized companies have good reasons to favor smaller, industry-focused partners over big vendors-come-latelys.
"Sixty to 70% of the companies currently competing in the mid-market space will pull out when the economy recovers," says Krammer, who recommends ironclad service agreements to prevent abandonment. "If you are looking at a big vendor you have to see how long they've been in the mid-market space. They should have been in the market for more than one version."
Krammer says that mid-market executives are usually cautious about making big technology bets and 70% will continue to do business with an incumbent supplier. RSR's Simmons noted he chose Novell's Extend software because he uses the Salt Lake City-based company's network-management tools. Likewise, when Farrell was looking at software for managing customer relationships, he was pitched by Siebel but concluded SalesLogix was a better fit and cost a "few million dollars" less to implement.
"We did talk to Siebel and they have a heck of a product, but it's also very complex and it's a product you pay a lot for and use about 30% of it," says Farrell. "The equation just doesn't work."
For Paul Freeman, chief investment officer for Alliance Medical, a Phoenix-based disposable medical equipment reprocessor with 298 employees, it is essential that he be able to buy only the software he plans on using.
Freeman uses J.D. Edwards software in modules for financial, sales order-entry, procurement and manufacturing, but skips transportation, forecasting and warehousing functions. "Most software is designed to apply to a broad number of companies and we just don't need all the functionality," says Freeman.
Krammer says most mid-tier executives take Freeman's approach. "They want to purchase one module at a time," she says. "Getting modules A through Z is not appealing. They want modules A, B, C and maybe they'll buy F later."
Krispy Kreme CIO Frank Hood says he's planning to pick and choose his functions as he launches a bake-off among Oracle, SAP and J.D. Edwards for an enterprise resource planning project that will better integrate the company with its suppliers and franchisees. Hood wants to begin the rollout in the fall.
Instead of a standard bidding process, Hood will give the three front-runners 25 examples of how Krispy Kreme operates, from tracking the manufacturing of donut equipment to e-commerce links with suppliers and joint venture accounting. The winner will have to outline how it'll integrate with human resources and payroll applications that won't be replaced.
"It'll come down to cost-of-ownership and how quickly we can implement," says Hood, adding that the company wants to keep consultant costs to a minimum. "We're looking to implement inside of nine months. How easy it is to implement will be key."
For Wilmington Trust's Farrell, ease of installation is often the main factor. He says he chose to implement Metastorm's eWork business-process-management software largely because it integrates well with Wilmington Trust's use of Windows software. The bank uses eWork to track deal flow, new and lost business, travel expenses and internal training.
To update its lending and wealth-management systems, Wilmington Trust is working with two software providers that focus specifically on the financial services industry-Shaw Systems Associates and InvestEdge, respectively. Shaw, which has been a player in the banking industry since 1967, boasts that 90% of its senior management has banking experience. InvestEdge is "smaller, but focused on what they do," says Farrell.
"Even though it's technology, this is still a people business," says Farrell. "You can get focus and get people's attention at companies that aren't as large."
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