Big Software Aims Small in 2003

Enterprise software vendors are getting creative in their quest for new customers. In fact, German software behemoth SAPSAP has enlisted the help of an 18-wheeler.

A sort of trade show on wheels, the big rig cruises to major U.S. cities, giving demos of new SAP products for small and midsize businesses. SAP is not the only company looking to capitalize on this largely untapped small-business market.

As sales to large customers stall, companies such as OracleORCL and PeopleSoftPSFT are expected to shift their focus in 2003 to the smaller market as well.

The ability to crack this fragmented field could play a pivotal role in delivering the growth that investors have come to expect from software makers, but which has eluded them this year. However, breaking in will be no easy task, and it remains an open question who will emerge the victor.

"The low-hanging fruit in the Fortune 1000 has been plucked, whereas the Fortune 1 million is still out there," said Josh Greenbaum, a principal and technology consultant with Daly City, Calif.-based Enterprise Applications Consulting.

Definitions of the small- and medium-size business market, often referred to as SME or SMB, are not all the same. Research firm Gartner defines the small-business market as companies with up to 100 employees and between $2 million and $50 million in annual revenue; the lower middle market as companies with 100 to 500 employees and revenue from $50 million to $250 million, and the upper end of the middle market as companies with 500 to 1000 employees and $250 million to $500 million in revenue.

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In the past, SMBs have turned to companies such as IntuitINTU, Great Plains Software (now owned by MicrosoftMSFT), The Sage GroupSGE.L (whose U.S. subsidiary is called Best Software) and highly specialized smaller companies catering to specific industries for accounting systems, while also building homegrown systems such as simple databases and spreadsheets to handle functions such as customer-relationship management.

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These smaller companies largely avoided the Y2K and dot-com overpurchasing done by large companies, resulting in a far-less saturated market. Yet with as much as 20% of their annual revenue by some counts coming from transactions with large companies, they are now facing a greater need to electronically enable and automate their systems.

"The midmarket seems to be one place in the economy where IT spending is still increasing," said Robert Anderson, Gartner's research director of small- and midsize business back-office systems. A Gartner survey this past year found that more than 40% of midsize businesses were actually increasing their IT budgets, while 75% were either increasing the budgets or holding them steady.

The sheer number of small and medium-size businesses and lack of penetration also make going into this market a no-brainer. AMI-Partners, a New York-based research firm focused on global small and medium businesses, estimates there are 6.9 million small businesses with up to 99 employees, and 103,000 medium businesses with 100 to 999 employees in the U.S. alone.