Enterprise software vendors are getting creative in their quest for new customers. In fact, German software behemoth SAP ( SAP) 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 Oracle ( ORCL) and PeopleSoft ( PSFT) 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 Intuit ( INTU), Great Plains Software (now owned by Microsoft ( MSFT)), The Sage Group ( SGE.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.

Good Things, Small Packages

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.

Total U.S. small- and medium-business spending on sales force automation, customer relationship management, enterprise resource planning and supply-chain management software topped $1.3 billion in the 12 months ending in July, registering a 21% increase year over year, according to AMI.

The firm forecasts a compound annual growth rate of 33% from 2002 to 2006 in spending on licenses by U.S. small and medium businesses for automation software.

In sharp contrast, Gartner has found that worldwide enterprise application sales have been falling since 2001, and it forecasts a mere 3.1% compound annual growth rate from 2002 to 2006.

Worldwide, AMI estimates that spending on packaged and customized software by SMBs will reach $65.4 billion in 2002. That's about six times larger than the $10.6 billion that Gartner estimates enterprises will spend on software licenses worldwide in 2002.

More than their larger brethren, SMBs are looking for relatively simple, inexpensive software that is quick and easy to install yet is also customizable. That means that enterprise software companies like SAP, Oracle and PeopleSoft can't just dumb down their products designed for larger companies; in some cases they must be re-engineered, analysts say.

"It's not good enough for me to say I have a financial vertical," said Best Software CEO Ron Verni. "You have to say I have business-to-business banking mortgage vertical software ."

Sage, which has 1.6 million customers in North America and 2.9 million customers worldwide, has responded to this need for specialization by establishing partners that have customized their products for various verticals.

Needed: New Ways to Sell

Another type of partner, resellers, is also crucial in selling to small and medium-size businesses. It's fine to have an expensive direct sales force to drive six- and seven-digit deals. But it's unaffordable and impractical to have those same people selling to small and medium-size businesses, because that market is driven much more by volume, analysts say.

Sage, which has been selling accounting software for 25 years, and Microsoft, through its Great Plains and Navision acquisitions, have a leg up in the reseller department. Sage boasts 19,000 resellers worldwide, including 6,600 in the U.S.

Microsoft sells its products through a network of more than 4,500 partners. Building that channel of resellers can take 10 to 15 years, noted Gartner's Anderson. Both Great Plains and Best largely target the lower end of the middle market, he said.

Currently, none of the enterprise vendors have built a reseller channel that nears those of Microsoft and Sage. Gary Fromer, vice president, SMB and hosting at SAP America, acknowledged the company never pursued developing channel partners until now, which it is doing in part with its roving tractor-trailer road show.

"I think the big boys are best to sticking to the upper midmarket," Gartner's Anderson said. "That's where they've got best chance for success." That's because in the upper midmarket, the large companies can employ a hybrid model in which they sell direct -- as they're used to -- but rely on a partner for implementation and services.

Indeed, that's the model PeopleSoft has been following since its early entry into the middle market five years ago: The company has its own direct sales force and relies on partners for implementation. Of the enterprise vendors that have moved in the middle market, PeopleSoft has done the best job, Gartner's Anderson said.

"The organizations that we target and we work with are really those that have the same business requirements as larger companies," said Jeffrey Read, vice president and general manager of PeopleSoft Mid-Market. "It's a misnomer that smaller companies mean simpler in terms of the business requirements. Most have the same business requirements. They don't have the budget, they don't have the people, and they don't have a lot of time to get things done."