Company News

IT Consultant Magazine
November 1, 2003

Channelling for Business
By Sally Whittle

With previously high-end heavyweights like SAP and Oracle now hungry for business in the mid-market, the pressure is on for the incumbent vendors to provide a level of service that will fend off this rather intimidating competition. Sally Whittle sees whether the winners in the mid-market will be the ERP vendors with the best channels

For James McCullough, the days of the $500m IT budget are ancient history. The former CIO of Delta Airlines now works at a small web company, eCompanyStore. But that doesn't mean McCullough has abandoned his old software suppliers - eCompanyStore just completed the rollout of an enterprise resource planning (ERP) application from SAP.

McCullough hopes the project will allow eCompanyStore's systems to scale effectively as the company grows. 'We don't want to come back in a year's time and find that we have to rip them out and start again because it can't handle the transaction throughput,' he says. Another advantage of SAP over mid-market products is that it gives McCullough's team access to the same functionality enjoyed by far larger competitors. 'It's essentially the ability to punch above our weight,' says McCullough.

The eCompanyStore deployment is an example of a relatively new trend in enterprise software: mid-market ERP. With budget freezes and market saturation hitting their traditional market, ERP giants including SAP, Oracle and PeopleSoft are turning their attention to the mid-market. At PeopleSoft, 40% of all new licences sold in 2003 will be bought by companies with a turnover between $50m and $500m.

Historically, the ERP market has been fuelled by large enterprises but that's no longer the case, says Tim Osman, head of SME at SAP UK. 'In the last couple of years, most of our growth has come from small and medium-sized enterprises,' he says. These customers aren't happy to accept cut-down versions of software, Osman believes: 'These companies are no longer content to just have something that works - they want all the business controls and functionality that larger enterprises are used to having.'

Mid-market ERP is essentially the same software as enterprise software - but without the bells and whistles. 'Mid-market companies don't have the same IT resources as the enterprise, so they can't afford to spend six months rolling out some software,' says Osman. The ERP vendors have therefore created vanilla versions of their software that customers can take out of the box and get working.

Smaller players

For example, SAP offers smaller customers the option to implement either MySAP or Business One, both vanilla versions of its enterprise software, for the mid-market and SME market respectively. Both packages incorporate pre-configured software modules that can be rolled out as needed. PeopleSoft offers mid-market customers the Enterprise One suite, pre-configured for mid-market companies and complete with templates allowing software modules to be adapted for specific vertical industries. Oracle customers have a similar choice with Oracle Lite.

The vendors are at pains to point out that these aren't simply cut-down, cheaper versions of their products. 'In some ways, mid-market customers are more complex than enterprises,' says John Finnegan, sales director of PeopleSoft UK. 'They operate in niche and vertical industries with more specific processes than many large enterprises.'

The advantage of these mid-market suites is simple: they can be deployed faster and easier than ever before. Today's mid-market ERP packages can cost just a few thousand pounds, and implementation takes weeks, rather than months. What's more, vendors offer upfront, guaranteed agreements on schedule and price, fully functioning applications - and a lot fewer headaches than traditional ERP.

These new products put the ERP giants into direct competition with the second tier software companies who have traditionally dominated the mid-market. Vendors such as IFS, Intentia and SSA are beginning to feel the pressure from competing products such as SAP's Business One, and PeopleSoft's Enterprise 1 mid-market suites.

The likely result is massive consolidation of mid-market companies as the enterprise software vendors make their mark. 'Customers should certainly look closely at the financial viability of tier two providers,' advises Byron Miller, an analyst with Forrester Research. 'We expect to see a great deal of consolidation in the sector as other vendors begin to target the mid-market more aggressively.'

Miller points out that the mid-market vendors don't just face competition from the likes of Oracle and SAP. Vendors such as Microsoft Business Solutions (MBS), Epicor and Sage have traditionally focused on the lower end of the market, with financial, business planning and HR applications. However, Sage and Epicor have both beefed up their applications in an attempt to woo mid-market customers, and Microsoft's acquisition of Navision makes MBS a compelling player in the mid-market space, Miller says.

Channel war

The battle for the mid-market could well be fought and won in the channel, says Rob Wallis, director of business development and alliances with LogicaCMG. Anyone hoping to sell to mid-market customers must have an effective channel strategy if they hope to reach enough customers to survive.

Resellers are incredibly important to mid-market companies because they can act as a virtual IT department, says Wallis. Smaller companies rely on the industry knowledge of local resellers to find out about technologies which they may not even be aware of. 'There's no reason why a mid-sized company should even know about financial planning software, or customer relationship management,' he says. 'The point is they want to keep their books, or speed up invoicing - the reseller's role is often to introduce them to software that will enable them to meet that business need.'

IFS is a typical tier two software provider and has strong relationships with the channel. The company uses resellers in geographies where it does not have offices, and to penetrate lucrative vertical markets in other regions, says Alastair Sorbie, IFS' European managing director. 'For us, resellers are a key way of reaching customers in our target sectors, where our sales force might not have the contacts to do so,' Sorbie says. 'For example, in the UK, we have resellers specifically to target the process sector.'

Sorbie doesn't believe that Oracle or the other enterprise vendors pose a significant threat to his business. 'Mid-market customers have an entirely different set of requirements, and mid-market vendors have the expertise to meet them,' he says. 'The problem with pre-configured modules is that almost nobody fits exactly into a template, and you don't get the flexibility you get with a fully integrated, flexible solution like IFS.'

Without a strong channel, the ERP vendors could struggle to compete with tier two leaders, agrees Miller. 'In the applications mid-market, the ERP vendors won't have a significant impact until they can build extensive value added reseller channels, and develop features like country and vertical specific functionality.'

The bad news for tier two vendors is that's exactly what the ERP vendors are planning to do. PeopleSoft has established a network of five industry-specific channel partners, who will work with local resellers to push mid-market versions of its software. SAP provides Business One and MySAP through a network of several hundred resellers, across the country. 'The channel is vital for mid-market customers because of the level of support and assistance they generally need,' says SAP's Osman.

'All of our mid-market sales are through the channel,' adds People-Soft's Finnegan. 'The channel provides customers with an additional source of industry expertise, and provide them with a local contact who can get really close to the business.'

Following on

The challenge for consultants is how to follow their software suppliers into the lucrative mid-market. Most companies buying through a reseller will also purchase support and systems integration as part of the contract, cutting out consultants from the picture. 'You're going to be doing a different sort of work, but mid-market clients definitely need consultants to help maintain their systems,' says Susie Davison, director of consulting firm Absoft. 'We find that resellers often just focus on selling licences, not in offering real expertise.' There is absolutely a role for consultants in supporting mid-market SAP customers, agrees Osman. 'Consultants can help where companies have undefined processes, or with change management when software goes in,' he says. 'That's critical to the success of the project, and an area where smaller companies and resellers don't necessarily have the experience.'

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