Tales from the midmarket turf war

When Champion Technologies looked to replace its amalgam of business applications in spring 2002 with one integrated ERP suite across multiple international sites, the Houston-based company compiled a list of midmarket vendors with solutions geared for its sector—the specialty chemicals industry. "Just for grins," says Ronnie Meaux, company controller, he also contacted SAP. He wanted to hear the pitch, though he "was 99-percent sure they'd be too expensive for us."

To his surprise, SAP—the world's largest ERP vendor—was eager to do business through a channel partner with implementation experience in specialty chemicals. SAP made the short list—and won the business.

In contrast, when CoorsTek, Golden, Colo., sought to gear up for extensive business expansion in 2000, it considered migrating away from a system from QAD, its long-time ERP provider, to "leverage a mega-suite vendor solution," according to Helmut Oehring, managing director of information services.

A short list of mega-suite vendors was drawn up, and one was chosen. After a pilot implementation in four plants, CoorsTek critically assessed the results. At that point, cost-of-ownership issues caused the company to reevaluate its strategy and further examine sticking with QAD.

The selection team revisited with QAD management in early 2003. It came away impressed with its handling of the market downturn, its positive balance sheet, strong R&D, and clear vision for the future. Given QAD's singular focus on manufacturing, CoorsTek decided to stay the course with MFG/PRO, re-implementing it in those sites where it had been taken out.

What can be concluded from these starkly different choices? For one, the "mega-suite" players—Stamford, Conn.-based analyst firm Gartner's term for the largest vendors—are pursuing the midmarket more aggressively using various strategies. But by no means do pricing tweaks, software repackaging, or even revised channel strategies guarantee a cakewalk for the big vendors.

"All the big vendors think pricing is key," says Yvonne Genovese, a VP and research director at Gartner. "But in the midmarket, it's not dating—it's a marriage."

Midmarket companies, Genovese explains, are absolutely dependent on their vendors for counsel and support. "PeopleSoft, SAP, and Oracle deliver business applications and associated technology," she says. "Sometimes they offer services, but not in the same manner as midmarket vendors that lead with them."

Jim Shepherd, a VP with Boston-based analyst firm AMR Research, concurs that the big vendors face hurdles. "The large vendors can come down and beat the mid-tier players on license price, and run on the same platforms," he says. "They can overwhelm prospects with functionality, but that is a two-edged sword. By the time you overwhelm them with it, you may have literally overwhelmed them."

SAP, Oracle, and PeopleSoft (see sidebar, More than a tweak?, page 20) have all been aggressively retooling strategies to more formidably attack the midmarket. The reason, says Shepherd, is simple.

"There are only so many dimensions in which you can grow your business," he says. "You can grow geographic coverage, industry coverage, functional coverage, or the scope of the size of companies you target. In the case of the market leaders, they've already done significant expansion in every area but one. The only avenue left to continue to grow their businesses is in coming down market. When you look at the demographics, when you go down market, the number of organizations expands dramatically."

Though new deals are sparse of late in every market, the appeal in the midmarket is future potential. "When the economy turns down," says Shepherd, "large companies spend less; but companies in the midmarket stop spending. In the next few years, however, we'll see a boom in the midmarket due to pent-up demand. That's what everyone is positioning for."

Though the definition of the midmarket varies widely, the "sweet spot" seems to be companies with annual revenues between $200 million and $500 million. A more instructive matrix, however, is comprised of characteristics that differentiate buying habits. Mid-tier companies lack the wherewithal for extensive evaluations, are more risk adverse despite arguments favoring competitive advantages, lack IT staff depth and therefore seek closer support relationships, and want ROI in a fraction of the time.

Overarching these habits is the sputtering economy of the last few years, which has pinched most ERP vendors and has led to a major wave of vendor consolidation. As a result, vendor viability has shot to the top of the selection criteria list, granting large ERP vendors with deep pockets fresh appeal. This was a consideration for CoorsTek.

"A number of vendors were facing a difficult road ahead, which made the financial strength of mega-suite vendors attractive," says CoorsTek's Oehring. "We knew they would have the staying power to grow as we grow."

CoorsTek, which is owned by various Coors family members and related family trusts, designs and manufactures ceramic, metal, and plastic components and systems for various industries. It has plants in the U.S., Europe, and Asia. In addition to financial viability and growth considerations, it was seeking a software solution flexible enough to handle unique functional requirements entailed in the manufacture of its diverse product line.

In its pilot of the mega-suite solution, CoorsTek found the software complexity mandated more sophisticated user expertise, requiring more staff. This skewed total long-term cost of ownership of the solution. Ultimately, the company decided that re-implementing the QAD system offered immediate value while also meeting the functional requirements.

The experience at Champion Technologies was starkly different. The company produces chemicals used in production in the oil & gas industry, including scale inhibitors and emulsifiers. It has plants in Texas, Canada, Europe, South America, the Far East, and the Middle East. Picking the right partner, coupled with functional fit, were top selection criteria.

"You know you have to pick a winner going in and give it every chance of being successful," says Meaux. The company found that match with SAP and its channel-partner strategy.

SAP has been stepping up cultivation of channel partners since early 2002 as part of a worldwide effort to bolster penetration of the midmarket. Champion Technologies turned to itelligence—a SAP global channel partner with strong experience in the specialty chemical industry—for its deployment.

"Whenever they visited us, they always brought experienced project managers and consultants who had done implementations at companies just like ours, or had worked for companies like ours," Meaux says. "These guys had done it before. It was an overwhelming factor in their favor."

Viability tends to be a strong point for larger ERP vendors, but their Achilles' heel—one they are all working to address—is the perception that they are too large to provide close, personal attention to midsize companies. The large vendors counter that in many cases they already are proven midmarket players.

"We don't need to change all that much," says Gary Fromer, senior VP of small and midsize business & hosting with SAP. "About 60 percent of our global implementations are in companies less than $500 million. What we need to do is stay close to the customer, to make sure they're satisfied."

Traditional midmarket players also must contend with Microsoft Business Solutions, especially on the lower end of the midmarket. Even so, some experts aren't ready to count out the midmarket specialists. "Traditional midmarket vendors will continue to win because of their deep functionality and because they're less expensive to own," says Gartner's Genovese.

Finally, while the big vendors are in some cases turning to indirect sales channels, as Genovese puts it, "The limited number of channel partners out there is the number one problem with that strategy. Most already are associated with one product or another."

What does all this spell for the traditional midmarket ERP vendors? They need to be more completely what they are. "In the past, they have tended to follow the marketing of the big guys, but they now need to clearly differentiate themselves, talking about how they're different," says AMR's Shepherd.

And they need to do what comes naturally: give close, personal attention to customers. In one recent competitive face-off in which a user of an ERP solution from MAPICS—a vendor long-focused on the midmarket—was being aggressively wooed by SAP, what turned the deal back in MAPICS' favor was neither promise nor price. It was a personal plant visit by Richard Cook, MAPICS' president and CEO.

The type of attention—as well as the renewed midmarket efforts of the mega-suite vendors—means the surest winners will be customers. They'll just have to cut through the marketing blizzard headed their way, and be able to pinpoint the best value proposition for their circumstances.