Spending fastest in small business segment last year; increase expected

Small to midsize businesses (SMBs) are shaping up as a big reason why the ERP market is improving. According to Boston-based analyst firm AMR Research, companies with less than $30 million in revenue increased ERP spending by 14 percent last year.

AMR found ERP spending flat last year across the main and upper segments of the midmarket, which it sees as companies of between $30 million to $1 billion in annual sales. However, AMR continues to believe the broader midmarket will increase ERP spending as the economy strengthens.

SMBs with up to 1,000 employees plan to increase overall IT spending by 6.6 percent in 2004, according to new survey from Cambridge, Mass.-based analyst firm Forrester Research. Larger companies, says Forrester, also will increase IT spending in 2004, but by only 1.7 percent. The firm also calls the midmarket the future "battleground" for ERP vendors.

Byron Miller, a principal analyst with Forrester, says the bigger suite vendors have made moves to capture more of the midmarket, citing PeopleSoft's acquisition of J.D. Edwards. Microsoft Business Solutions (MBS) also has emerged as a force in the midmarket, according to Miller. AMR sees MBS as a major player, estimating its sales grew 60 percent in 2003.

To compete, traditional midmarket vendors will have to increase their vertical market expertise and offer lower cost of ownership, says Miller. He also expects more consolidation among midmarket vendors. "They have to do multiple things to survive," Miller says. "One thing they have going for them is that some midmarket companies are uncomfortable going with a software giant. They prefer a vendor that looks more like them."

Scott Rich, a VP with ERP vendor Lilly Software Associates, which targets SMBs, says Lilly expects growth in the 10-percent range this coming year. To differentiate, he says, Lilly Software offers integrated modules that help companies execute—either via lean manufacturing in the plant, or warehouse management system functionality for distribution operations. "There still is a need for systems, but the system has to offer a competitive advantage, and that typically comes from the execution layer," says Rich.

Brian Angle, a VP with ERP vendor CMS Manufacturing Systems, says CMS is seeing solid growth among SMBs. So strong, in fact, that during the second half of the year, the company will release a Microsoft .NET-based ERP package called CMS m5. Meanwhile, CMS's iSeries-based suite will be renamed CMS i5.

To differentiate, says Angle, CMS focuses on integrated EDI, sequenced parts delivery, bar coding, and other functions that aid supply chain communications. Says Angle, "We're adding staff, and positioning for tremendous growth."