A small textile manufacturing unit at Tirupur in Tamil Nadu was overjoyed when it bagged a contract to supply garments to the world's largest retail chain, Wal Mart. But its celebration was short-lived. The company realised it would not be in a position to execute the contract as it was not connected online to the retail chain's supply network.
Why was on-line access required? Well, WalMart books orders with its suppliers electronically and the company had to be hooked to WalMart's US supply chain management network.
So the textile company roped in IT company Cisco Systems, which built an online secure network from the scratch for the company and directly linked it to Wal Mart.
That episode illustrates the dramatic shift in focus that the top information technology companies have been adopting in recent times. Sensing a huge business opportunity, all kinds of IT companies -- ranging from Sun Microsystems to Big Blue, from enterprise application service provider SAP to US IT hardware and software company Hewlett Packard -- are scrambling to offer IT services and products to small and medium sized enterprises.
Neelam Dhawan, vice president, customer solutions group, Hewlett Packard India, says: "We have launched solutions for SMEs to cater to three key needs -- security, mobility and enhanced communications. It's the fastest growing market segment and it's growing by about 25 per cent per annum. So everyone is refocusing here."
Jangoo Dalal, senior vice president at Cisco, expects as much as 20 per cent of Cisco's revenues to come from non-metro cities (where most SMEs are located) this year, up from just five per cent just two years ago.
HP has a separate SME sales team, which offers non-metropolitan city customers solutions. SAP India has garnered over 45 new SME clients in the first nine months of this year. The Indian arm of the German software giant has segmented the market according to customer requirements -- companies with sales of above Rs 50 crore (Rs 500 million), of between Rs 25 crore (Rs 250 million) and Rs 50 crore and below Rs 25 crore.
SAP wants to offer specific products for each of these segments. Says Srinivas Rao, director, sales, SMEs, at SAP India: "Today about 50 per cent of our new customers are in the SME sector. In the next two to three years they will comprise about 70 per cent of new customers."
Some are cutting prices to gain a foothold in the SME market. Sun Microsystems, for instance, has dramatically reduced its entry-level server prices by nearly one tenth, from $20,000 (about Rs 10 lakh) to Rs 100,000. IBM has just launched a new series of no frill personal computers with Celeron chips at the low price of Rs 23,000 for small companies. PCs with Intel Pentium 4 are now available for less than Rs 30,000.
Says Rahul Aggarwal, brand manager, desktops, at IBM India: "We reckon that about 50 per cent of PC sales are already coming from this segment. And the small sector contributes half of this".
A few weeks ago HP India launched several products and IT solutions under its "Smart Office Program" at a gala media seminar in Singapore aimed at SMEs. HP offers a range of new products for SMEs -- printers with PIN numbers (you can only print a document only if you known the number), Ipaqs (a personal digital assistant with a biometric fingerprint reader (to protect data) and PCs that are specially protected against virus attacks.
If everyone who's anyone is rushing to court SMEs, it's because the SME market is huge and growing. Access Market International, the US-based IT research agency, reckons that the size of the Indian SME market will rise sharply from $ 6.33 billion (Rs 28,504 crore) in 2003 to over $10.45 billion (Rs 47,056 crore) in 2005.
Dhawan points out that SMEs already account for over 45 per cent of the total IT revenues in the country. What's more, the segment is growing faster than the overall IT industry -- by 20-25 per cent this year versus the average growth rate in the IT market of 17 per cent. More importantly, India has some 18 lakh (1.8 million) SMEs -- and only the surface has been scratched.
An AMI study of SMEs shows that only three per cent of them in India have a local area network at their offices or factories, just 15 per cent have a internet connection, four per cent have broadband and a mere one per cent have their own website. Notes AMI analyst Deepinder Sahni: "This clearly shows what a large untapped market is waiting for everyone to leverage."
Encouragingly for IT companies, Sahni's market research suggests that most SMEs are increasingly realising that investing in IT can improve bottomlines. The AMI study found that over the next 12 to 18 months, 17 per cent of the SMEs AMI contacted want a data back up and recovery system, 18 per cent want to interconnect their offices, and about 21 per cent want instant messaging systems to be installed in their offices.
To be sure, IT companies realise that catering to SMEs is an entirely different ball game. Unlike the big boys, they are extremely sensitive to price, demand quick implementation, want continuous support as they don't have IT departments and often are not located in metropolitan cities.
The size of their transactions too is much smaller. So to make money, an IT company has to look for volumes. HP, for instance, is concentrating on companies that have fewer than 12 employees and whose transactions would be in the Rs 500,000 to Rs 600,000 range, because HP believes that such companies constitute 85 per cent of the market. (Definitions of an SME vary; IDC, the international IT data tracking agency, for example, defines any company with under 500 employees as an SME, while others say that a company falls in this category if its IT transactions are in the Rs 10 lakh (Rs 1 million) to Rs 30 lakh (Rs 3 million) region).
Most IT companies have tailored their strategies to the special needs of the SME market. Says Sun Microsystems' marketing director K P Unnikrishnan: "We realised that SMEs are price sensitive and do not have the money for an IT infrastructure internally. So they need vendor support." So Sun dropped server machine prices by offering cheaper versions of the chip and software, and with slower computing speeds.
Instead of an Intel chip, it introduced machines with AMD chips, which are 30-40 per cent cheaper. It also shifted to using the cheaper Linux platform from machines with Solaris software. Sun's own Office was thrown in, in place of Microsoft Office, to cut costs by a fourth.
Sun also worked out the economics of an SME and launched models whose cost could be recovered in two years, backing this up with the support of over 50 resellers that have the ability to offer localised solutions an SME requires and a nationwide toll free number for customers to dial if they face problems. Says Dhawan: "We realised that as the order sizes were small, between Rs 500,000 and Rs 700,000, system integrators won't focus on this market. So we stepped in."
Other IT companies, meanwhile, have reworked products. IBM has incorporated an automatic rescue and recovery of data facility by portioning a part of the hard disk in some of its PCs because SMEs do not have the luxury of a back up server. And because most SMEs don't have an IT department, HP has a simple offline and online trouble shooting facility, which is available at the press of a button.
Most IT companies are also joining hands to bundle products. HP, for example, has tied up with Intel, SAP, Oracle and Microsoft. Dhawan says that as HP negotiates prices with these companies on the basis of volumes, customers obviously get a better price -- bundled solutions could be 8-15 per cent cheaper for customers than if they'd bought these separately.
HP also offers customers loans from HP Financials, on terms that are more attractive than those banks offer. For instance, credit is available for the entire cost of the machine and no collateral is required.
Still, it has dawned on IT companies that SME clients aren't exactly anxious to pick up stripped down products. Says SAP's Rao: "We realised that you cannot sell SME customers a scaled down version -- their processing requirement is the same as the bigger companies and they have the additional challenge of competing with the bigger companies."
That's why SAP launched My SAP All in One, a Rs 25 lakh software package that offers the best practices incorporated in enterprise resource planning solutions for big companies. The software is also scaleable, as and when the company expands. Rao says that 60 per cent to 90 per cent of the software is already pre-configured and that reduces costs substantially. The software can be programmed on a mass scale.
SAP is also coming out with cheaper versions of its ERP package for small companies. At a street price of about Rs 10 lakh, (the cheapest solution now costs Rs 25 lakh), the SAP Business 1 to be launched next year can run on a single PC and will meet the basic sales and inventory data storage requirements of a company.
PeopleSoft too is offering SMEs preconfigured business process packages, one for the general running of business, the other for industries and the third for wholesale distribution.
Says Ray Kloss, director, product strategy, at PeopleSoft: "The whole idea is to offer an aggressive price and ensure that implementation is fast." So most of these processes can be implemented in 20 to 30 days, versus the months it takes to implement an ERP package.
Clearly, IT companies have no option but to look at SMEs. As Cicsco's Dalal puts it: "The growth of IT spends in the larger companies lead by the telecom sector is no longer sustainable in the next few years. So the obvious market of the future is SMEs. But the challenge is that their spends per deal are small. So obtaining volumes is crucial."
That's the challenge that all IT companies are grappling with.