ERP: Small fish, big sea

How small ERP vendors are surviving in a rapidly changing market.

Survival in a market dominated by goliaths is never easy, and life in the US$30-billion enterprise resource planning (ERP) market is no different. From 2000 to 2006 the sector underwent a rash of consolidation as the largest companies jockeyed to become the top vendor.

The North American SMB segment is worth about US$3.2 billion, with research firm Gartner forecasting a robust increase to $4.2 billion by 2011. With large ERP vendors becoming increasingly aggressive, finding and exploiting a niche market is the key for a smaller ERP provider's success, says Simon Bragg, research director for enterprise software at ARC Advisory Group, an industrial research group in Dedham, Mass. “There are â??local heroes' around the world that are strong in their markets.”

Bragg says the value of a so-called “local hero” is expertise in a specific market. “A [smaller] company with quirky processes may need to talk to the developer. The chances of getting through to the guy who wrote the code for SAP or Oracle is probably nil. Smaller companies feel they can get this kind of special support from local heroes.”

Francois Taschereau, CEO and founder of Quebec-based Fortsum Business Solutions (TSXV: FRT), noticed a gap in the local accounting software market ? namely, that it was all developed in English. This made implementing the software a nightmare for francophones. Fortsum's French software targets the small but stable demographic of Quebec companies with less than 50 employees and revenues of less than $50 million.

Focusing on a market too small for the big companies to target isn't Fortsum's only strategy. The company partnered with both Microsoft and SAP, becoming a value-added reseller (VAR) for both companies.

“Our company has a customer base of about 75,000 [licenses],” says Taschereau. “Some of these enterprises will eventually outgrow our technology, so this is a good opportunity for the larger companies to access our market and we leverage our existing clientele to these packages instead of developing our own mid-range package.”

Fortsum's strategy didn't end there. Taschereau took the company public in 2004, raising $22 million. Then he went shopping, acquiring Quebec-based VARs Groupe Conseil LVMB Inc. for about $3 million and Implanciel Inc. for $2 million. Most recently, Forstum bought Centre Informatique Micro-Accès Inc., a local ERP developer focusing on Canadian child-care centres, for $1.9 million. The strategy appears may be working with revenues steadily increasing since 2004. While its stock has hovered around $0.55 over 2007, Fortsum recently posted a 20% increase in second-quarter revenues over the same quarter in 2006, at $6.7 million.

Joel Martin, the Toronto-based VP of enterprise applications for market research firm IDC, suggests another survival strategy is to focus on industry-specific solutions. “There are a lot of niche players that sell new licenses and make a lot of maintenance off their applications,” he says.

Jonas Software, an ERP developer in Richmond Hill, Ont., primarily servicing golf course operators, caters to specific needs the major vendors overlook, such as membership, reservations and banquet and catering data. “Very rarely will I ever compete against Oracle, SAP or Microsoft,” says CEO Brock Philp.

Jonas has 3,500 Jonas Club Management software customers, each paying an annual maintenance fee and nominal fees for updates. On the back-end Philp has reduced his company's internal costs by leveraging the good graces of the Internet ? most of the software is advertised, demonstrated and sold via the web.

“This year we will do close to 50% of our sales in the U.S. It's a focus to go to the U.S. and the web helps us do that effectively without having a large number of dealers there,” says Philp.

Another strategy for smaller ERP providers is to leverage the flexibility afforded by hosted ERP and software-as-a-service (SaaS) solutions. IDC's Martin says consolidation planted the seeds for the rise of these two trends.

“One of the fears with consolidation for the buyers is running different systems that are bought up by one player. All of a sudden, it becomes very difficult to get rid of that software and start fresh,” says Martin.

But SaaS, for example, eliminates the need for a company to invest in (new) IT infrastructure. Instead, users log on to a secure web page and manage data remotely.

“We see this pushback happen ? SaaS lets them jump ship. It becomes a huge equalizer in the market,” says Martin.

The big players are developing SaaS but rebuilding ERP systems to be web-friendly requires plenty of investment and time. And introducing hosted solutions ? after having developed hundreds of VAR relationships around the world ? can lead to channel conflicts.

It's this situation that opened the door for St. Paul, Minn.-based Lawson Software (NASDAQ: LWSN), which develops ERP systems for SMBs in the manufacturing, financial and healthcare industries. Lawson has beat SAP to the punch, offering a hosted human-capital management (HCM) solution aimed at the SMB market. SAP plans to release its version in September 2007.

“We manage the application, do the back-ups and handle upgrades,” says Barry Wilderman, Lawson's VP of business strategy. “It's like they have a bunch of terminals running to a server in their office, except they don't.”

Wilderman says passing the support onto the hosting company is a big draw.

“The alternative is waking up to find that instead of having processed 18,000 orders an hour, you've only processed three, and having to figure it out,” he says. With a hosted solution, the host company takes care of it.

Lawson's stock has risen about 50% since August 2006 to sit at US$9.59 in 2007; fiscal year-end revenue grew to US$212.9 million from $126.1 million last year, resulting in $8.1 million quarterly profit. Lawson has few channel partners to alienate and its target segment is booming, but this market is about to be hotly contested as the Fortune 500 ERP customer base matures and the bigger vendors look elsewhere for revenue.

“SAP and Oracle are getting exceedingly good at identifying niches which could be served with only minor tweaks to their core products,” warns ARC's Bragg, who says the textiles and apparel industries, for example, are based on attributes such as size, colour and style, rather than numbers such as SKUs. “For years SAP couldn't do it, but they have recently started to handle these attributes, so the niches are disappearing fast.”