More and more companies, regardless of size, have come to the conclusion that high-end software solutions are the fastest path to better operational and financial performance. Last year, U.S. companies spent $10.6bn on sophisticated enterprise solutions, according to Boston-based AMR Research. This spending encompassed such systems as enterprise resource planning (ERP), customer relationship management (CRM), supply-chain management (SCM) and e-commerce. By 2003, that number is likely to climb to $18.3bn.
What is surprising is not just the huge amounts being spent on this software, but who is spending it. No longer are such systems the exclusive domain of Fortune 500 companies. Nearly two thirds of these expenditures are being made by midmarket companies with annual sales between about $100m and $1bn.
This surge in spending on sophisticated solutions by midmarket companies is being driven by two factors. First, midmarket companies need this technology to compete with industry giants, which have long had such systems. Second, truly cutting edge systems have only recently become available to midmarket companies in versions that are affordable, flexible and easy to implement with modest IT resources.
Clearly, the software industry has discovered the midmarket.
"Midmarket companies are doing things now that until recently only large companies with a big operations research department could accomplish," says Andrew Carlson, director of worldwide market for advanced planning solutions for Denver-based J.D. Edwards, which earns 75 percent to 80 percent of its revenue from the midmarket.
"The tools are there, and midmarket companies are using them to grow their businesses," says Carlson.
For example, J.D. Edwards's advanced planning suite includes such sophisticated functionality as strategic network optimization, demand planning and demand collaboration, order promising, production and distribution planning. It is fully internet-based and allows companies to collaborate with customers, suppliers and other business partners.
Manugistics, the Rockville, Md.-based supply-chain solutions vendor that has traditionally served Global 2000 companies, has started a key accounts group that focused only on companies under $1bn. It is offering the midmarket at least 18 supply-chain related solutions in its NetWORKs family of products.
"We show them how planning and execution systems can be layered on top of their ERP systems."
"There is a wealth of potential in this market," says David Austin, Manugistics's senior manager of its industry and alliances marketing group. "Over the next 18 months we expect that 50 percent of our business will come from this midmarket group. We see about 20,000 companies that we could serve."
IBM also has created a global midmarket business division. It goes well beyond selling hardware, and provides end-to-end systems integration, application selection, implementation and process transformation.
"Midmarket companies are looking for a single solution package, not just an application," says Michael Mohrman, who heads up the supply-chain management segment for IBM's global midmarket business division. "They want to work with one company that can select the right combination of applications and make the whole solution work. The package they want must include services, technology and applications."
IBM's midmarket business division provides no applications of its own. In the supply-chain segment, it works with all of the major application providers, including J.D. Edwards, Manugistics, SynQuest, Logility, QAD and many others.
"We have five or six choices for each type of application for each industry segment, " says Mohrman, who explains that IBM segments midmarket companies by size and vertical focus. The only software that IBM provides is the middleware solution needed to handle integration, both within the company and with outside trading partners.
"These customers want three types of services: implementation, integration and transformation of business processes," Mohrman says. He adds that this need for a one-stop shop is the main difference between the midmarket companies and their Fortune 500 brethren.
"Very large, multi-division companies have many platforms and need a wide variety of best-of-breed solutions," says Mohrman. "These large companies are not nearly as constrained by information technology (IT) resources. They also are used to dealing with the difficulty of implementing and integrating a myriad of solutions. The smaller the company, the simpler the whole solution package has to be."
Another major difference between Global 2000 companies and the midmarket is concern about risk. According to Sonny Angle, vice president of key account sales and solutions for Manugistics, midmarket companies understand that technology decisions will have tremendous impacts on their businesses. They do not want to make a mistake.
"The message we want to bring to the midsize companies is that Manugistics essentially eliminates the risk of failure," says Angle, who says that Manugistics has implemented systems for more than 950 billiondollar-plus clients, including the leaders in nearly every industry. "We show the midmarket company what we can do for them, what we have done for their marketplace leaders. This gives them a comfort factor."
Another common issue with midmarket companies is the lack of IT resources and expertise to get the most out of the software they buy.
"Midmarket companies do not want to pay for long-term consulting, but they need help with re-engineering their processes," says J.D. Edwards's Carlson. "We provide them with templated solutions that reflect the best practices and business processes for their specific industries, so they can leverage the software to its maximum capability."
In the electronics industry, for example, J.D. Edwards has templated processes called eTech-Edge. Similar packages exist for all the other industries J.D. Edwards serves. The templates are fully customizable.
"Companies can immediately use the templates we provide, and a year from now, they can implement new ones of their own if they prefer with no re-implementation," says Carlson. "The templates just give them a resource to lean on."
Pressure to Collaborate
The key driver that Mohrman sees behind the increased systems spending by midmarket companies is pressure from large customers demanding that key suppliers have e-business capabilities compatible with their processes and systems.
"Large companies have a vision of collaborative marketplaces with them at the center," says Mohrman. "They expect their suppliers and partners to share that vision and integrate into their processes."
Since most midmarket companies have several large customers, all with the same vision, they are caught in a bind. It is very difficult to adapt the customer-facing applications to the demands of multiple customers that have rigid processes and different ways of collaborating.
"Sell-side solutions need to be able to present different workflows, queries, views, prices, incentives and much more," says Mohrman. "These demands can be met with software, but it is not easy. The whole system has to be built around the concept of flexibility on the front end."
Carlson agrees that midmarket companies are literally in the middle of their industries, and that position creates certain technology needs. Midmarket companies are participants in multiple supply chains, each dominated by large customers with their own software and processes and exchange capabilities.
"Midmarket companies cannot have the same software as all of their customers," says Carlson. "They can't even have the same architecture or processes. But with the right middleware, they can have interoperability throughout their supply chains, so they can share the same data."
J.D. Edwards calls this need convergence. It is all about sharing all of the data instructions that go into any business process with all the trading partners.
"Convergence starts with visibility," says Carlson. "Once you have visibility, you can synchronize demand and supply. All parties can see what should be in the supply chain far down the line, even at the customer level.
To accomplish this interoperability among disparate systems, J.D. Edwards offers an integration product called XPI. It first allows intra-enterprise systems to work in unison. It also supports web-based messaging using hypertext transfer protocol (HTTP), electronic data interchange (EDI), extensible mark up language (XML) and encrypted XML.
Many midmarket companies have been hoping that industry exchanges might be a quick solution to the interoperability problem among supply-chain trading partners. While many public and industry exchanges hold out the promise of providing so-called e-hubs that provide visibility, collaboration and transaction capabilities among all trading partners in an industry, Mohrman says widespread usage is not going to be practical very soon. The problem is not so much technology. It's organizational. Hundreds of mid-sized companies would have to participate in each industry-specific e-hub.
"Just getting all suppliers to adopt the systems and processes is a tall order," he says. "Each company would have to change its internal processes to adapt to new workflows. Job content would change. People would need to be retrained. The more companies that are involved, the order of magnitude just continues to grow."
Mohrman points out that it took the travel industry 10 years to fully implement the Sabre airline reservation system, which is a very basic online marketplace.
"The difficulty with Sabre was changing the way many companies operate, and that took time," says Mohrman. "Why should any large online exchange be much different?"
Mohrman says that middleware and integration applications will be needed for a long time to come.
One Size Does Not Fit All
While there are many common challenges among midmarket companies, there are just as many differences when it comes to providing software solutions.
"There is no such thing as a one-size-fits-all solution especially in the midmarket," says Angle. "We take a prescriptive approach that looks at where each company is, and where they want to be."
The technological needs and capabilities of midmarket companies track closely to their annual sales, according to Angle.
The smallest midmarket companies with sales under $250m generally have minimal systems. Impressive results on ROI can come very quickly with almost any solution, but demand planning is often a good place for them to start.
The larger midmarket companies with annual sales between $500m and $1bn can actually be more of a challenge, according to Angle.
"These companies usually have an ERP system, but they often assume that this means they have a supply-chain solution," says Angle. "We have to show them that ERP is purely a transactional system with no supply-chain functions and no ability to support collaboration with customers or suppliers. We show them how planning and execution systems can be layered on top of their ERP systems."
IBM's Mohrman agrees that the higher end of the midmarket is the most challenging.
"Companies with existing enterprise systems are resistant to changing them, and perhaps with good reason," he says. "They want to spend their budget and their effort where it will produce the greatest immediate results. They are willing to live with an existing ERP system, even if it is old and perhaps obsolete and layer new applications on top to achieve strategic goals."
E-business applications are good examples, according to Mohrman.
"We have $300m clients that are using old ERP systems designed for $10 to $50m companies," he says. "The systems don't scale very well. They provide no inter-enterprise capabilities. They are clearly obsolete, but companies don't want to change them. They want to invest their IT dollars in what they think will get them strategic advantage. They want to be able to do business online. They usually want new supply-chain applications, and often customer relationship management solutions."
Rightly or wrongly, replacing the ERP system is viewed as too costly, too time consuming and too low a return on investment, according to Mohrman.
To see how they can help a midmarket company, IBM uses a diagnostic tool called the supply-chain analyzer for evaluating current performance. The tool consists of a number of performance-related questions provided on a CD that the customer must answer. The questions vary by industry. IBM takes the inputs, shares ideas with potential application partners to focus on key business drivers to improve performance.
In the middle of the midmarket, Mohrman says the most typical performance goal is to achieve complete inventory accuracy, which then allows shorter lead times, less safety stock and more reliable delivery dates.
"Getting inventories under control can produce the most dramatic results most quickly," says Mohrman. "One dollar less in inventory not only reduces working capital, but it reduces financing costs and obsolescence."
By coupling better inventory management with collaboration with trading partners, companies can get away from making to stock and start producing exactly what customers want when they want it.
"Inventory is permanently lowered," says Mohrman. "Sales increase because customers have assurance that ship dates can be met. Online ordering increases, which results in more revenue from existing customers. It's a cycle of success."
While this is not a new concept, midmarket companies only now have begun believing that such success is possible and affordable. The cost of these solutions scared off many mid-sized companies for years, but that also is changing, according to Mohrman. Not only are solutions more affordable but companies are beginning to understand that they have to focus on the opportunity to make major lasting improvements in profitability, not on the cost of the solution. Mohrman says that it is not unusual for a $100m company to be able to save $10m over three years and keep bringing those savings to the bottom line.
"Even if the solution costs $1m, the decision makes irrefutable sense," says Mohrman
According to Carlson, J.D. Edwards is targeting the high end of the midmarket where cost is not the issue. Speed of implementation to foster further growth is the driving force.
"We are increasingly working with companies that have disparate systems," says Carlson. "In the midmarket there is a huge amount of consolidation of companies, so it is very common to have combined companies with many different systems. Maybe they are trying to decide on a common ERP system, or maybe they just want to layer on additional functionality as quickly as possible."
"Midmarket companies cannot have the same software as all of their customers ...[b]ut with the right middleware, they can have interoperability throughout their supply chains."
For example, Carlson says that J.D. Edwards is working with a $150m high-tech contract manufacturing company that expects to be at least a $1bn company within three years. It is growing by rapid acquisition. The company bought three plants in the past year and has plans to buy 10 more fairly soon. "That fast-paced growth can put quite a strain on the supply-chain systems," says Carlson.
He says that there is no easy way to suddenly have all these new acquisitions and plants on exactly the same systems. In fact, it is unrealistic to think that is possible in a short time frame with growth happening so quickly. The answer is to allow interoperability among all the systems using middleware such as J.D. Edwards's XPI solution.
"Fast growing midmarket companies have almost as much organizational complexities as very large multinationals," says Carlson. "These companies may only have one of several supply-chain applications in common across the divisions, such as product and distribution planning, but they have to be able to talk immediately. They usually need to optimize across multiple plants. Maybe they need to allow suppliers to be part of the optimized solution."
The ASP Solution
At the opposite end of the spectrum are small companies that need the sophistication of supply-chain solutions to join in collaborative networks but cannot afford the standalone software. The smallest customer for Manugistics is a $50m company. Rather than license software and host it on its own system, this company taps into the Manugistics hosted solution. Called b-Networks, it is an application service provider (ASP) that essentially rents the application to the customer.
"The ASP approach is immediately attractive for a small company that doesn't have the capital or the IT staff," says Angle.
IBM also will provide any of those solutions through its ASP service, and this option is becoming an important offering according to Mohrman.
"The ASP approach allows users to take a solution on a trial drive," says Mohrman. "They will know exactly what the cost is because they are charged a monthly fee."
Mohrman says the ASP model is essentially the same concept as "time sharing," which was how many companies bought their accounting software services in the early days of large-scale data processing. The pay-as-you-go approach of time-sharing allowed many start-up companies to boot strap their business growth, Mohrman says
"They could scale their IT costs as they grew," says Mohrman. "The ASP trend promises the same thing for small companies that need sophisticated functions, but can't afford to buy the solution."
The only caveat that Mohrman says companies must consider is to make sure that they select an ASP that is going to provide high-quality service and has the financial strength to be there for the long haul.
While large vendors such as IBM and Manugistics will offer their solutions through an ASP service as an alternative to having the customer hosting its own software, a number of start-up software vendors are exclusively focusing on ASP distribution of supply-chain solutions.
For example, CastaLink.com, based in Mountain View, Calif., delivers its supply-chain electronic collaboration application solution (eCAS) exclusively in an ASP version allowing users to subscribe on a monthly basis.
According to CastaLink COO David Hushbeck, midmarket companies are looking for a solution that allows them to achieve the same levels of efficiency and productivity in their supply chains as their larger tier-one counterparts. But they don't want to have to invest the same amounts of money and resources necessary to implement traditional enterprise-wide solutions.
"Midmarket companies do not want the financial and organizational burden of having to maintain an in-house IT support staff," says Hushbeck. "Our ability to have the functionality of eCAS delivered via the ASP model is very attractive to the midmarket. "
The ASP approach also answers another critical need of midmarket companies - speedy implementation.
"CastaLink's approach provides companies a fast e-commerce solution that is easy to use, without lengthy installation or major up-front hardware costs," says Hushbeck. "A customer can usually be fully implemented in two to eight weeks."
According to Hushbeck, using an ASP solution can provide all of the functionality and collaborative capabilities of traditional company-hosted software. The eCAS suite, for example, includes a number of modules for order placement and tracking, collaborative planning, available-to-promise (ATP), capable-to-promise (CTP) calculation, materials resource planning (MRP), business rule customization, "what-if" modeling, messaging among trading partners in any format, and other functions. The eSupply module, for example, provides suppliers with web access to view order details and receive special "alerts" to any changes, and offers the ability to commit orders and update product information. eSupply merges actual and forecasted demand to generate purchase order recommendations and tie these to strategic sourcing logic for purchase order generation.
An ASP solution can be just as scalable, and because it is fully web-enabled, it allows real-time communication to all trading partners.
"Our goal is to create a virtual community where suppliers and customers of all sizes are so deeply integrated to the enterprise that they virtually become one extended enterprise, sharing secure information and conducting collaborative activities," says Hushbeck.
Among Castalink's users are Nucleo-Tech, a medical equipment company based in San Mateo, Calif.; KGC, a distributor, located in Fremont, Calif.; and Rod-L, a electronic equipment manufacturer, located in Menlo Park, Calif.
Another ASP-only offering focusing on supply-chain applications for mid-sized companies is e-BizChain of Pleasanton, Calif. The company develops, markets and supports a hosted supply-chain solution that uses XML and EDI to solve the difficult problem of getting trading partners of all sizes together in a supply-chain fulfillment community.
"IT staffs for mid-sized companies are always overloaded and spread thinly across many corporate initiatives," says Jeff Viehmeyer, marketing and strategic alliance manager for e-BizChain. "With the constraints of limited resources, mid-sized companies want one-stop shopping with solutions that work out of the box and are fast to implement."
Viehmeyer says that 85 percent of business-to-business commerce is handled in private exchanges, so there is a tremendous need for a solution that will efficiently automate the process of supply-chain activity of translation, transformation, and data transport. A hosted solution such as e-BizChain requires no additional software or hardware. Using XML, e-BizChain can take input from essentially any data source, and transform it into the format required by each trading partner, whether human or machine. Small partners may use a simple web form. Larger trading partners may prefer an automated interface.
"The host mid-sized company can provide the personal touch of a small organization, the efficiency and reach of the internet, and integration to automated systems for larger trading partners," says Viehmeyer.
ASP set-ups like e-BizChain can integrate with existing ERP and other legacy systems internally. Externally, they are usually compliant with any message format or workflow process.
"Customers don't care about company size," says Viehmeyer. "They expect efficient, personal service, quality products and competitive prices from a vendor, or they will go elsewhere. This places midmarket companies in a difficult position. They must compete with the volume efficiency, buying power and resources larger companies bring to bear, while at the same time, have the personalized service characteristic of smaller companies."
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