Most SMEs are spending on IT for data mgmt, decision-making initiatives

Indian SMEs, which are aggressive on IT adoption, make the the $8-billion Indian SME IT spend market one of the most exciting avenues for growth, says Vinod Krishnan, managing director, TVS Infotech (TVSi). In an interview with FE’s S Saroj Kumar, he says that tech spend by SMEs is getting a fillip, since SMEs today have access to funding, technology and above all, the legacy of family-owned business. Excerpts:

The Indian enterprise software market will witness a growth of 12.3% between 2009 and 2014, according to Gartner. How do you view this in the context of SMEs?

You will see more businesses in tier III zones which will adopt technology to enhance their business value. The very fact that all tier I companies targeting this segment today points to this fact. Today, most SMEs are spending on IT for data management and those who have already automated their businesses will spend on decision-making initiatives. This is TVSi’s mantra — to help companies in fields ranging from data management to decision making, to help them focus on their core business activities and not be worried about keeping their servers, attrition, disaster recovery, their mail servers being down, ERP support etc. We will be their ‘CIO’ on demand.

Is it true that ERP system vendors like Oracle, Microsoft and SAP are planning to jump into the end customer fray, bypassing customising vendors like TVSi?

I doubt this is true. For any enterprise software vendor, it is imperative to develop a strong channel strategy and build an ecosystem of vendors and promote their products and solutions. Even with ‘ERP on the cloud’ gaining a strong momentum, the channels will coexist.

You say that 90% of your clients lie outside TVS group companies. Will group companies remain a virgin territory to be tapped later?

TVS Group companies will not give any special preference to TVSi just because of the group affiliation. We have to earn our way on merit. TVSi has looked at the whole market from the beginning, with TVS Group companies being an important part of the target market. We expect to progress on both the fronts in the coming years.

On a standalone basis, what is TVSi’s contribution to the group company and how much is it expected to grow?

Our current contribution to the group is in a single digit, but I expect this to change over the next few years.

ERP solutions bare the whole gamut of operations of an SME. Traditionally, family-owned proprietary SMEs do not wish to expose their operations fearing competition and tax implications. How do you succeed in convincing your clients about the suite of ERP solutions?

We have never come across an instance in which a customer feared exposing its operations. Most of them talk of doubling/tripling their turnover in the next 3-4 years. For this, they need to have a strong foundation and a principled approach towards business. Today, companies cannot run businesses like their predecessors did decades ago. Second and third generation entrepreneurs are taking over the mantle of running these family-owned businesses. They understand the necessity of a strong backbone in terms of an ERP/IT systems for the growth envisaged and the requirements for security and confidentiality to be in place.

Is vendor lock-in an issue in enterprise software segment? What do you think of the call to develop solutions in open standards and open architecture?

Yes, to an extent there is a fear of lock-in, but this fear in is there in every business transaction, including that of a mobile service provider. If you ask an enterprise today to go with open standards-based solution, they will hesitate, both to build or to buy such a system off the shelf.

The ERP segment is a highly reference-based environment, with a herd mentality for procuring technologies. If you consider the manufacturing domain, SAP is dominant and will remain so for a long time to come because the adoption of SAP in this sector. If you drill down further within SAP for manufacturing, you will find a slew of solutions for every micro-vertical you can think of. Considering these dynamics, it is always better to entertain a known devil than an unknown one. Developing solutions in open standards will become a norm in the near future but enterprises would not risk taking the gamble right now. Their risk appetite for their core business is very high. However, this is not the case in non-core areas like IT. It is also a well-known fact that it is possible to integrate system architectures of better known ERP systems with open source solutions.

Changing Indian ERP scenario

ERP Market growthIN recent times, the ERP scenario in India is witnessing a rapid growth. A number of manufacturing firms, automotive, steel, oil, textile and pharmaceutical companies have already been implemented ERP solution thus making ERP dominating the overall picture in these organizations.

For the early adopters of ERP solution, Finance and Accounting, Sales and Distribution, Materials Management/Purchase, and Manufacturing are the most popular ERP modules implemented. In recent times Plant Maintenance, HR, Transportation and Service modules are also growing in popularity.

We find different industrial sectors like cement sector, power sector, and food sector are going for ERP solutions. The construction or project companies have also implemented different ERP solutions suitable to their needs.

Currently, the SME segment in India has been one of the most aggressive adopters of ERP software. In fact almost 60 per cent companies in the SME segment have already implemented ERP. This substantial increase in the penetration level in the SME segment is attributed to the introduction of low cost ERP solutions such as eresource ERP which also caters the country-specific localizations and availability of large pool of skilled functional and technical talents.

The primal objectives that the SMEs have for switching to ERP is to get aid in smooth inventory management, timely scheduling of production cycles and shipment of goods, managing human resources and online data communication.

According to estimates, the ERP market in India has witnessed a growth rate of 70 per cent in the last decade. As a result, the market has leapfrogged over the years to a tremendous volume in terms of monetary gains. There were many reports which underlined the tangible quantitative benefits accrued by Indian companies in post-ERP implementation era.

Most of the time these benefits are difficult to prove on statistical grounds as soft benefits like comfort in work life, maturity in planning, attitude changes, transparency, visibility etc are either practically impossible to measure or correlate such improvements to ERP implementation. Companies are supposed to set their objectives prior to implementation followed by measuring of the achievements after implementation, and only then should they conclude about the effects of ERP.

Putting the Enterprise into the Enterprise System

Enterprise systems appear to be a dream come true. These commercial software packages promise the seamless integration of all the information flowing through a company—financial and accounting information, human resource information, supply chain information, customer information. For managers who have struggled, at great expense and with great frustration, with incompatible information systems and inconsistent operating practices, the promise of an off-the-shelf solution to the problem of business integration is enticing.

It comes as no surprise, then, that companies have been beating paths to the doors of enterprise-system developers. The sales of the largest vendor, Germany’s SAP, have soared from less than $500 million in 1992 to approximately $3.3 billion in 1997, making it the fastest-growing software company in the world. SAP’s competitors, including such companies as Baan, Oracle, and PeopleSoft, have also seen rapid growth in demand for their packages. It is estimated that businesses around the world are now spending $10 billion per year on enterprise systems—also commonly referred to as enterprise resource planning, or ERP, systems—and that figure probably doubles when you add in associated consulting expenditures. While the rise of the Internet has received most of the media attention in recent years, the business world’s embrace of enterprise systems may in fact be the most important development in the corporate use of information technology in the 1990s.

But are enterprise systems living up to companies’ expectations? The growing number of horror stories about failed or out-of-control projects should certainly give managers pause. FoxMeyer Drug argues that its system helped drive it into bankruptcy. Mobil Europe spent hundreds of millions of dollars on its system only to abandon it when its merger partner objected. Dell Computer found that its system would not fit its new, decentralized management model. Applied Materials gave up on its system when it found itself overwhelmed by the organizational changes involved. Dow Chemical spent seven years and close to half a billion dollars implementing a mainframe-based enterprise system; now it has decided to start over again on a client-server version.

Some of the blame for such debacles lies with the enormous technical challenges of rolling out enterprise systems—these systems are profoundly complex pieces of software, and installing them requires large investments of money, time, and expertise. But the technical challenges, however great, are not the main reason enterprise systems fail. The biggest problems are business problems. Companies fail to reconcile the technological imperatives of the enterprise system with the business needs of the enterprise itself.

An enterprise system, by its very nature, imposes its own logic on a company’s strategy, organization, and culture.(See the table “The Scope of an Enterprise System.”) It pushes a company toward full integration even when a certain degree of business-unit segregation may be in its best interests. And it pushes a company toward generic processes even when customized processes may be a source of competitive advantage. If a company rushes to install an enterprise system without first having a clear understanding of the business implications, the dream of integration can quickly turn into a nightmare. The logic of the system may conflict with the logic of the business, and either the implementation will fail, wasting vast sums of money and causing a great deal of disruption, or the system will weaken important sources of competitive advantage, hobbling the company.

It is certainly true that enterprise systems can deliver great rewards, but the risks they carry are equally great. When considering and implementing an enterprise system, managers need to be careful that their enthusiasm about the benefits does not blind them to the hazards.

The Allure of Enterprise Systems

In order to understand the attraction of enterprise systems, as well as their potential dangers, you first need to understand the problem they’re designed to solve: the fragmentation of information in large business organizations. Every big company collects, generates, and stores vast quantities of data. In most companies, though, the data are not kept in a single repository. Rather, the information is spread across dozens or even hundreds of separate computer systems, each housed in an individual function, business unit, region, factory, or office. Each of these so-called legacy systems may provide invaluable support for a particular business activity. But in combination, they represent one of the heaviest drags on business productivity and performance now in existence.

Maintaining many different computer systems leads to enormous costs—for storing and rationalizing redundant data, for rekeying and reformatting data from one system for use in another, for updating and debugging obsolete software code, for programming communication links between systems to automate the transfer of data. But even more important than the direct costs are the indirect ones. If a company’s sales and ordering systems cannot talk with its production-scheduling systems, then its manufacturing productivity and customer responsiveness suffer. If its sales and marketing systems are incompatible with its financial-reporting systems, then management is left to make important decisions by instinct rather than according to a detailed understanding of product and customer profitability. To put it bluntly: if a company’s systems are fragmented, its business is fragmented.