Make your resources go further - IT for SMEs

SMEs are often more innovative and nimble than their larger corporate rivals

It could be argued that small and medium-sized enterprises (SMEs) will suffer more than most in the present bleak economic environment. Shorter cashflow cycles, limited bargaining power, shrinking funds available for IT investment and a lack of internal resources all look to be daunting obstacles.

On the plus side, SMEs are often more innovative and nimble than their larger corporate rivals. Those canny enough to sniff out the best IT deals available can find themselves outpacing more leaden-footed competitors.

And there are growing signs that SMEs are exploring new ways to acquire and deploy technology to gain enterprise-class capabilities without having to pay top-dollar prices. Noticeably, the way SMEs are approaching outsourcing relationships is changing, according to Tim Jackson, chairman of technology consultancy Inflector. For example, the web hosting market has seen competition among vendors for SME business increase dramatically, he says. This trend is likely to be replicated in other areas, with SMEs expected to start outsourcing services to other countries in much the same way as larger enterprises do now.

“This move will be pushed by a number of elements including virtualisation, a reduction in computer costs, and the availability of faster network connections due to expanded broadband rollouts,” says Jackson.

Further changes to the way SMEs deploy technology are being driven by economic circumstances. A recent report by consulting group BroadGroup suggests that SMEs will increasingly turn to cloud computing and software-as-a-service (SaaS) as the economic malaise deepens. Both models can help smaller businesses to deliver new products and services quicker and at a lower cost, reports BroadGroup.

The SaaS model is gaining a lot of traction in the business world, with most large software vendors and application service providers, including HP, IBM, Microsoft and Salesforce.com, now offering business applications such as customer relationship management (CRM), databases, knowledge management and web development software as web-based utilities.

Analyst Gartner estimates that organisations are typically generating project savings of between 25 and 40 per cent by deploying SaaS-based CRM applications, with savings derived from reduced application expense and lower implementation costs.

SaaS is particularly appealing to the SME sector because it removes the high entry costs associated with some business applications. Users avoid hardware, installation and maintenance fees, software licensing charges and the expense of dedicated internal IT resources nee-ded to administer systems. SaaS offers a pay-as-you-go approach that allows firms to lease only the resources they need without the worry of installing, upgrading, maintaining or securing those systems.

“Some of the earlier adopters [of SaaS] were SMEs, but it is down to cashflow and the fact that many organisations do not need to keep their own servers under the stairs,” says David Mitchell, senior vice president of IT research at Ovum.

“Driving down cost is the obvious reason for moving to SaaS/cloud computing, but there are two aspects to cost – ­ total cost of ownership and cashflow,” says Inflector’s Jackson. “If you save 20 per cent off the cost of the IT over five years, that is nice, but if doing it involves spending 80 per cent of the money right now, that has a more dramatic effect.”

Flexibility is also part of the attraction. In the past, if a company wanted to offer a new service and forecast that it would have about 4,000 customers, for example, it would need to build the technology infrastructure to support that and factor in the cost of paying the money upfront.

“With the cloud model, you can actually try it out without incurring signi ficant capital costs,” says Jackson.

In future, suggests Jackson, some of the larger SMEs will start examining options that look more like cloud services, where they lease computer power to run intensive applications and storage space by the megabyte.

To date, the nascent cloud computing model has tended to focus more on the consumer market, with companies such as Google and Amazon offering simple and standard on-demand applications such as word processors or spreadsheets, coupled with online storage resources.

“Many executives are still very sceptical about the cloud,” says Jackson. “But there are millions of consumers already using it. It is gaining rapid and universal adoption – ­ 2009 will be the tipping point where a wider business community will start switching to the cloud as they come to understand it more.”

Other ways SMEs are avoiding the debilitating expense of software licensing include the use of open-source software, where firms pay maintenance and support costs but the software is free.

Nevertheless, the fees for commercial open-source packages such as those on offer from Red Hat, Novell or Ingres, can often equal the total cost of ownership of propriety software over time.

Small open-source projects especially have the reputation of being written by geeks for geeks. This is one reason why few SMEs trust open-source software for mission-critical applications, unless they have the expertise in-house.

“It is difficult to move people onto open-source software on the desktop if they are used to Windows and Word environments,” says Ovum’s Mitchell. “Also, is it actually going to save them anything by moving to OpenOffice and Linux for instance? Because when it comes to replacing those assets in two or three years’ time, there might be an issue.”

For many SMEs, however, IT delivers sufficient business benefits to justify owning their own hardware and software. In such cases, SMEs lack the clout to establish direct relationships with technology vendors, and instead buy goods and services through the reseller channel.

This does not mean SMEs should expect lower levels of service, says Glenn Morrison, managing director of UK business-to-business reseller Upgrade Options. Resellers are better able to forge a close relationship with the user, he says, and have better insight into available inventory, ensuring they can deliver orders to schedule.

“Resellers provide the basics ­ – product knowledge and implementation assistance. We are at the forefront of dealing with customers and provide a readily available point of contact and a quick response,” says Morrison.

Given the importance of trust in the SME relationship, Morrison knows how vital it is to make sure customers are getting value for money from the deal; particularly as dealing with smaller businesses usually means dealing with the boss.

“They are intelligent beasts – ­ they know when they are being shafted, and you do not get a second bite of the cherry if you have upset the governor,” he says. “Vendors are ultra-keen to sell to everyone right now, and we are getting supported prices as well.”

Given their limited staff numbers and in-house IT skills, the clients that resellers serve are often looking to them for knowledge and guidance about the systems they buy, and a guarantee that they will not fail.

“We have to have patience and good communication skills because it is a question of trust, and our customers need to be confident that we can fix something that goes down,” says Morrison.

As well as resellers, SMEs are far more likely to buy from local IT suppliers rather than the multinationals. “If you ask SMEs who they trust to deliver IT support, it is not large telcos, ISPs, systems integrators or anyone else, but more likely to be their friend Bob located just down the road,” says Ovum’s Mitchell.

Morrison admits he has already seen a slowdown in SME spending, though it is not as significant as the general economic decline.

“Everybody is getting at least two or three quotes, and is taking a bit more time over their purchasing decision, which may be a bad thing given the exchange rates,” he says. “Prices next month could be eight per cent more expensive if sterling continues to fall against the dollar.”

Yet given that for SMEs particularly, cashflow is extremely sensitive, it is likely that many companies will try to cut expenditure on support and maintenance contracts to reduce operational costs.

“Some may consider going without support contracts this year, and take the risk of waiting for something to break before calling in help,” says Mitchell.

Many are also turning to remote management services, such as those offered by Sun Microsystems, with its Management Connection Service. These aim to cut system maintenance fees by monitoring hardware and software and scheduling preventative fixes before problems occur, thereby avoiding more expensive emergency repairs.

So while this year may prove a difficult one for many SMEs, intelligent use of the IT assets already at their disposal, selective upgrades and hard bargaining should help them weather the storm.

In the final part of our guide we look at what the future holds for IT in the SME sector

The rise of SaaS

According to IT advisory group Gartner, spending on software as a service (SaaS) is set to grow at nearly 34 per cent per year, through to 2012. About 50 per cent of that growth will be driven by the SME sector.

SaaS is particularly beneficial to SMEs with tight capital budgets and limited resources as it offers favourable payment schedules to alleviate cashflow problems, says Robert Anderson, vice president of research, SME business applications at Gartner.

“Well-negotiated exit clauses can help reduce financial exposure and SaaS also frees up IT staff for other tasks,” he says.

Within the SaaS market, the hottest segment is still for customer relationship management software, where Salesforce.com blazed a trail. But for SMEs, spending is growing fastest on office suites and digital content creation, notes Anderson.

Elsewhere, SMEs’ spending on SaaS-based enterprise resource planning and supply chain management applications varies greatly, depending on firms’ business process complexity, says Anderson.

When it comes to costs, SMEs need to be realistic about the savings they can generate, he says.

“Costs vary a great deal but SaaS applications definitely have a lower total cost of ownership for the first two years, because they do not require large capital investment in software licences or hardware support infrastructure. But in the third year and beyond, on-premises deployment can become less expensive as the capital assets depreciate while the SaaS operating budget remains constant,” says Anderson.

According to Gartner’s research, the integration cost for SaaS-to-SaaS deployments and SaaS-to-on-premises solutions is about the same.