BANGALORE, INDIA: With over 35 million units, India has the second largest number of small and medium businesses (SMBs) across the world after China. Indian SMBs are significant in terms of not just size but also revenue contribution to the economy.
Around 65 percent of India's GDP is attributed to the SMB sector. The SMB segment is definitely going to play a key role in India's growth story as future unfolds itself. Indian SMBs are already trotting the globalization path and contribute nearly 40 percent of our exports. Simultaneously, increasing number of global companies are being attracted towards India as the country presents a large consumer population and also provides the right environment for business expansion.
However, globalization also brings along several challenges with it and the SMBs often bear the brunt. While our SMBs are able to effectively compete with global players on parameters such as value for money and timely deliveries, they often lose out to opponents due to lack of IT adoption in their businesses.
One look at the figures for PC adoption by SMBs is enough to further strengthen this argument. Only 16 percent of our SMBs use PC in their business operations. There is still hope in the fact that more SMBs are adopting PCs by the day and by 2012, nearly 40 percent of our SMBs would be penetrated with basic IT. Most of this growth will come from sectors such as retail and manufacturing. Increased PC adoption within this vast base will create new opportunities for information technology products.
One of the most important parameters that an SMB considers before purchasing software is the capital investment to be made into the software implementation. This includes not only the license of the software but also the implementation & maintenance costs, both direct as well as indirect.
An SMB is very unlikely to have the capability to absorb costs over and above the budgets. Another important factor that influences decision-making is the return on investment and how much time lag it would take to achieve the returns. An SMB would usually be in the growth stage of its life cycle, and hence would need to upgrade the software once it crosses a certain size in terms of revenue, number of employees, number of transactions etc. The software should be able to allow a smooth transition to a larger scale.
Retail represents nearly half of the total SMB segment in terms of both size and revenue. Retail is one of the most diversified sectors and especially in India, it includes various dimensions of the retail format such as street vendors, the corner stores, and most recently the large format stores. Indian retail industry is on the upsurge and will witness increased IT/ software adoption to remain competitive in the market place. Talent attrition and increased usage of plastic money in transactions is pushing Indian retailers to adopt basic technology such as credit card swiping terminals and point of sale (POS) terminals for faster invoicing and enriched customer experience.
The unorganized sector is not far behind in terms of adoption and presents ample opportunities for IT companies. Companies should focus on building solutions that can address the retailers' pain points across the value chain of sales and inventory management. Organized and large retail players are also deploying ERM suites for inventory management and demand forecasting along with accounting and payroll.
A majority of the SMBs would be first-time adopters of ERM software and hence have very little exposure to IT and its complexities. Thus, a vendor that can implement the software with minimal IT support required at the client location as well as low training requirements would have the potential to succeed in attracting SMBs to adopt the software.
Manufacturing is the next biggest sector among SMBs with nearly 13 million units and over USD 150 billion in revenue. The mid-sized manufacturing units hold large potential for the growth of ERM software. The Manufacturing industry is one of the biggest consumers of ERM software and is used to manage supply chain, logistics, warehousing, order management, material movement and processing, inventory management, accounting and payroll, production outflow etc. to improve business profitability.
Deployment and implementation of ERM packages is relatively easier and the cost and time overrun is lesser compared to other verticals since the users are adept with required technical expertise. Adoption of SaaS and open source-based ERM applications are further fuelling these opportunities. Both SaaS-based ERM and Open source ERM solutions are low-cost models of ERM implementation. The model that should be used by a particular business depends on the timeline of the deployment, cost considerations as well as security considerations for the data.
The growing SMB sector in India will also bring in the initial opportunities for storage software. Innovation in delivery models such as storage as a service can help technology companies address the SMB potential in a better fashion. IT brings along with it security threats and hence adoption of security software to avert these threats. Security software offerings through SaaS and appliance models are expected to influence increased adoption among SMBs.
The software industry is in the midst of a wave of business model innovation that is defining the base for customer and vendor value in the years to come. Customers are demanding more value for the money spent on software, which is pushing product businesses to fundamentally change their business model and hence distribution of software. Over the last decade interesting business/revenue models have emerged and have revolutionized the perception of both enterprise and consumer software. Innovations in three key areas of technology, delivery models and platform have already made way for non-license business model. Disruptive innovations in technology, revenue and delivery models are helping unlock significant potential.
SaaS, an innovative delivery model is also being explored by Indian majors such as Bharti and TCS. The SaaS model offers the user the convenience of paying for the software as a service, on a monthly or annual basis etc. This avoids the upfront cost of software purchase as also vendor lock-in. The appliance model provides an integrated solution to the user, consisting of hardware and software that is mostly plug-and-play, and thus offers high convenience. Innovations in revenue model have provided flexibility to customers to choose and buy software products based on need and reduce upfront costs.
A combination of these disruptions is helping Indian software product businesses break through the erstwhile barriers. It is important for technology leaders to choose right strategy of revenue and delivery model to have a significant play in the SMB market. These innovations offer immense potential for targeting potential customers who otherwise would not have the capability or willingness to purchase software in the traditional license format.
Author: Kishan Bhat, Engagement Manager, Zinnov
