The U.S. Small Business Administration (SBA), the government agency responsible for assisting and protecting the interests of small businesses, created small- and medium-sized business standards, which are usually stated in terms of the number of employees or average annual receipts. SBA has established two widely used size standards: 500 employees for most manufacturing and mining industries, and $7 million in average annual receipts for most non-manufacturing industries. While there are many exceptions, these are the size standards applied in this article to distinguish small- and medium-sized businesses (SMBs) from large enterprises.
Table 1 lists the pros and cons when it comes to information resources associated with being a small- or medium-sized business.
Table 1 – Pros and Cons of IT Investment for SMBs
| Pros | Cons |
|---|---|
| Business processes are often immature so easier to re-engineer. | Must justify IT based on a smaller number of users. |
| Less risk as processes modeled on fewer product lines/customers. | Capital expenditure on IT difficult to justify because of high cost. |
| No legacy IT infrastructure to contend with. | Ad-hoc approach to IT investment because of pressure on operations, limited funds, and lack of strategic planning. |
| Benefits immediately seen from better data management. | Established strategic IT portfolio management processes for large companies too expensive or complex. |
Many SMBs fail to see the opportunities hidden in economic downturns. In reality, this is the time for them to make the most of the pros in terms of IT investment and to effectively mitigate the cons. But first, SMBs must thoroughly assess their vulnerabilities and act decisively to minimize them.
Leveraging the opportunities of the economic downturn often means focusing a high level of attention on cost improvements—usually strategic, structural improvements, such as streamlining infrastructure, adjusting the service delivery model, and redesigning the business model. Figure 1 is an example of various cost-improvement levers.[1] These projects all involve a significant number of information and process systems decisions.
Adapted from Deloitte’s, “Three Steps to Sustainable and Scalable Change, Part 1: Rethinking a Company’s Business Model.”[2]
For SMBs, IT alignment with business objectives must be elevated and strategic data information flow management should be a top priority. However, these often get pushed aside in the midst of crisis management—especially if IT projects are seen as additional up-front capital expenditures.
Now, with the arrival of cloud computing, software as a service (SaaS) can provide lower-cost alternatives without the need for an internal IT group and reduced up-front capital costs. (Editor’s Note: For more on SaaS, read “Servicing the Software Industry: 7 New Rules for the Software Business.”)
As indicated above, one advantage that SMBs have over large enterprises is that they do not have legacy infrastructures. Large enterprises have to migrate these often-complex legacy systems, whereas SMBs can often build their services directly into the cloud with greater efficiency, at a lower cost, and in a streamlined, strategic manner, thus mitigating many of the challenges highlighted in Table 1. However, in order to move toward a solution, SMBS must first consider more strategic IT portfolio management based on the cost improvement levers above and critical success factors for surviving the economic downturn.
Critical Success Factors for Surviving Economic Uncertainty
Innovation
In any economy, innovation is essential to business success. While the economic downturn lasts, firms will need to find innovative ways to cut costs and to make better strategic decisions. They must also create products and services that will drive greater revenues once the economy improves.
The Internet and enterprise IT are accelerating competition within traditional U.S. industries—not because more products are becoming digital, but because more processes are. Just as a digital photo can be endlessly replicated quickly and accurately by copying the underlying bits, a company’s unique business processes can now be propagated with much higher fidelity across an organization by embedding it into enterprise information technology. As a result, an innovator with a better way of doing things can scale up with unprecedented speed to dominate an industry.[3]
To survive or, better yet, thrive in this more competitive environment, the mantra for any CEO should be “Deploy, innovate, and propagate”.[4]
- Deploy a consistent technology platform.
- Separate yourself from the pack by coming up with better ways of working.
- Use the platform to propagate these business innovations widely and reliably.
The most effective corporate strategy is now a function of answering three key questions: What are my capabilities? What is my position relevant to the competition? What technology should I use to help improve my results?
Strategic Planning
IT benefits the most from a long-term, disciplined, strategic view and a square focus on achieving the company’s most fundamental goals. Many units within SMBs have individual initiatives that are not centralized or integrated. They each might have their own business applications, technologies, and even data definitions. Data rationalization and integration become important once an SMB reaches a tipping point in its life cycle, such as significant growth in customers, geographic expansion, or the proliferation of product lines. It may also be required when project costs are high because individual teams are isolated, rather than harnessed together.
A unified technology platform can replace a wide variety of vertically oriented data silos that serve individual business units with a clean, horizontally oriented architecture designed to serve the company as a whole. Just like its large counterparts, an SMB’s first step is coming up with technology standards, followed by a concept of rational data architecture. The firm will have to think strategically about IT-enabled business value and to develop a plan for facilitating this value.[5]
Cost Reduction and Elimination
Expense reduction in good times is important for business; in difficult times, it is essential. IT budgets need to be rigorously scrutinized because if there is duplication built into them, there is waste. In some instances, SMBs are not utilizing their existing functionality due to outdated or inefficient processes. IT groups should examine the costs and benefits of extending refresh cycles, delaying upgrades, discontinuing maintenance agreements, and using open source platforms and applications.[6] In today’s world, we also need to stop thinking about how to perform tasks more efficiently and start thinking about how to automate work that eliminates the task entirely (and with it, the cost).[7]
Beyond Cost-Cutting
Except in the direst of circumstances, eliminating technology investments during a downturn is counterproductive. When business picks up, a firm that made such a decision would inevitably lack critical capabilities. Besides, when they are aligned with business value, many technology investments can improve a company’s profitability in the short to medium term. In fact, when business and IT professionals come together to take an end-to-end look at business processes, the resulting investments can have up to 10 times the impact of traditional IT cost reduction efforts.[8] The trick is to scan for opportunities, such as improving the customer experience, reducing revenue leakage, and improving operating advantage.
Technology investments can have a substantial impact on businesses, and such outcomes can be greater for SMBs than large enterprises because any cost cutting through process optimization is immediately apparent in the bottom line, given most SMBs’ tighter financial situation. Likewise, any additional revenue generated by better data analysis in areas such as market research shows up very quickly.[9]
To extract value from these opportunities, SMBs must make managerial improvements in the following areas:[10]
- Developing New Insights: Few companies have successfully capitalized on the explosion of data that has occurred in recent years. Often, this information has never been mined for insights that could add value. Business and IT staffers can uncover opportunities by combining their detailed understanding of business processes with straightforward analyses of consolidated datasets to identify new opportunities for revenue leakage.
- Optimizing Processes: As IT becomes tightly integrated with processes, breaks in workflows are often built into systems, diminishing productivity. Focusing on these areas with an integrated view of operations and technology may well reveal problems, such as outdated processes, manual steps, redundancies, and bottlenecks. A new system may be needed or, perhaps, modest enhancements or targeted workarounds will suffice.
Solutions for SMBs in the Current Economy
Operations efficiency comes from building a unified, streamlined business environment that fosters collaboration and agility. The integration of business processes can improve coordination among individuals and streamline workflows and processes, which, in turn, help to retain and satisfy customers. These systems link the order, inventory, sales, purchase, manufacturing, supply chain, and warehouse management modules within an enterprise to ensure fast and accurate information availability for those involved. All enterprise resource planning (ERP) systems in the market perform these functions, but identifying those that best meet the needs of SMBs requires careful scrutiny.
On-Demand, Hosted ERP Solutions
SaaS ERPs—sometimes called hosted software, on-demand software, or utility computing—have been the most interesting technology innovation for SMBs over the last two decades. The changes hosted software introduces—such as movement from a fat client portfolio to a thin one, from software acquisition to software subscription, and from on-premise installation to hosted Internet delivery—have been enthusiastically adopted because of the tangible business value and bottom line benefits they provide, such as:
- Lower Total Cost of Ownership: There is little question that SaaS solutions generally provide lower computing costs initially and over a useful five-year life.[11]
- Decreased Implementation Risk: By eliminating the computer hardware and platform software components, companies can decrease overall implementation time and the probability of project delays and implementation failure risk.
- Outsourced Skills and Expertise: Outsourcing the IT management of ERP systems frees up internal IT resources to focus on core competencies, higher-priority projects, and strategic services. SaaS hosting enterprises also retain IT and security specialists with deep skills not found within SMBs, such as high operations availability, performance optimization, information security, disaster recovery, and business continuity.
- Hosted Software Delivery: The more reputable SaaS systems guarantee anytime-anywhere access backed by service level agreements with financial penalties for system down time. Browser-based system access to the ERP is especially valuable to highly decentralized companies. As there is no need to purchase additional hardware and bandwidth, on-demand scaling as the business grows is another valuable benefit.
- Subscription Pricing Model: The market has enthusiastically embraced the pay-as-you-go software-utilization pricing model over the traditional “pay-and-pray” procurement method. Pay-as-you-go pricing is a great boon for companies that cannot afford traditional ERP systems, but want to reap the benefits of informed decision-making processes. Subscription pricing also delivers a foreseeable future payment schedule, while eliminating the all-too-common cost overruns associated with on-premise ERP system implementation.
Considerations for On-Demand ERP System for SMBs
Hosted, on-demand ERP solutions offer greater flexibility for SMBs with little or no revenue in the earlier phases. Lower total cost of ownership and faster implementation are the key advantages from an SMB perspective. Because SaaS does not require a complex internal technical infrastructure for support, the initial costs are significantly lower than they would be for purchasing ERP software and running it internally. In addition, one can essentially “lease” the software, so firms have less of a big payment up front than they would with traditional, on-site ERP. However, there is still the ongoing cost of the lease to consider in calculating total cost of ownership.
On the downside, because the firm does not own the software on its own servers, there is inherently less it can do to customize the ERP to its own business needs. The software can still be configured and set up according to the firm’s needs, but when it comes to hardcore workflow redesign or software customization, SaaS is limited in its capabilities. However, unlike large businesses with complex workflows and legacy processes, SMBs have less of a need for customization. Firms should look for systems that offer greater flexibility in choosing modules and accommodating their growing needs. The other key requirement is for the most commonly used system with little or no downtime. Supporting service-oriented architecture (SOA) functionality is an added advantage because SOA allows businesses to share and collaborate more efficiently.
The challenge for all companies, including SMBs, is that going “live” has less to do with getting the software up and running than it does with clearly defining business processes, configuring the system accordingly, and ensuring that people are well trained in the new process workflows and transactions.
Conclusion
In an economic downturn, innovation is particularly essential to business success. Deploying IT serves two distinct roles—as a catalyst for innovative ideas and as an engine for delivering them. Firms should examine their processes and data to find opportunities for cutting costs through the automation and elimination of processes. By taking a careful look at operations with an integrated view of technology, firms may discover problems, manual steps, redundancies, and bottlenecks, many of which can be resolved with modest enhancements.
In terms of revenue generation, it is essential to search for opportunities, such as improving the customer experience, reducing revenue leakage, and improving operating advantage. More importantly, SMBs must leverage IT to develop new insights by examining the existing data to find opportunities to create new value for customers.
SMBs can also look at new, less expensive options for unified platform technology solutions. A strategic IT portfolio analysis that incorporates these concepts should enable small- and medium-sized businesses to survive the economic downturn and positioned for future success.
[1] Deloitte Development LLC, Three Steps to Sustainable and Scalable Change, Part 1: Rethinking a Company‘s Business Model, white paper, Deloitte Touche Tohmatsu, (2008).
[2] Ibid.
[3] Andrew McAfee and Erik Brynjolfsson, “Investing in the IT That Makes a Competitive Difference,” Harvard Business Review, 86, no. 7/8, (July-August 2008) [subscription required].
[4] Ibid.
[5] Charlie S. Feld and Donna B. Stoddard, “Getting IT Right,” Harvard Business Review, 82, no. 2, (February 2004). (hyperlink no longer accessible).
[6] Susan Cramm, “The Truths About IT Costs,” Harvard Business Review, 87, no. 3, (March 2009) [subscription required].
[7] Rich Murphy, “Be Bold with Smart New IT Investments: 5 Valuable IT Investment Steps for Difficult Economic Times,” ITBusinessEdge.com, June 10, 2009.
[8] James M. Kaplan, Roger P. Roberts, and Johnson Sikes, “Managing IT in a Downturn: Beyond Cost Cutting,” McKinsey Quarterly, (September 2008).
[9] Ibid.
[10] Ibid.
[11] Inside-ERP, “Midmarket ERP Solutions: Buyer, white paper, Inside-ERP.com [registration required].
