The Indian economy is growing rapidly with small and medium enterprises (SMEs) in the manufacturing sector being a significant contributor, witnessing a compounded annual growth rate (CAGR) of 15 to 20 per cent. But in a booming economy, competitive pressures are high. This has led to a strong drive for growth in which smaller companies are exploring various avenues to improve their efficiency across departments.

The pressure of staying ahead in a competitive environment by reduction of costs and product development time is compelling SMEs to leverage technology and business applications adapted by their large counterparts. On the technology front, the emergence of the internet as a secure, low-cost platform for business transactions and the availability of affordable information technology infrastructure have made it simpler for SMEs to look at end-to-end business management applications.

The opportunity
Over the next five years, the enterprise resource planning (ERP) market in India is expected to reach Rs1,550 crore ($341 million), according to International Data Corporation (IDC), a market research and analysis firm specialising in information technology, telecommunications and consumer technology. Of this, the SME potential in India for the enterprise-class is projected to be Rs 728 crore ($160 million) — 47 per cent of the overall market. Industry analyst ARC Advisory pegs Indian ERP growth at a CAGR of 25.2 per cent over the next five years. The ERP market was $83 million in 2004 and is forecast to be over $250 million in 2009, it says.

Owing to a lack of education, most SMEs in the manufacturing sector even today are dependent on inflexible, cheap and standalone applications. But they are fast realising the necessity of setting up intra- and inter-office networks, reliable IT infrastructure and the value of opting for branded ERP and software products. This provides an extensive opportunity for software business solution providers to offer cost-effective tailormade applications and solutions to Tier 2 and Tier 3 companies, especially in the manufacturing sector.

ERP systems are gaining the most popularity of all the e-business applications deployed by organisations. Geared to streamline and integrate business operations, ERP providers are exploring the opportunities in the SME segment that has remained untapped for years.

The ERP implementation that began over two decades ago in India has also led to opportunities for replacement market players. In the mid-90s, there was a boom in the use of bespoke applications as well as smaller inexpensive branded systems, which flooded the SME manufacturing sector.

Early users of these systems now see the downside in non-branded applications in terms of re-wiring, functionality, development and ease of use. The replacement ERP market for the SME sector itself in India is growing at over 30 per cent annually, along with an overall rise in the ERP / SCM market of 20 per cent over the next 12 months (according to webreasearch). The early adopters of the system were unable to cope with the development requirements of the Indian market, either because of a lack of resources or lack of functionality. Both these criteria need to be successfully managed through extensive domain knowledge and team strength.

Challenges
The boom in the ERP business segment is accompanied by a lot of challenges. One of the key challenges faced by solution providers is that the SME sector are poor paymasters. Vendors are offering ERP at an introductory cost of Rs4 to Rs5 lakh. In fact, the cost of ERP software should not be viewed as an expense but as an investment, towards an ability that provides better profitability, market share and / or customer service.

The costs will remain high but the advantages far outweigh the expense, and ERP decisions are a ''high-risk high reward'' option. Considering the concept is just a decade old in India, SMEs are reluctant to invest in an ERP replacement as they lack domain-specific knowledge, technical know how and monetary resources to implement solutions.

At the same time, educating these companies about the benefits of ERP is not an easy task. To conquer this problem, solution providers and implementers are spreading awareness in their target audience by organising programmes, seminars and road shows in their target market. And then, there are the technical challenges of training, integration and implementation, which can take from two to 12 months.

The SME-ll of money
AMR Research feels SMEs are the lynchpin of the ERP market. Globally, the mid-range ($50 million to $1billion in annual revenue) and SME (< $50 million) markets continue to be a major focus area for ERP vendors. Mid-range solutions and channels are critically important for penetrating China, India, Eastern Europe, and the Latin American market. It is exciting times indeed for SMEs and the major ERP players.