Smaller firms still buying ERP applications despite downturn

Small- and medium-sized firms in the Middle East are still buying enterprise resource planning (ERP) applications and upgrades despite the economic downturn.

But large companies are holding on to their existing software, according to industry experts.

Research company IDC said the market for enterprise application software, including software licence and maintenance revenues, was worth $402 million (Dh1.47 billion) in the GCC, Levant and Egypt in 2008. Low single-digit growth is expected this year.

Saudi Arabia accounted for the largest share of the market at 34 per cent, and the UAE came second with 32 per cent. Enterprise application software includes ERP, customer relationship management (CRM), supply chain management and operations and manufacturing management.

The ERP market has clearly been hit by lower IT budgets, said Ranjit Ranjan, Senior Research Manager at IDC Middle East, Turkey and Africa.

"The real cut in IT budgets happened earlier this year and projects were put on hold," he said. "It was a kneejerk reaction to the crisis. Some projects have been revived and others are expected to be relaunched at some stage in 2009. Core business applications are still relevant but purchases of add-ons are being cut. Certain verticals are renegotiating maintenance agreements and upgrades. New implementations are happening to a limited extent."

Companies that have suffered least from this trend are tier two ERP players such as Epicor Software, Sage and Raqmiyat. Many customers are no longer interested in particular brands as long as solutions fit in with their business models.

Rishikesh Trivedi, who is responsible for marketing and channel development in MEA and India at Epicor Software Middle East, said: "For a large enterprise, the investment needed for an ERP purchase or upgrade is high. Normally large ERP manufacturers charge for maintenance as a percentage of the list price or actual value. If the licence price is $100 then at least $25 will be needed for maintenance, which is high.

Epicor has seen a 15 to 25 per cent drop in business due to the postponement of purchase decisions.

Ranjan said: "The majority of market share is still occupied by SAP, Oracle and Microsoft but in today's environment tier two companies definitely stand to gain. They won't make a huge dent on the market leaders but because of the difference in pricing, there is an opportunity for globally competitive tier two vendors."

Sage Software, another tier two player, expects the ERP market to be worth $300m by the end of 2009.

Vikram Suri, Managing Director of Sage Software Middle East, said: "The GCC market will witness a compound average growth rate of 14 per cent over the next five years. Rising demand in the regional corporate and small and medium-sized enterprise sectors continue to fuel the growth of the ERP market."

Navneet Tandon, Vice-President of ERP and Services at Raqmiyat, said: "As investments into new solutions are reviewed and monitored, our mid-tier solutions stand to benefit. We have witnessed an increase in the number of inquiries from regional customers. Market assessments indicate that the SME sector is most interested in ERP solutions."

Larger ERP players are also targeting SME customers. Tamer Elhamy, Business Solutions Manager at Microsoft Gulf, said: "The customer base for Microsoft Dynamics is more than 1,800 customers, making us the highest mid-market ERP/CRM vendor in the Middle East.

"This year we have grown the number of new customers by about 10 per cent compared with last year. But the rate of growth was less than we achieved during earlier years and some customers have started projects with much lower levels of investment than earlier."

In terms of market share, Microsoft Dynamics was placed third with 9.2 per cent in IDC's Mena Enterprise Application Software 2008-2012 report. The software giant's share was estimated to be worth $35.5m.

Though there has been a slowdown in investment, the ERP majors say most sectors are still buying solutions.

Elhamy said: "Customers are looking for ways to manage their costs and reduce them if they can, in addition to finding ways to increase efficiency by producing the same results with fewer resources. Also organisations are looking for ways to get closer to their existing customers and acquire new ones. "

Even for SAP, the importance of the SME segment has been growing for some time. Managing Director Sergio Maccotta said: "At present we have 670 customers and our target is to break the 1,000 barrier by mid-2011.

"The majority of these customers are SMEs. There is a definite contraction in the market as well as a focus on investments with strong solutions and low total cost of ownership (TCO). There is software readiness in the market as we have added 28 companies in the first half of the year."

Technologies such as software as a service (Saas) or managed services are emerging in the ERP segment, but CIOs are reluctant to outsource core applications or opt for the Saas model.

"This will have to start with non-core applications as the hosted model is not much in demand," said Ranjan.

Trivedi said: "In countries such as Saudi Arabia, an organisation's data is not supposed to be taken from the server outside the region."

Microsoft, however, said customers are opting for different ways to cut the TCO and some outsource the entire process to their IT partners.

"This is why Microsoft Dynamics is available in a software-plus-services version," said Elhamy. "We have partners who are using Microsoft Dynamics ERP and CRM in a hosted environment. However there is a smaller effect on the ERP market compared with the CRM market. Dynamics ERP and CRM are characterised by a low TCO by design."

Keep up with the latest business news from the region with the daily Emirates Business 24|7 newsletter. To subscribe to the newsletter, please click here.

Follow Emirates 24|7 on Google News.