Bharat Goenka, managing director of the Bangalore-based Tally Solutions, is fond of repeating his late father’s vision for the organization. In that vision, S.S. Goenka acknowledged only two types of businesses in India: Those that used Tally software and those that one day would. With the recent launch of “Tally.ERP 9,” the company’s enterprise resource planning software for small and midsize enterprises (SMEs), Goenka believes he has moved a step closer to his father’s vision.

Only time will tell how many Indian SMEs will become Tally customers. But Goenka’s confidence reflects the sector’s enormous potential for the adoption of IT. “We estimate that there are eight million SMEs in India that can afford information technology,” Goenka says. “Our target is that all eight million must become Tally customers over the next three years.” Goenka expects Tally.ERP 9 to drive revenue growth at the company from around US$60 million in 2008-2009 to around US$200 million in 2009-2010. He eyes US$1 billion in the not-too-distant future.

Despite the economic slowdown, the SME sector’s potential has caught the attention of India’s IT players. Says Vikram K., director of key markets in the technology solutions group at HP India: “SMEs are a very key part of HP’s growth plans in India. Most of the growth that we are betting on will come from this segment.” Adds Alok Ohrie, president of EMC’s India and South Asia region: “The long-term success of EMC in the India market will be built on the strong foundation of large footprints and deep penetration in the SME segment.”

The size of the Indian SME market is difficult to gauge. Different studies using different definitions produce different numbers. The Union Ministry of Micro, Small and Medium Enterprises estimates that 13 million such companies exist in India. The ministry defines a micro, small or medium enterprise as an industrial undertaking with fixed assets in plants and machinery — whether owned or leased — of US$200,000 to US$1.5 million.

New York-based research firm Access Markets International (AMI) Partners estimates the addressable SME market for IT vendors at four million. It defines these enterprises as legal entities registered in India that are profit-oriented and in a commercial location. Bangalore-based Zinnov Consulting, on the other hand, puts the number at 35 million. Zinnov defines an SME as any organization with up to 1,000 employees. (It doesn’t include certain segments, including farmers and contract construction laborers.) Of the 35 million SMEs, Zinnov says, almost 34 million have fewer than 10 employees.

IT vendors have their own definitions. Cisco Systems, the networking supply and management firm, defines an Indian SME as one with fewer than 200 personal computers. Dell defines it as an organization with fewer than 500 employees. Wipro defines it as an organization with annual revenues of less than US$200 million. The National Association of Software and Service Companies (Nasscom) quotes the Zinnov numbers in its Strategic Review 2009.

A Vast Market by Any Definition

This ambiguity doesn’t trouble anyone. As Ravi Bharadwaj, head of Dell India’s SME division, says: “The numbers, whatever they may be, are huge. PC penetration in the country is itself abysmally low (2% to 3%) and so the potential the SMEs hold for IT adoption is simply enormous.” According to Pramodh Menon, Cisco senior vice president of sales for India and South Asia, “Our interest is not so much in the size of the market but more in how we get even a small portion of that market.”

Sheer size isn’t the only reason IT vendors have high hopes for SMEs. While Nasscom estimates that 70% of a US$24 billion domestic IT market can be attributed to large enterprises, that is expected to change. As Nasscom vice president Rajdeep Sahrawat notes: “Most large enterprises in India compare reasonably well with global firms in terms of IT adoption. Their appetite for IT in the future will be incremental. But the SME segment is very under-penetrated, and this is where the real growth in the Indian IT market will come from.”

Kapil Dev Singh, country manager for consulting firm IDC India, agrees. “If the period from 2003 to 2008 belonged to the large and very large enterprises, the next two years would be the era of small and midsize enterprises,” he says. “For calendar year 2009 over 2008, the SME segment will witness IT spending growth of 12%, compared to the growth of large enterprises at 8%.”

Basic computing among SMEs is expected to grow rapidly, says Zinnov. According to C.S. Chandramouli, director of advisory services: “Over the past five years, the adoption of personal computers has grown by 25% in the SME segment, and this is expected to double by 2015.” Praveen Sengar, senior manager, enterprise computing research practice at IDC India, points out that IT investments from the Indian SME segment will be diversified in coming years. The smaller enterprises, Sengar says, will focus on basic infrastructure and automation, while midsize enterprises will look for applications such as enterprise resource management/planning, virtual private networks, video conferencing and security solutions.

Multiple Factors at Play

So why has the focus turned to Indian SMEs now? Multiple factors are at play. Indian SMEs are facing increased competition from both large Indian players and multinationals on their home turf. They’re also entering global markets, increasingly engaging in partnerships with multinationals and larger Indian players and becoming part of a globally integrated supply chain. All of these require them to beef up by way of processes, quality and productivity. “To be successful in an environment which necessitates interaction and competition with organizations that use IT extensively to run and drive their businesses, Indian SMEs have no choice but to adopt IT themselves,” says Kishan Bhat, engagement manager at Zinnov.

Government is another driver, through initiatives such as creating IT awareness among SMEs, facilitating technology upgrades by providing up-front capital subsidies, and partnering in programs such as the United Nations Industrial Development Organization’s cluster development program, which identifies and supports specific SME clusters that show significant growth potential on the basis of IT adoption.

Having identified SMEs as the driver of their future growth, IT vendors are striving to address them more effectively, whether setting up dedicated teams, creating specific products, building and strengthening channel networks, focusing on brand salience, or offering financing options. That no established market leaders exist in the segment makes the investment opportunity even more attractive.

Consider the products themselves. Earlier IT vendors typically had a “one size fits all” approach. At best they would take enterprise products, strip them of some features, and shrink them for SMEs. But that didn’t work because SMEs’ needs and expectations are very different from those of large enterprises.

According to Anand Sankaran, senior vice president and head of Wipro Infotech: “In large enterprises, IT is now used as a business driver, whereas SMEs use IT more as an enabler and to fix a business problem. The requirements therefore are very different.” Adds EMC’s Ohrie: “In storage, for instance, large enterprises have issues of scalability, headroom, interoperability, etc., whereas SMEs look for an easy, reliable and robust solution that can take care of their current needs.” Having realized this, IT players more than ever are introducing products specific to SMEs.

Channel Networks

The focus on building and strengthening networks of resellers and creating brand salience is critical because the SME segment is spread out geographically. The direct engagement used for high-value deals in large enterprises therefore is not scalable. To address SMEs effectively, IT vendors must change mindsets to chase smaller deals and to perfect channel networks.

Following the launch of its Vostro line for SMEs in mid-2007, Dell started building its channel network in India in April 2008 and now covers 150 cities. In November, Dell chose India to launch its “Take Your Own Path” advertising campaign. Featuring entrepreneurs including Raman Roy, CEO of Quattro BPO Solutions, and P. Rajendran, cofounder and chief operating officer of the NIIT Group, this is Dell’s first global advertising campaign for SMEs. As part of Dell’s recent global restructuring, Dell India has a separate division to address the SME segment.

Cisco has increased its channel presence three times in three years, and now has 900 resellers in more than 100 cities. To support them, Cisco has set up a dedicated team, the sales and marketing services organization (SMSO). Says Cisco’s Menon: “Most channel partners have no marketing arm and have no idea of business planning or how to deploy their resources effectively. Our SMSO is like an on-hire department for our select channel partners and equips them to be more effective.”

HP, which has addressed the Indian SME space for 20 years and has more than 1,500 partners in 260 cities, set up a program last year called the HP Presales Partner Community. The aim, explains Vikram, is to ensure that its partners can take a value-led approach, rather than a deal-led approach. “We want to ensure that our channel partners understand the complete environment in which the SMEs are operating,” Vikram says, “and are able to effectively communicate the business benefits of IT to them.”

Industry analysts see these as essential moves. Unlike the CIO of a large enterprise who has a clear IT road map, the SME customer typically doesn’t have internal IT expertise, and doesn’t fully know his own requirements. In most cases, the neighborhood reseller acts as the IT arm of the SME customer. Unless the reseller can fully understand the customer’s needs and effectively articulate the benefits of the IT solution, the customer won’t be able to perceive its full value.

This lack of value perception is one of the key roadblocks to SMEs’ IT adoption. Sahrawat, of Nasscom, notes: “The problem with the current IT deployment model is that it requires huge up-front costs without adequately demonstrating the benefits that will accrue from it.” S. Raghu, vice president, India and South Asia, for AMI Partners, says this is true even for the purchase of a basic PC. According to a recent AMI survey, 55% of small businesses view PCs as irrelevant to their business, and nearly a third haven’t even considered buying one. Only a third of small businesses use a PC, Raghu says.

Serving those who do see value in IT isn’t well-suited to the vendors. “Enterprise sales and business development teams cannot deliver on the needs and wants of SMEs. IT vendors need to create and nurture dedicated channel teams for this segment,” says Diptarup Chakraborti, principal research analyst for Gartner, a leading IT research and advisory firm.

S. Sadagopan, director of the International Institute of Information Technology, Bangalore, offers another perspective. The biggest challenge for SMEs, he says, isn’t so much relevance or cost, but the complexity of IT. “For their large customers, IT vendors have account managers who manage the complexity and report to the CIOs. But small customers are left to fend for themselves. They feel completely lost.” Sadagopan adds it is imperative for IT vendors to work together and with intermediaries to develop an ecosystem that can remove complexity for SMEs.

Sadagopan expects that telecom players will play a critical role in coming years. “Thanks to cloud computing, I expect that telcos will partner with IT vendors to provide the last-mile connectivity and deliver IT services to the SMEs.”

Unlocking the Potential

Indeed, disruptive innovations in technology (cloud computing), delivery (Software as a Service, or SaaS) and revenue models (transaction, subscription-based, etc.) are expected to help unlock the potential in the SME segment as they reduce up-front costs and make deployment easier for customers.

Some beginnings are already visible. Microsoft, for instance, offers its enterprise resource planning (ERP) application to SMEs in the SaaS model. Says Srikant Rao, president and CEO of Affordable Business Solutions, Microsoft’s first partner for the SaaS model and a pioneer of the hosted-solutions model in India: “Our aim is to provide a complete turnkey solution to the customers at a fixed and affordable cost and to function as the IT consultants for them.” Rao believes that the economic slowdown will provide impetus to the hosted-solutions model among SMEs.

In line with this thinking, Wipro is piloting a project with Microsoft to deliver ERP software on an SaaS model for an auto parts supplier. Sankaran expects that the shared-services model for IT infrastructure and applications management that Wipro offers through its global service management center will find greater traction among SMEs. Yet he isn’t bullish about the SME segment for now. Noting that SMEs have been the hardest hit in the economic slowdown, he says: “Six to 12 months back I would have thumped the table, but given the current circumstances it is difficult to say.”

Others, however, see the slowdown as an opportunity to drive home the value of IT, provided that vendors take the required measures. According to Nasscom’s Sahrawat, IT vendors have typically fulfilled existing demand and not focused adequately on market creation. They also haven’t focused on adding value for SME customers. The slowdown, he says, is a great time for IT vendors to both create and articulate the value proposition of IT in the SME segment.

“While the SMEs have started deploying IT,” Sahrawat notes, “they have not yet fully intertwined IT in their processes. For the real benefit of IT usage to accrue, IT, like quality, must get intertwined with the processes.” Adds Sadagopan: “If IT is seen only as a cost then it will surely be hit in the current downturn, but if the customers can gain tangible value by adopting IT they will be willing to invest in it to gain competitive advantage.”