ERP Adoption amongst Indian SMEs

CONFIANZYSCONSULTINGPVT.LTD.

ERPAdoptionamongIndianSMEs

StatusQuo&ChallengesintheIndianMarket:

ASectoralAnalysis

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CompanyConfidential:ConfianzysConsultingPvt.Ltd August2010

www.confianzys.com Email:[email protected]

Contents

1. TheIndianERPMarket..................................................................................................................... 3

2. StudyBackground ............................................................................................................................ 4

Glossary ............................................................................................................................................... 5

3. ERPfortheTextiles&ApparelIndustry........................................................................................... 6

ResearchFindings ................................................................................................................................ 7

Inferences ............................................................................................................................................ 8

4. ERPfortheRealEstate&ConstructionIndustry ............................................................................. 9

ResearchFindings .............................................................................................................................. 10

Inferences .......................................................................................................................................... 11

5. ERPforthePackagingIndustry ...................................................................................................... 12


Inferences .......................................................................................................................................... 15

6. ERPfortheLogisticsIndustry......................................................................................................... 15


Inferences .......................................................................................................................................... 17

7. ERPfortheHeavyMachinery&ToolsIndustry ............................................................................. 18


Inferences .......................................................................................................................................... 20

8. InSummary .................................................................................................................................... 21

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1. TheIndianERPMarket

EnterpriseResourcePlanning(ERP)canbedefinedastheuseofanintegratedsoftwarepackage

to bring together various business departments such as Manufacturing, Finance, Human

Resources, Payroll and Sales. In practice, companies may choose to integrate specific

departmentswhere integratedworkingandvisibility isseenascritical tocostoptimizationas

wellasprofitability.

ERPisnotnewtotheIndianmarket;yet,ascomparedtodevelopedmarkets,theIndianmarket

for ERP is highly fragmented. IDC’s report on the India Packaged SoftwareMarket (2009‐13)

estimatedthedomesticmarketforERPin2008at$263.3million.

ThethreelargestplayersinthemarketareSAPAG(thegloballeader),OracleCorp(whichhas

acquiredotherERPvendorssuchasPeopleSoftandSiebel)andMicrosoftCorp.,arelativelylate

entrantandsmallerplayer.

The presence of these big guns has not prevented other smaller players from attacking the

market, with many of them building entirely customized solutions and thus, not strictly

adheringtothedefinitionofanERPsystem.

AtConfianzys,webelievethatpostthedownturnof2008‐09,2010‐11arepoisedtobeexciting

andchallengingyearsforERPvendorsandimplementationpartners.Thisreport,basedonour

in‐depthresearchconductedwithERPusersandpotentialusersacross5keyindustrysectors,is

aimedathelpingthoseintheERPindustrybetterunderstandthemarketdynamicsaswellas

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outlook. It covers the status quo of ERP implementation in these sectors as well as the

underlyingfactorsdrivingcurrentandfutureimplementation.

2. StudyBackground

The study was conducted among 5 sectors (mentioned above), with respondent companies

situated across India. The target companies approachedwere all in the small andmid‐sized

enterprises(SME)bracketwithturnoverintheRs.30to100crores($6to22mio)range.The

respondent actually interviewed was the IT Manager or Finance Manager. Interviews were

conductedtelephonically.

Thetotalsamplesizeforthestudywas228.

LearningOutcomesExpectedfromthisReport

(Across5sectors:Textiles&Apparel,RealEstate&Construction,Packaging,Logistics&

Transportation,andTools&HeavyMachinery)

• CurrentStateofERPImplementation

• ERPVendorShare

• Drivers/BarrierstoERPAdoption

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Asector‐wisebreak‐upisgivenbelow.

Fig2.1Respondentsinterviewed,bysector(Numberand%)

Glossary

Someofthetermsusedforpurposesofthisstudyareexplainedbelow:

• GlobalPlayers:Marketparticipantswhoseoriginmaybefromanycountry(includingIndia),

butwhose currentoperationsextendacross geographical borders. Examples includeSAP,

Oracle,Quadra,Tallyetc.

• LocalPlayers:MarketparticipantswhoseoriginaswellasareaofoperationissolelyIndian.

• In‐houseERP:ERPprojectsthathavebeenimplementedbythecompany’sin‐housestaff.

• UnbrandedERP:ERPproductsfromextremelysmallandregionalplayers,wherefrequently,

theclientisunabletorecallabrandname;theseplayerstendtobelocal.

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• Others: Branded ERP products, which individually account for a very small proportion of

thatmarket,andhavethereforebeengroupedtogether; thesecouldbeglobalor local in

origin.

3. ERPfortheTextiles&ApparelIndustry

ThetextilesandapparelindustryinIndiaprecedesliberalizationbymanydecadesandhasbeen

anindustryofsomeimportanceduetoitsemploymentgeneration.However,traditionally,the

industryhasbeenhighlyfragmentedandaslowadopteroftechnology.Postliberalization,the

industryhasgeareduptocompeteintheglobalmarketwhereitfacesimmensepressurefrom

other low‐cost producers such as Bangladesh, Vietnam and Sri Lanka besides China, which

operatesonagiganticscaleofitsown.

The need for higher productivity and business efficiency has been the driving factor for ERP

implementation.However,whiletherearesome“full‐service”manufacturers,mosttextileand

apparel industry players still work in a specific area of the value chain, such as spinning,

weaving, dyeing, finishes or garment production. One of the challenges for the industry is

thereforemore affordablepackages that canworkon limited resources anddealwith fewer

departmentsandprocesses.

Someofthekeydriversthathavemotivatedtheindustrytomodernizeandadopttechnology,

includingERPare:

• Wideningcustomerandsupplierbaseinaglobaleconomy

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• Shorterlead‐timesandincreasingdemandforjust‐in‐timesupply

• Backwardandforwardintegration,inordertocapturealargershareofthevaluechain

ResearchFindings

Ourstudyfindingsrevealthat58%ofthetargetrespondentshadanERPsystemofsomekind.

Ofthese,45%hadacompleteERPsolutionandanother34%hadapartialsolution,while21%

ofrespondentswereunabletoordidnotprovidearesponsetothisquestion.

Fig3.1WhetherERPImplemented Fig3.2StateofERPImplementation

As for choiceofproduct, SAPERPhadbeenused inonly14%of cases.A large chunkof the

companies surveyed had opted to use either an in‐house ERP solution or an unbranded

product.Tallyaccountedforasmaller7%ofcases.

It is interesting to look at a break‐up of the partial implementation cases, in terms of the

productapplied. In60%ofcaseswhere therehadbeenpartial implementation, the in‐house

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ERPwasused,whichimplieseitherlimitedobjectivestobeginwithoraninabilitytodealwith

theintegrationofcomplexanddisparateprocesses.

Fig3.3ShareofPlayers Fig3.4ShareofPlayers(PartialImplementation)

Inferences

Considering the relatively low usage of SAP ERP in this segment and the preponderance of

unbranded and in‐house ERP, it is evident that there is a felt need for ERPwhich organized

playershavenotbeenabletocapitalizeupon.Whilecostcouldbeaconsideration,unbranded

players could also bemaking inroads because of a higher level of familiaritywith the Indian

apparel industryanditsspecificrequirements.Requirementsanalysiswillthereforebecritical

for key ERP vendors hoping topenetrate thismarket, in order to identify better the level of

customizationactuallyneeded.

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While a 58% rate of adoption in the SME textile and apparel sector points to a reasonably

maturemarket,therelativelyhighpercentageofpartialimplementation(especiallyaccounted

forby in‐houseERP)alsopointstohiccupswith integratingdifferentprocesses.Thiscouldbe

becausein‐houseteamsmaynothavethecapabilitiesneededtointegratecomplexprocesses

intherequiredtime.Thetotalcostofprojectownershipratherthansolelytheproductlicense

purchasecostisthereforeafactorthatorganizedERPvendorscouldemphasizetothemarket.

4. ERPfortheRealEstate&ConstructionIndustry

The realestate industry in India faceda temporary slump in2009due to cautious consumer

and business sentiment. Infrastructure construction however has been growing due to large

governmentalprojects,andcommercialaswellasresidentialconstructionissoonexpectedto

pickuppace.Theindustryishighlyfragmentedwithahandfuloflargeplayerswhohaverisen

toprominenceinthelastdecade.

Theindustryhasfacedachallengewithhiringandtrainingthehigh‐skilledmanagersneededto

complete large projects on time. Another challenge is efficient cash flow management and

accesstofinance,sinceprojecttimeover‐runsarecommon,onbothpublicandprivatesector

projects. Other challenges include logistics andmaterialsmanagement (since vendors in this

industry tend to range from large, organized players to many smaller players from the

unorganized sector) andgrowingawarenessof regulatoryand safety issues, and theneed to

maintainproperdocumentationonthese.

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includingERPare:

• Need for collaborative informationmanagementamong the largenumberof internaland

externalteamsinvolvedinconstructionprojects

• Highratesofattritionleadingto“knowledgeloss”andthereforerealizationoftheneedfor

amoreprocess‐driventhanperson‐dependantapproach

• Growing to amore professional work style that includes attention to hitherto neglected

areassuchasriskmanagement,performancemanagementandsafetymanagement.

ResearchFindings

Our study findings reveal that only 38%of the target respondents in this sector had an ERP

system.Ofthese,68%hadacompleteERPsolutionwhile32%hadapartialsolution.


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As for choice of product (within the small sample where ERP was implemented), Tally

accountedfor21%ofcases.ThiswasfollowedbySAPandQuadraat16%each.Thesewerethe

top 3 players in the market, although other organized players too seem to have got small

footholds.

Fig4.3ShareofPlayers

Inferences

ThelowrateofERPadoption inthismarket likelyreflectsthemarketmaturity intermsof its

movement from an unorganized industry characterized by informal working and financial

arrangementstoamoreprofessionalone.IntheSMEsector,itislikelythatthisprocessisstill

underwayandataslowpace.The lowrelianceon in‐houseERPcanbeattributedtothefact

that fewmid‐sized companies in this sector have large internal IT departments, thus forcing

themtolooktowardsestablishedfirms.Italsopointstothefactthatin‐housemanagement

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capabilitiesfortakingforwardERPimplementationarelikelytobelow–thisisasectorthatwill

needextensivepost‐implementationsupportandtrainingfromvendors.

5. ERPforthePackagingIndustry

The packaging industry in India spans a wide range of materials such as glass, plastic,

aluminium,tin,paperandboardaswellaspackagingtechnologiesrangingfromthesimplestto

themosttechnologicallyadvanced.Inthelast2decades,theindustryhasundergonesignificant

automation, although labour‐intensive manual packaging continues to be used by some

productsectors.Duetothewiderangeofmaterialsandtechnologies,theindustryishometoa

verylargenumberofplayers,fromsmall‐scaleenterprisestoindustrialbehemothssuchasITC

LimitedandHindalco.

Sincepackagingisprimarilya“feeder”industry, ithasfacedenormouspricingpressuresfrom

itsend‐usersacross sectors suchashouseholdproducts, food&beverages,electronicgoods,

pharmaceuticalsetc,mostofwhomhavebeenreluctanttopassonhigherpricestoconsumers

in the recent past. The growing export orientation in some sectors has also meant higher

regulatorycompliancedemandsonpackagingmanufacturersintheorganizedsector.


includingERPare:

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• Greaterneedforcostvisibility,withrisinginputpricesanddownwardpricepressuresfrom

buyers

• Movement frommanual to semi‐automatic to fully automatedmanufacturing processes,

withautomatedproductionfreeingupproductionmanagementresourcesforvalue‐added

roles

• Closer integration with buyers’ manufacturing, leading to shorter supply chain and lead

times

• Larger role for demand forecasting led production, and greater interest in maintaining

lowerinventories

• Demandfrombuyersthatpackagingsuppliersfocusbeyondbasicqualityanddeliveriesto

includehighervalueonpackaginginnovationanddesign

ResearchFindings

Ourstudyfindingsrevealthat46%ofthetargetrespondentsinthissectorhadanERPsystem.

Of these, 32%had a complete ERP solutionwhile 36%had a partial solution. (Datawas not

availableintheother32%ofcases).


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The data reveals that in the target segment, there are many competing players with small

shares of themarket. Tally is the only playerwith a significant share (32%)withmost other

globalplayershavingsmallersharesrangingfrom5to15%.Localplayersaccountforanother

27%ofthemarket.Sinceglobalplayershavethelargershareofthemarket(andthereisvery‐

little in‐houseERP), theanalysisofpartial andcomplete implementationsbyplayerdoesnot

revealmuch.


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Inferences

46%isafairlygoodrateofimplementationandreflectsthematurityoftheindustryintermsof

adoptingtechnology.Thissectorseemstobecharacterizedby intensecompetitionamongall

theglobalplayers,withunbrandedplayerstoovyingforashareofthepie.Themeagershareof

in‐houseERPreflectsthatthisisacompetitivebutpromisingsectorforERPvendors,sinceitisa

sectorwheretheneedforprofessionallyimplementedERPisalreadybeingrecognized.

6. ERPfortheLogisticsIndustry

The logistics industry as covered in this study includes courier and logistics, as well as

warehousingandtransportation.ThelogisticsindustryinIndiaisstillatanascentstagewhenit

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comes to organization and professional management. The bulk of the industry consists of

extremely small players, suchas trucking companieswith a few trucks, individualwarehouse

owners, small Cost & Freight agencies etc. The exception perhaps is the courier and cargo

industry,whichhasgrownrapidlyandincludeslarge,organizedIndianaswellasmulti‐national

companies. The industry, althoughgrowing rapidly, facesmany challenges suchaspoor road

andportinfrastructure,complexandnon‐uniformtaxstructuresandpoorqualityofmanpower

atthemanageriallevel.

Sincethemajorityoftheindustryisintheunorganizedsector,thedeploymentofIT,including

ERPhasbeenslowinthisindustry.

ResearchFindings

Our study findings reveal that only 12%of the target respondents in this sector had an ERP

system. This extremely lownumber reflects the nature of businesses in this industry, fewof

which areprofessionallymanagedor large‐scale.Of the small number that did have an ERP,

only33%,(correspondingto1respondent)hadacompletesolution.

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AmongthosewhodidhaveanERP(3cases),SAPaccountedfor1,whiletheothertwoaredone

in‐house,thusnotbeingstrictlyofftheshelfERPsolutions.

Inferences

The numbers reveal that at least among the SMEs in this sector, there is still very little

awarenessofthebenefitsthatanERPsolutioncouldconfer.Perhapsthescaleofoperationand

the nature of management too do not make ERP implementation imperative. Our findings

reveal that theSMEportionof the logistics sector isnot likely tobeeasy to convert forERP

vendors,atleastintheshortterm.Consideringthehigherlevelsofawarenessandreadinessin

othersectors,thissectormaynotthereforebeapriorityforERPvendors,exceptforitssmall

organizedcomponent.

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7. ERPfortheHeavyMachinery&ToolsIndustry

Boostedbyrisingdemandfromvarious industriessuchas infrastructure,power, iron&steel,

railways,miningetc,theheavymachineryandtoolsindustryinIndiahasseenrapidgrowthin

the last decade. This sector includes diverse categories such as industrial machinery, earth‐

movingequipment,machinetoolsandelectricalequipments.Beingcapitalintensive,itincludes

manylargeandmid‐sizedorganizedplayerswithahighlevelofprofessionalcompetenceand

managementbasedonbestpractices.SomegiantssuchasLarsen&ToubroandHMTcatertoa

widerangeof industrieswhileothersspecialize inmachineryandtoolsforselectedend‐users

suchastextilesorthedairyindustry.

Insomesectors,the industry ishamperedby legacyequipmentandprocessesthathavekept

productivitylowwhencomparedtoglobalstandards.Althoughcompetitiveinlabourterms,the

Indianmarketalso suffersdue to the lackof indigenous research intoemergingandbest‐of‐

breedtechnologiesovertheyearsofthelicense‐permiterabeforeliberalization.Duetothese

factors, the industry has not been able to compete globally, but remains dependent on the

domesticmarket,whichisneverthelessavibrantone.


includingERPare:

• TogainbestresultsfromcoremanufacturingimprovementinitiativessuchasSixSigmaor

Kaizen

• Forbettercostcontrolandvisibilityintocosts

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• Toimprovecollaborationbetweendesignandmanufacturingandreducetimetomarketin

acompetitiveenvironment

• Greaterexposuretointernationalmarketsleadingtoexportpossibilities

ResearchFindings

Ourstudyfindingsrevealthat60%ofthetargetrespondentsinthissectorhadanERPsystem.

Of these, 33%had a complete ERP solutionwhile 37%had a partial solution. (Datawas not

availableintheother30%ofcases).


Thechoiceofproductdatathrowsupsomesurprises:whileSAPisthesinglelargestcommercial

playeraccountingfor23%ofcases,in‐houseERPisevenlarger,accountingfor27%ofERP

installations. This perhaps indicates that considering the capital‐intensive nature of this

industry,ERPisseenasasignificantinvestment–usingin‐houseresourcestodevelopanERP

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system could be an attempt to trim project costs or cope with very long‐drawn out

implementationsandtheconsequenthand‐holdingrequired.Globalfirms(asawhole)account

for the majority of all installations and the same goes for both complete and partial

installations.


Inferences

TherelativelyhighlevelofrespondentswithERPsystems(60%)reflectsonthematurityofthe

industry and its high level ofwillingness to adopt technology to improvebusinessprocesses.

However,in‐houseERPandunbrandedERPtogetherformagood37%ofERPinstallations,

indicatingthatmanyofthesearenotERPinthestrictestsenseoftheterm,but instead,fully

customizedsolutionsthatmayormaynotfollowacceptedbestpractices.Thereasonforthese

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couldbetwofold–eithercostconsiderationsorafeelingthatestablishedERPpackagesdonot

meet the unique needs of heavy machinery firms in India. Branded ERP manufacturers

thereforehavesomewaytogoinaddressingthesebarrierstoadoption.

8. InSummary

Itisevidentthatatleastinsomesectorssuchaspackaging,heavymachineryandtextiles,there

isconsiderableinterestamongSMEsinimplementingERPsolutionsandimprovingproductivity.

There isscopethereforefor industryspecificsolutions,giventhedistinctrequirementsofthe

Indianmarket.

EveninthecaseofcompanieswherethereisreluctancetogoinforERP,partofitisdefinitely

attributable to the fear of investing large amounts in a solution that they are not entirely

confidentabout.Forsuchcompaniesthatdohavesome interest inputting insuchprocesses

butare fearfulof thecosts, SoftwareasaService (SaaS)modelsmayprovemore successful.

The lower front‐up costs of SaaS ERP and CRMmodels maymake themmore attractive to

SMEs,besides theability theyoffer toevaluate resultsonapay‐as‐you‐gobasis. Italso frees

themfromthefearofbeingcaughtinlonglock‐inarrangements.

Thereisofcourseathirdsegmentofcompanies(fore.g.inthelogisticsindustry),wherethere

is low interest in ERP, not just because of costs, but also because of senior management’s

discomfortwithnewtechnologyandprocesses.WithsuchSMEs,ERPproviderswillfinditless

easytomakeinroads,regardlessofthesalesmodelused.

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Whilesuccessstoriesarepresent,theIndianSMEmarketisstillrelativelyslowontheroadto

adoptionofsuchtechnology,andERPsolutionswillneedtotakeintoaccountitspeculiarities

andpredilections.

AboutConfianzysConsulting:

Incorporated in 2008, Confianzys Consulting is a first‐of‐its‐kind consulting entity in India,

focused on helping technology product companies by providing consulting, training and

coaching interventions in Product Management, Customer Management and Marketing

Managementareas.

Formoreinformation,pleasevisithttp://www.confianzys.com.

Technology

ERP Adoption amongst Indian SMEs