After several years of stagnation there are signs of 'green shoots' in the mid-market. Microsoft has shown a return to profitability in its mid-range business solutions, SAP is bullish about its mid-range initiative, Systems Union has just turned in a good result for 2005, and middle market consolidators such as TSG are pushing ahead with acquisitions. The market is not big enough for everyone. So who can you rely on to be there in 5 years time? FSN investigates.
There is a renewed sense of optimism surrounding the prospects for the mid-market. This is most amply demonstrated by significant licence fee growth in Microsoft Business Solutions (MBS) which includes the Microsoft Dynamics brands of Navision, Axapta and Great Plains . Revenue for the six months ended 31 st December 2005 was $423 million, an increase of 16.5 per cent over the same period of 2004 and allowed the MBS division to return to profitability in the second quarter of 2006, reporting an operating income of $10 million for the quarter to December 2005.
Whilst recent research has pointed to growth in the U.S. it is interesting to note that global players are seeing growth in all of their major territories. Systems Union Group, for example, one of the UK's most mature global players in Financial and performance Management software solutions has posted encouraging world-wide results. Global revenue for 2005 increased 8.5% to approximately £113 million, and earnings increased by 14% to approximately £16.2 million.
Dave Turner, Group Marketing Director of CODA, the financials software house based in the UK confirmed the trend for growth. He told FSN, "2004 was a pretty tough year for most software houses but our 2005 results are ahead of expectations and show reasonable growth on last year."
"What is particularly pleasing is that there has been a return to growth in the core financials business. Many companies replaced systems in the late 1990's in anticipation of the new millennium and are now replacing or upgrading those systems especially as some of the original providers are no longer in business or have been swallowed up by other concerns."
Ian Caswell, Managing Director of Sapphire Systems, a major reseller for both Systems Union and SAP agrees with Turner's analysis. "Most financial systems are on a five to seven year replacement cycle," he says.
Although mid-market vendors are reporting generally improved conditions, Turner believes there are still too many players and that Microsoft and SAP may have underestimated the challenges of working in the mid-market. "Parts of the mid-market have become commoditised and Microsoft are masters at commoditising software," he said, "but the mid-market also has significant complexity and it would be a mistake to believe that commoditised solutions can meet the range of industry complexity that is out there. The mid-market is not made up of homogenous businesses and even small companies can have overseas subsidiaries and complex requirements."
This says Turner, leaves SAP and Microsoft thrashing it out to gain market share in the generic mid-market positioning players such as CODA and Systems Union to win the more complex, higher margin business. "SAP still have to prove that they can deliver appropriate solutions into the mid-market and global suppliers such as CODA with a strong domestic revenue stream and twenty five year track record will have an advantage," he added.
However, Ian Caswell, believes that the smaller national software vendors could be vulnerable. "Whilst we haven't seen a change in the balance of competitors in the mid-market we are beginning to see signs that customers are wary of smaller software houses that may be susceptible to takeover or cannot devote so much resource to research and development. This is where brands such as SAP and Microsoft have an advantage," he told FSN.
Nigel Hudson, Business Development Director of TSG, a major consolidator of dealerships in the UK mid-market, sees the basis of competition between SAP, Microsoft and the strong national brands differently. He told FSN, "There in definitely growth in the mid-market, particularly at the lower end but customers are looking for a much broader solution set. These days, customers are not only looking at their ERP requirements but also at their reporting and business intelligence needs as well as vertical market specialisation and skills. The established national brands such as Sage and Pegasus have built up huge brand loyalty, functionally rich packages and a supplier (channel) network that has developed strong vertical market solutions. A strong brand, such as Microsoft will carry you so far but you need experienced channel partners to be successful. So a key part to competing successfully in the mid-market is securing the channel."
Whilst Hudson believes that the mid-market is increasingly more competitive it is also a huge market. "All of our products, such as Sage, Pegasus, and Microsoft Navision are doing well. It is a matter of finding the right fit for the customer and being able to provide all of the other services that they need."
Hudson says that concerns about Microsoft's product direction with three products all serving the mid-market are overstated. "There are always exciting developments in the pipeline but we have to work with what is available today. We work closely with Microsoft and are fully aware of developments to come so we have no concerns and the Navision product is doing very well."
Sapphire's Caswell also believes that Navision is Microsoft's strong suit. "We get the impression that GreatPlains is receding in favour of Navision," he told FSN.
Adrian McNay, managing director of Touchstone Limited, also a provider of mid-market systems and solutions, believes it is too early to call a change in the balance of the market but believes that it has entered a new growth phase. "Customers who bought before the millennium are beginning to notice the age of their systems. With newer technology such as web services they can see how they can better collaborate and compete. This is driving steadily increasing growth," he told FSN.
Renewed growth in the mid-market is not at issue but in common with many marketplaces it is important for suppliers to be either very big or very niche. Nobody questions the capability or commitment of SAP and Microsoft to carve out a dominant position and there is consensus around the continuing need for vertical market specialisation and broader IT services. But on this analysis, what seems clear is that small national vendors of mid-market accounting packages are susceptible to takeover or failure – a process that will accelerate as they increasingly struggle to retain their dealer networks seduced by rich pickings and incentives from the tier one software houses. Sooner or later, the super-software houses, SAP and Microsoft, are going to push out this vulnerable group.
