IT Opportunity Indian SMB Sector

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IT Opportunity in Indian SMBSector

Feb, 2008

CONFIDENTIAL

This report is solely for the use of Zinnov client and Zinnov personnel. Nopart of it may be circulated, quoted, or reproduced for distribution outsidethe client organization without prior written approval from Zinnov LLC.

Zinnov LLC

To obtain a full copy of reportplease send your request

to [email protected]



1Zinnov Research & Consulting (Confidential)

AGENDA

• SMB sector landscape

• IT spending in SMB sector

• Strategy of leading IT vendors

• Road Ahead for Indian SMBs 2008 - 2015




AGENDA







3Zinnov Research & Consulting (Confidential) 3

Zinnov defines SMB sector as organizations having upto 1000 employees

Source: Ministry of Small Scale Industries GOI, Primary Interviews, Zinnov Analysis

• An industrial undertaking in which theinvestment in fixed assets in plantsand machinery whether held onownership terms, on lease or on hirepurchase is in the range of USD 0.2Million to 1.5 Million.

Zinnov Definition

What is SMB Sector?

SMB sector is defined as organizations with employee strength up

to 1000. Small enterprises have an employee strength up to 100,whereas medium enterprises have an employee strength of 100 to1000.

Information TechnologyCompanies

Ministry of Micro, Small & MediumEnterprises

• A large MNC networking companydefines SMB as organizations withup to 500 employees.

• A leading SI for Enterpriseapplications defines SMB asorganizations with a turnoverbetween INR 300cr and INR 1000cr.




India has the 2nd largest population of SMBs, when compared to peer

nations such as Brazil, Russia, China and US

Number of SMBs in India (2006-07)

Source: GEM Report, Zinnov Research

41415

35

142

0

20

40

60

80

100

120

140

160

China India US Brazil Russia

N u m b e r s

( i n M i l l i o n )

48 (Year 2015)




SMB contributes more than 60 percent to the Indian GDP while their

spending on IT is only 30 percent of India’s total IT spending

Indian SMBs – an opportunityIndian SMBs – an opportunity

• Zinnov estimates; SMBs total revenuecontribution to Indian GDP is more than USD600 Billion

• Growth Rate – SMB contribution to GDP has been growing

at steady rate of CAGR 12 percent over thelast 7 years

• Huge potential for IT spend to increase amongthe SMB sector

Source: Zinnov Research

65%

30%

35%

70%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

GDP Contribution IT Spending Contribution

SMB OTHERS

USD 22 BillionUSD 950 Billion

Breakup of Contribution of SMBs in GDP and IT Spending




Sectorial breakup: Retail contributes 52 percent to the total

Total= ~ 35.1 Million Total= ~ 35.1 Million

Industry Sector wise Distribution of SMBs in India(2006-07) DiscussionDiscussion

• Indian has 35 million small and medium

business

• Sector wise breakup of the entire SMBlandscape is as follows

– Retail sector , with 18 million units is thehighest contributor to the SMB landscape

– Services sector 1, which primarily providesbusiness and other social services such aseducation, medical services are around 9.5million units

– Manufacturing , contributes with around 7.3million units

Manufacturing

21%

Retail52 %

Services

27%

Note: 1 services sector will include educational service, legal service, CA’s, Medical services, hotels, restaurants and theaters, Xeroxing centers, telephone booths, laundering centers,beauty parlors etc.

The above estimate does not include agricultural enterpriseSource: MSME, Zinnov Research




India today has a total of approx. 1200 manufacturing SMB clusters spread

nationwide

Source: MSME ministry, Literature search, Zinnov Analysis

Calcutta

6%ChandigarhLudhiana

JaipurLucknow

New Delhi

Ahmedabad

Vadodara

Bhopal

Mumbai

Nagpur

Pune Aurangabad

Bangalore

Hyderabad

Chennai

Coimbatore

Tirupur

Cochin

Note –

Some clusters such as Hospitals and

Diagnostic centers, and Wholesalersare pan-India in nature.

Locations with only these clusters do not

appear on the map.Locations that are underlined are not

included in the top 50 centers

Ahmedabad

Bangalore

Bhopal

New Delhi

Chandigarh

Coimbatore

Chennai

Calcutta

Cochin

Hyderabad

Jaipur

Lucknow

Ludhiana

Mumbai

Pune

Trivandrum

Tirupur

LegendTravel & Tourism

Wholesale (Agriculture RM)

Apparel

Auto & Auto Comp.Auto ComponentCluster

Auto Component

Cluster

Apparel Cluster




Governmental regulations, lack of funds and micro-markets in India are

some of the key reasons for a large SMB sector in India

Government Regulations

Distributions of Clusters

•India has many SMB clusters spreadacross the country. These provide aready ecosystem for a new entrepreneurto get in. To a certain extent, it is also asa result of herd mentality in respectiveregions.

Culture of Family Owned Business

• India has many family owned businessesin SMB. Family members often getinfluenced by their family business from ayoung age and continue to work in thesame.

Lack of Funds

• Most of the entrepreneurs are from Tier IIand Tier III cities, and don’t have accessto the capital to scale up their operations.Also, they are unaware of the VCecosystem and the stringent processfollowed for loan disbursement by bankinginstitutions.

• The Government has taken a number of

initiatives for growth of SMB segment – Collateral free loans, reservation inmanufacturing of restricted items,purchase preference policy, pricepreference policy and subsidy schemesfor technology up gradation.

Large SMBSector

Source: http://dcmsme.gov.in/policies/preseve.htm , http://www.indiaonestop.com/face2face/sidbi_chairman.htm , Zinnov Analysis




AGENDA








IT spend by SMBs was USD 6.5 billion in 2007-08 which happens to be

around 30% of the total IT spend in India

0

5

10

15

20

25

Hardware Software Services Total

IT spending in SMB IT Spending in Consumer & Large Enterprises

I T S p e n d i n g i n U S D

B i l l i o n ( 2 0 0 7 )

11.5

2.2

7.9 21.6

0.9

1.2

IT spend in SMB as a percentage of overall IT spend , 2007-08

Source: Nasscom, Dataquest, Zinnov Analysis

7.4

1.3

6.7

15.4

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Key factors inhibiting the adoption of technology in SMBs…

Lack of IT Awareness

• Many of the SMB owners in Tier II/III cities or rural areas are not aware ofexisting IT solutions that may solve their problems.

• Focus of most of the IT vendors should not be restricted to increase theirpenetration across the country. But, they need to educate these SMB

owners about leveraging technology to solve their business problems.Moreover, there should always be easily accessible communicationchannels available to SMB owners.

Lack of Vertical Specific

Solutions

• Most of IT solutions are not customized to vertical / cluster specificproblem of SMBs such as:

– Case of Textile Industry• The industry a four stage value chain, i.e. spinning, weaving,

processing and stitching• Currently there aren’t many specific customized solution catering to

each process of the value chain

Unclear Return onInvestments

• SMB owners need to be convinced of returns before making any capital

investments in IT. In most of the cases, SMB owner expects thequantified benefits such as growth in revenues/profit margin or significantcost savings.

• A complex ROI mathematical calculation might not be the best solution inthis case. However, IT vendors need to build a case for IT solution andneed to highlight benefits that can solve SMB’s key problems.

K E Y

F A C

T O R S

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Key factors limiting the growth of technology adoption in SMBs…

High investments made inlegacy systems

• Most of the SMB invest in technology solutions on a long term basis.Frequent technological development which force them to migrate to anewer technology and dump legacy system is not welcomed by them.

• IT vendors and their channel partners needs to guide SMB owners to

design their IT investments and become their trusted partners.

Need for integration

• Most of the SMBs invest in IT in a phased manner due to constraint in ITbudgets and not having a clear roadmap of IT implementation. Hence, Itbecomes a big challenge for SMBs for integrating various technologies on

different platform.

• Need for seamless integration between various technologies is a majorchallenge for most of the SMBs, which might translate into big opportunityfor IT vendors.

High cost for technicalsupport

• SMBs that have invested in IT need frequent technical support due to

limited knowledge of technology. Most of the SMB don’t invest much oninternal IT staff.

• SMB owners have to often choose between a regular support with highcost or settle down to limited support at economical price. However,neither of the two options solves the need for technical support.

K E Y

F A C

T O R S


please send your request to [email protected]




AGENDA



• Strategy of leading IT vendors – Cisco – IBM

– SAP

– Microsoft





All the large MNC technology companies have identified the SMB sector as

the growth area

IBM

Cisco

• Since 2004, Cisco’s R&D has developed and customized SMB products and solutions that areaffordable and easy to use.

• Cisco generates around USD200 million from its Indian SMB business, and posted anaggressive growth rate of 100% over the last year.

• Microsoft has targeted 35 clusters of SMB in India and has partnered with 11 companies totarget each industry vertical.

• Microsoft has 3000 channel partners in the country to target its SMB business and has doubledits workforce aggressively to focus on it.

• Microsoft’s SMB business contributes around 40% of its India revenues and is expected tocontribute 50-60% in next three years.

• IBM was amongst the first MNCs to focus on SMB starting in early 1990s. It has plans to expandits presence to 14 Tier-II cities in India apart from its presence in major metros.

• 60% of IBM India revenues comes from its Indian SMB business with 15-20 per cent of IBMIndia’s workforce dedicated to the SMB market.

• SAP has 1000 SMB customers in India with 400 of them being new accounts added in the firstsix months of 2007 alone.

• SMB segment accounts for 35% of SAP India revenues. It is focusing aggressively on SMBsegment and by 2010 it is likely to contribute 50% of SAP India revenues.

SAP

Microsoft

Source: CIOL, Express computeronline, Hindu Businessline, Company Websites, Primary Interviews, Literature Search, Zinnov Analysis






Leading MNC companies leverage their partnership with large

telecom/network service providers to reach SMBs

• Cisco has tied up with Reliance Communications to offer singlewindow IT solutions by reducing high entry costs.

• Bundles suite includes broadband, antivirus package, business email

package, domain name registration, firewall and LAN/WAN.

• Microsoft and Nortel’s Innovative Communications Alliance (ICA) offer

solutions that enable service providers to deliver unifiedcommunications services to SMBs.

• Nortel will integrate its Communication Server 2000 softswitch with theMicrosoft Solution for Hosted Messaging and Collaboration.

• IBM has acquired Network Solutions which is a leading infrastructuremanagement services firm.

• This strategic investment would enhance IBM’s networking andmanage services portfolio in India to cater to its SMB customers.

IT VendorsIT Vendors PartnersPartners Joint InitiativesJoint Initiatives

Source: CIOL, Express computeronline, Hindu Businessline, Company Websites, Primary Interviews, Literature Search, Zinnov Analysis

Microsoft

IBM

Cisco RelianceReliance

CommunicationsCommunications

NetworkNetworkSolutionsSolutions

NortelNortel


please send your requestto [email protected]




Cisco offers easy financing and customized range of solutions to its SMB

customers in India

Branding &Channel

Strategy

Customized product range Flexible financing services

Cisco Strategy

Source: CIOL, Express computeronline, Hindu Businessline, Cisco Website, Primary Interviews, Literature Search, Zinnov Analysis






IBM has focused on educating and empowering SMB segment and assist

them to take informed decision for IT adoption

StreamliningSMB sales

channel

Increasing Penetration Empowering SMB customers

IBM Strategy

Source: CIOL, Express computeronline, Hindu Businessline, IBM Website, Primary Interviews, Literature Search, Zinnov Analysis






SAP leverages faster implementation process and reduced integration

time due to its strong channel network

FasterImplementation

Cycle

Strong ChannelNetwork

ApplicationCustomizationand Flexibility

SAP SMB Focus

• SAP has plans to launchSAP A1S by mid 2008. Itwould provide ERP, CRM,SCM, and BI in one suitevia SaaS. It would betargeted at Low-MediumSMB category.

• SAP’s partner ecosystem inIndia includes 20 servicepartners, 22 SAP all-in-one

partners, over 65 ISVpartners, 3 SAP BusinessOne distributors, and 80SAP Business Oneresellers.

• SAP can boast abouthaving a fastimplementation for itsmySAP All-in-onesolution. It can be rolledout in 8 weeks unlike a 4-5 month timeframerequired in other ERPproducts.

• SAP’s Business One portfoliofor SMBs has amplecustomization functionality tomeet their individual need.

• SAP has 30 vertical specificsolutions localized to thecustom needs of Indianmarket.

Source: CIOL, Express computeronline, Hindu Businessline, SAP Website, Primary Interviews, Literature Search, Zinnov Analysis


please send your request



please send your request





Microsoft relies on Software as a Service to make their solutions

affordable to SMBs

Adoption of

SaaS Model

• Microsoft offers its Dynamics Suite of ERP applications through SaaS model. Itenhances the affordability of ERP solutions by doing away with upfront capital

expenditure and need for in-house IT infrastructure.

• Microsoft’s ‘Open Value’ licensing program allows SMB to make the payment over aperiod of 3 years. Moreover, SMBs can add Microsoft software on new desktops for noadditional cost that year.

• Microsoft would be expanding its penetration from 12 to 33 cities by partnering withsystem integrators and independent software vendors for applications.

Flexible Payment

ExpandingPenetration

Microsoft Strategy

StreamliningSMB Sales

Channel

Source: CIOL, Express computeronline, Hindu Businessline, Microsoft Website, Primary Interviews, Literature Search, Zinnov Analysis






AGENDA








Various macro and micro economic factors would further drive technologyadoption in SMBs by 2015

– Zinnov found that government is tryingto lure the SMBs to adopt technologiesfor making their process efficient

– The main idea for such as push is tomake the Indian SMB fraternityface the global competition

– India has seen an increase in interestamong large IT majors to cater to thespecific needs of the SMB segment

– The main idea has been to tap therevenue opportunity from this segmentwhich can have significant top lineimpact

– Indian SMBs going to global marketor partnering with MNC requires IT tomanage business at Global level

– Influx of global players increasingthe pressure of competition resultingin requirement better efficiency withthe help of IT

– Growth in broadband and mobilepenetration in the Tier II/III cities and

rural areas

– Availability of affordable customizedhardware and software for SMB

Need for GlobalizationImprovement in IT infrastructure

SMB focused IT Initiatives ofIT Majors

Government Initiatives




The Road ahead in 2015…

Virtual network of SMBs

Cloud computing solutions

• SMBs would not have to necessarilyinvest in software licenses or make highcapital investments.

• Zinnov expects that SMBs would be ableto access applications like ERP, CRM,security solutions on ‘pay per use’ basis.

• Product companies are likely to focus onrevenues from advertisement for SMB

sector.

• Product companies might providesoftware free of cost and generaterevenues from advertisements.

Software enabled solutionscatering to SMB

• Zinnov expects that there would be a set ofthird party vendors that would use the ITinfrastructure to provide services to SMB.

• SMB would need to just pay for theservices without having the burden toinvest and manage IT infrastructure.

• By 2015, Zinnov expects that there wouldbe virtual network of SMB across differentlocations.

• This network would be able to competewith large companies due to regionalexpertise and lower operational costs.

SMBlandscape in

2015

Advertisement based revenues




Indian SMB sector is a ‘Goldmine’ with untapped market potential and

there is an opportunity for clear market leaders to emerge

• Various MNC companies have invested in SMBs in India, however there

aren’t any clear market leaders in any of the IT segments so far.

• There is a tremendous opportunity for MNC hardware and product companies to tap the potential of Indian SMB market with : – Optimum localization strategy – Strong distribution network

– Understanding the unmet needs of SMB landscape and designing right product strategy.

Zinnov predicts that prominent market leaders would emergefor each IT segment catering to SMB landscape by 2015




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IT Opportunity Indian SMB Sector

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