Analysis: Lessons From Midsize Companies

By Jeffrey Rothfeder  |  Posted 11-01-2003 Print Email
Until recently, small and medium-size companies have lagged in the strategic use of IT. But now they're spending more money than their larger brethren to catch up, despite the economic slowdown of the past three years. Here's how they're using their latec

Even for a fast-on-the-trigger startup, it was a gutsy step. A year ago, before FRISA Wyman Gordon, based in Santa Catarina, outside Monterrey, Mexico, had opened for business, a team of internal software design specialists was putting the finishing touches on an enterprise resource planning system. Built entirely in-house and from scratch, the internal effort was something few companies of any size would dare tackle—let alone complete successfully. Yet FRISA's ERP system is now the calling card of its growth strategy.

"We're in an old, classic industry, not prone to IT innovation," says Hector Mario Cruz, head of IT at FRISA. "When you're a small player trying to make an impression in an industry, the first message that you want to send to customers is that [you] can provide the highest quality."

FRISA's immediate goals are not overly ambitious—to grab about 10 percent of the $600 million international market for forging turbine rings for aircraft engines in the next three years. But despite the modesty of FRISA's ambitions, the Mexican forge's ERP gamble illustrates something much larger: Small and midsize businesses, notorious for being at least a step or two behind technologically, are suddenly discovering that innovation pays—or rather, they're making innovation pay. As the economic environment tightened over the past three years, many small and midsize companies, in a surprise departure from their behavior in other periods of slow growth, became more aggressive about creating strategic applications that link directly to the top and bottom lines. Instead of waiting out the downturn by ceding technology to their larger competitors, they've decided to go head-to-head this time.

"The mid-market is doing pioneer work in implementing technologies," says Jeffrey Read, PeopleSoft Inc. vice president and general manager for the mid-market. "These companies have the same business challenges as large companies, but they have smaller IT departments and smaller budgets, so they have to look for certainty of value. And they've learned that technology is not just a utility or a luxury; it's a differentiator and a necessity."

In FRISA's case, the decision to build the ERP system was an obvious one. The company, a spin-off of the large Mexican steel foundry FRISA Industrias, serves blue-chip customers, primarily General Electric Co., Rolls-Royce Corp. and Pratt & Whitney, all makers of aerospace engines, who expect extremely high-quality service. Parts must be manufactured to high tolerances, and response times for everything from shipments to tracing old orders must be

prompt and accurately gauged. All of FRISA's rivals are still using paper-based systems to drive these highly complex operations. But FRISA's management guessed that by becoming the first in its industry to automate and meet customer requirements better with an ERP system, it would get noticed among the 15 or so plants that forge turbine rings worldwide.

But there was a significant obstacle: FRISA ruled out purchasing a system from a software integrator, having determined it would be both too expensive and too risky given the many reports of dissatisfied ERP owners. If the system didn't work out as planned, FRISA would have run through a great deal of its capitalization with nothing to show for it. So Cruz's staff convinced the parent company to lend the startup some of its most experienced software developers to design and implement an ERP system that specifically met the needs of a steel business.

The ERP's data management component shows how closely the technology was tied to essential operations—and how it was geared to catch the eyes of potential customers. So-called traceability records that recount in detail every manufacturing activity—among other things, when and where the product was placed in a furnace, how it was forged and treated, and the date it was shipped out—must be kept for each turbine ring. If an airplane malfunctions, even years later, the engine manufacturer will have to produce a traceability record for each part quickly, so the cause of the mishap can be determined. At most forges, where paper files are the norm, it can take weeks to provide background material about a part. With the ERP system, FRISA can guarantee instant traceability. And, Cruz says, FRISA's decision to use in-house developers shaved as much as 50 percent off what it would have cost had he hired an outside software developer: "We had a solid team that knew the iron industry and understood what we needed. So we were satisfied with what we got."

Recent studies bear out the increase in technology activity among smaller companies. According to a survey conducted last summer of 300 executives at companies with annual revenues between $50 million and $2 billion by market researcher Grant Thornton International, 84 percent have invested in new technologies—or at least plan to—to be ready for improved business conditions. Backing this up is a report by Access Markets International-Partners Inc., which concludes that worldwide IT and telephony spending in the group grew upwards of 7 percent in 2003, compared with 0 to 4 percent for larger corporations. According to AMI, larger companies are hesitant to boost spending when earnings and stock prices are under pressure, and there's "a general sense in boardrooms these days that recent IT investments in areas such as ERP or storage networks have yet to impact the bottom line."



 

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