The SME sector is an area of the UK economy that has experienced growth throughout the GDP revisions of the last few years, with expectations that this trend will continue. There is, therefore, a huge growth opportunity for businesses that provide software and services to SMEs.
ECI undertook a survey of 240 UK SMEs looking to understand more about the 3rd party software and services they procure.
The results of this survey suggest businesses that service SMEs have many reasons to be excited about the future, with 60% of company leaders expecting to increase their current levels of expenditure on 3rd party software and services in the next 12 months and only 4% expecting to decrease their expenditure.
Having invested in a number of businesses with an SME customer base over the last 4 decades, ECI continues to seek further opportunities in this space.
Customer concentration is inherently low in these businesses and, with a good management team and good quality systems in place to enable them to adapt quickly to the changing needs of SMEs, it is possible to keep attrition rates low.
The provision of high quality yet low price products and services is a challenge facing any company servicing the SME customer segment. SMEs seek the quality of service of any corporate customer but, equally, they need a product that is affordable and that will not impact their cost base significantly. This price sensitive nature of SMEs is supported by the survey, with findings highlighting that price is considered the most important factor for SMEs when selecting a 3rd party service or software provider (cited by 36% of respondents), closely followed by the reputation and branding of the vendor (32%).
Businesses that focus on larger corporates are unable to cater for this type of customer cost effectively and, therefore, fail to provide the quality of service that SMEs demand. Conversely, for the businesses that do chose to focus their attention on providing services to such customers, the SME sector can prove to be a hugely successful and profitable space in which to operate. SMEs have relatively undifferentiated demands from one another and, therefore, companies that focus on them can seize the opportunity to create an efficient channel and scalable cost base. These businesses will grow and increase their profitability quickly.
Achieving higher margins can be facilitated through the use of technology, which also increases the resilience of the business as it brings with it the opportunity to lock in more contracted and recurring revenue through subscription models.
In 2014, ECI delivered a 3x return on the exit of XLN, a fully tech-enabled services provider that offers high-quality, low-cost telecom services to SMEs via its proprietary technology platform. The company’s SME customer profile and technological capabilities, along with its strong management team, sparked ECI’s interest in the company in 2010.
Returning to the findings of the survey, it came as no surprise that compliance with industry specific regulation is the area where SMEs are most commonly procuring 3rd party software solutions.
For the foreseeable future, compliance software and services will continue to be an attractive space with 82% of respondents stating they believe the overall burden of complying with regulation in their sector is set to increase over the next 5 years.
ECI acknowledged the growing need for small businesses to comply with an increasing amount of employment law and health & safety regulation, and invested in Citation in 2013. Through the combination of their online platform, 69 legally trained operators and 49 health & safety consultants, Citation provides health and safety, and employment law compliance products to SMEs.
ECI’s investment in Citation demonstrates an additional growth opportunity for businesses servicing SMEs in the form of new adjacent products and services that can be sold through the same channel to existing, as well as new customers.
In 2014, Citation acquired QMS International, an ISO certification provider. This acquisition took Citation into a new market and increased Citation’s client base from 9,000 customers to more than 15,000, thus providing a significant cross-sell opportunity.
As a growth focused investor with a vast experience supporting businesses that are focused on SMEs, we are always interested in looking for further opportunities in this space.