Betting on a big roll: enterprise software vendors confident market is about to pay dividends.

You cannot touch or see it. It is complex and expensive. It often breaks down and causes disruption for those who use it. Yet, despite burst bubbles, financial gloom and burnt fingers, corporate or enterprise software is still selling in Mexico. It appears that after an awkward pubescence, the sector may be growing up.

The "Latin Channels: Enterprise" conference that took place in Cancun in early June was one of the few Latin American technology events in recent years that had a real buzz about it. Some of the industry's top software vendors, including Microsoft, Computer Associates and SAP, jetted down to the Caribbean resort town to carouse with representatives of Mexico's burgeoning IT consulting and systems integration sector.

On the surface this event seemed like any other tech jamboree with vendors reeling off their usual spiel about how wonderful their products are. However, in the backrooms and over cocktails, delegates were doing serious business. At 8 a.m. Sunday, bleary-eyed journalists had breakfast with the conference's panel of chief information officers. There were the usual moans about the nation's lack of infrastructure and poor technology education. Yet, despite the inherent challenges and the early hour, the talk among the IT bigwigs was generally upbeat.

With Brazil and Argentina struggling economically, Mexico is now the No. I market for many of these vendors. Analysts believe that, after having hit hard times since the tech crash of 2000. the sector has turned a corner. Select, a Mexico City-based technology research and consulting firm, estimates that growth in software sales will be around 6% this year, bringing total annual spending to US$708 million. Such growth may be modest, but many see it as a sign Mexican companies' frosty attitude toward technology may finally be thawing.

DEFINING THE TECHNOLOGY

Before reviewing the basis for the sector's positive outlook, it is worth taking a little time to understand the nature of enterprise software. Computer systems consist of hardware (the physical bit that you can touch) and software (the intangible strings of computer code that run the computer). Ever since the PC as we know it was invented in the 1970s by IBM, software companies have been selling applications aimed at helping businesses become more efficient or gain some kind of competitive advantage.

Thanks to what is known as Moore's Law--which states that the power of computing will double and its cost will be reduced by half every 18 months--and to the rise of the Internet as a cheap and efficient form of data communication, modern business systems can perform all sorts of weird and wonderful tricks.

In the corporate world, there are two basic types of software applications: personal productivity solutions, which include word processors and spreadsheets, and corporate or enterprise class solutions, which automate business processes. These range from simple accounting packages to large-scale customer management systems.

In the 1980s, most large companies invested in stand-alone applications to manage basic data processes such as payroll and inventory. By the end of the decade, large corporations found themselves with a mass of heterogeneous and autonomous systems. Then, led by a German company called SAP, software makers started to produce what are called Enterprise Resource Planning (ERP) applications.

These firms offer ubiquitous solutions that bring together all the company's disparate transactional data processes. So, for example, when a customer purchase order is entered in the sales department system, the warehouse is automatically alerted to prepare the order, the inventory updated and the account system is adjusted accordingly. Today, most large organizations have deployed an ERP system.

Although the most common, ERP is by no means the only breed of enterprise application. In recent years, firms have invested in supply chain management solutions, which follow the 'just-in-time" methodology, where components are only ordered as sales are made.

They have also bought customer relationship management (CRM) applications to help companies improve service by unifying all customer "touch points" including sales, support and field service. They have also deployed management information systems, including corporate performance management (CPM) and business intelligence (BI). These help bosses keep vigil over their organization's activities and support decision-making.

INVESTING TOO EARLY

So we know a little about what software firms make. But what kind of trade have they been doing in Mexico? Mexican firms typically adopt these solutions one or two years after their European and U.S. counterparts. However, that is not to say the region's executives are averse to technology. During the late 1990s, there was huge investment in corporate software.

"This reached a boiling point in 1999, when everybody invested in ERP," said Karen Bitran, a senior software and services analyst at IDC, a consulting firm.

During this period, deregulation, Nafta and foreign investment escalated the level of competitive warfare in corporate Mexico. Companies saw themselves in a do-or-die situation. If they did not invest heavily in technology, their competitors would get the better of them.

Yet as many as half of these grand IT projects failed and, looking back, many feel they were sold the high-tech version of the emperor's new clothes.

"There was a lot of bad ERP implementation in that time because the firms investing in these solutions were caught up in the hype," noted Bitran.

"Firms spent a lot on ERP solutions," added Gilberto Romero, a senior software analyst at Select. "Yet many have not seen the returns on their investment that they had initially hoped for."

He argues that the cause of this was because they were sold systems designed for their U.S. and European peers that were unsuitable for local business processes.

Carl Wood, director of Tactikal, a Mexico City-based strategy and management consulting firm, believes many companies were simply oversold. "With ERP, many customers believed that they were getting a panacea to all their needs. In reality, they were left with many gaps in the enterprise spectrum," he said.

Since those heady days, the technology market has cooled considerably in Mexico. According to Select, annual software revenues fell by roughly 10% and 5% in 2001 and 2002 respectively. Because of the economic downturn, many firms simply could not afford to risk millions of dollars on solutions without guaranteed returns. In addition, the ERP market, which constitutes the lion's share of software spending, was saturated. According to Select's Romero, 147 of Mexico's 180 large firms now have an ERP system in place.

Still, today the outlook for the software sector in Mexico remains positive. The recent downturn is not expected to lead to a total meltdown as has happened in past economic cycles.

BIG BOYS BACK THE SECTOR

To what can we attribute software's survival? This partly rests on inertia of tech spending by very large companies. Firms such as Pemex and Telmex, as well as the government, have continued to spend on software despite the slump. Additionally, the consolidation in the region's banking sector has also created demand.

"Firms are desperately hunting for the productivity gains that will allow them to remain competitive," said Ken Morris, of Latincor, a Latin America-focused market intelligence consulting firm. "Any solution that could help them to cut their head count or reduce procurement costs remains very attractive." And, of course, since 9/11, many have heavily increased spending on IT security systems.

But there have also been fundamental changes in the sector, and these are furnishing it with a brighter outlook.

"Capitalism has made its way into IT," Chris Gardner wrote in his 2000 book, The Valuation of Information Technology.

Or, as Sergio Vega, marketing manager of Computer Associates in Mexico, put it: "People no longer buy enterprise software just because they like the idea."

Where investment decisions were once controlled by emotion and the latest technology craze, IT buyers are looking harder than ever at the real value of their purchases and are thus spending more wisely.

"Non-technologists are now making IT investment decisions," said Manuel Quiroz, CIO of the government's environmental prosecutor's office Profepa. "A few years ago, few understood what they were doing. Now at least they are able to assess the impact of their investment."

Profepa is a good example of this new technology strategy, as players look for a way to effectively manage the wealth of data pouring in from thousands of agents across the nation. As part of President Fox's National Development Plan that sets key operational targets for government entities, Quiroz's agency had to implement a system that would provide a timely and accurate gauge of their performance.

"We had to be very careful which solution we chose because we did not have much money," Quiroz said.

The agency selected a best-of-breed solution from Comshare that allows it to define, resource, measure and adjust their strategy across the organization. "The most important thing has not been the technology itself," Quiroz said, "but the way our managers have learned to use and get the best out of it."

VENDORS WISE UP

Such attitudes have had a profound affect upon the vendors themselves.

Instead of trying to dazzle their customers with promises of "revolutionizing" their businesses, software firms are now showing how their products can help overcome smaller and more tangible challenges.

"These days, we tend to find that most companies have a very specific need," said Phil Suggars, head of Comshare in Latin America. "We focus on that one area and deliver one application which solves that problem."

This has even changed the way the industry describes itself. "Vendors are unwilling to bracket themselves as a provider of a specific breed of software," said Bitran of Select. "They do not wish to impose their concepts on customers. They are trying to sell solutions to business problems and are trying to talk in their customers' language."

Vendors are evolving in other ways, too. With saturation at the top end of the market, and driven by their all-consuming quest for growth, they are looking to new hunting grounds.

Where once vendors like Siebel and SAP would only talk to companies with nine-figure incomes, they are now seeing huge potential in mid-sized organizations. "In Mexico, this is an enormous and untapped market," said John Dix, director of SAP's mid market solution in Mexico. "We have taken our solution, scaled it down, made it simpler and faster to implement and dropped the price tag." His company is not alone; other vendors including Siebel, Oracle and Microsoft have also been eyeing this market.

Insiders have their doubts about whether these firms are quite ready for such complex software solutions. In the words of one vendor at the recent Cancun conference, "When most smaller firms view a serious technology investment as buying a printer, how will they understand the intricacies of ERP?"

Software makers are learning that, in order to close deals in Mexican markets, they need friends on the ground. Computer Associates, for example, now does 40% of its business through partner channels that both sell and implement its solutions on its behalf. Likewise, Hewlett Packard estimates that 70% of this year's Mexican sales will be generated via local partners.

The final secret to software vendors' success in Mexico is their distribution model. Using channels to shift software not only allows them to increase their sales and consulting force with minimal capital expenditure, but also to obtain local knowledge and skills based around niche domestic customer needs. This also meets a challenge that is particular to Mexico. "Business gets done by informal networks," said Suggars of Comshare. "If you do not have some kind of relationship with the prospect, it is very difficult to make the sale."

Thanks to Mexico's relatively stable economic outlook and a high regard for technology, its software sector is on the road to recovery. At the Latin Channels event, Daniel Lund, director of market research firm Mund Americas, commented, "Instead of Miami, Mexico City should be the IT capital of Latin America, and I know no reason why this should not one day be the case."

Yet the region's software sales remain proportionally far lower than in the United States. Things take time in Mexico, and as one salesman at the conference said, "It is not question of if, but when, they will buy our software."

AVERAGE SOFTWARE SPENDING

                  Incidence of Software   Average Software In-
                  in IT budget (%), 2002  vestment (US$), 2002

SMALL COMPANIES           31.2%                  10,733
MEDIUM COMPANIES          39.9%                 127,716
LARGE COMPANIES           36.8%                 234,695

                  Incidence of Software   Average Software In-
                  in IT budget (%), 2003  vestment (US$), 2003

SMALL COMPANIES           40.1%                  13,106
MEDIUM COMPANIES          40.8%                 179,903
LARGE COMPANIES           37.8%                 192,843

                     GROWTH
                  2002-2003 (%)

SMALL COMPANIES       22.1%
MEDIUM COMPANIES      40.9%
LARGE COMPANIES      -17.8%

Source: IDC de Mexico

SOFTWARE PENETRATION IN MEXICO

                                                Have and do NOT
Enterprise Software Breed                      plan to purchase
                                              additional software

E-COMMERCE                                            22%
SUPPLY CHAIN MANAGEMENT                               20%
CUSTOMER RELATIONSHIP MANAGEMENT                      35%
ENTERPRISE RESOURCE PLANNING                          37%
OFFICE SUITES AND COLLABORATIVE APPLICATIONS          53%

                                                  Have and DO
Enterprise Software Breed                      plan to purchase
                                              additional software

E-COMMERCE                                            22%
SUPPLY CHAIN MANAGEMENT                               20%
CUSTOMER RELATIONSHIP MANAGEMENT                      13%
ENTERPRISE RESOURCE PLANNING                          27%
OFFICE SUITES AND COLLABORATIVE APPLICATIONS          33%

                                              Do NOT have but
Enterprise Software Breed                     plan to purchase
                                                  software

E-COMMERCE                                          26%
SUPPLY CHAIN MANAGEMENT                             14%
CUSTOMER RELATIONSHIP MANAGEMENT                    15%
ENTERPRISE RESOURCE PLANNING                        13%
OFFICE SUITES AND COLLABORATIVE APPLICATIONS        10%

                                               Do NOT have and
Enterprise Software Breed                      do NOT plan to
                                              purchase software

E-COMMERCE                                           25%
SUPPLY CHAIN MANAGEMENT                              39%
CUSTOMER RELATIONSHIP MANAGEMENT                     31%
ENTERPRISE RESOURCE PLANNING                         18%
OFFICE SUITES AND COLLABORATIVE APPLICATIONS         3%


Enterprise Software Breed                     Don't Know


E-COMMERCE                                        5%
SUPPLY CHAIN MANAGEMENT                           8%
CUSTOMER RELATIONSHIP MANAGEMENT                  6%
ENTERPRISE RESOURCE PLANNING                      5%
OFFICE SUITES AND COLLABORATIVE APPLICATIONS      1%

Source: IDC de Mexico's survey of companies, 2002

Rawdon Messenger is a Mexico City-based freelance writer and IT columnist for the Evening Standard of London.