The Corporate Software Market: Can Domestic Software Compete with Foreign Solutions?

We continue to publish a series of articles by the head of Documentolog, Baizhan Kanafin. This article analyzes the current state of affairs in the domestic corporate software market.

To begin with, let's discuss what software is absolutely necessary today for a company to exist as a business. We will separately consider large and medium-sized businesses (more than 30 employees) and small businesses (less than 30 employees).

For large and medium-sized businesses, the following are required:

- Website;

- Office applications;

- Corporate email (own server or online services, such as Gmail, Yandex);

- Accounting system (1C or SAP);

- Electronic document management system (EDMS) or business process automation, such as CRM;

- Infrastructure and IT security management systems (domain controllers, SIEM, Zabbix, etc.); - Analytical systems for business management (management reporting, etc.);

- Production systems (ABIS, ACS, SCADA).

For small businesses, it is sufficient to have:

- Website;

- Office applications;

- Corporate email (online services, such as Gmail, Yandex);

- Accounting system (1C or SAP);

- Electronic document management system (EDMS) or business process automation, such as CRM.

What software from the above is currently available in our market?

Let's start in order:

1. Websites. There is no clear strong leader in our market. There are many internet studios and just budding programmers. Creating and maintaining websites is a fairly accessible type of business for IT specialists. Unfortunately, it is becoming low-margin due to the emergence of large template providers (wix.com) and the availability of freelancers worldwide.

2. Office applications. Approximately 99.8% of large, medium, and small businesses use Microsoft Office solutions: either locally or via the Office365 cloud ($10/month per user). Very few companies are progressive enough to use open-source software like LibreOffice.

3. Corporate email. In my observations, the breakdown is as follows:

• 5-10% of large companies with more than 50 employees use paid online services for corporate email, such as business Gmail or Yandex.

• 85-90% of large companies have deployed corporate email based on Microsoft Exchange Server.

• I assume 5% of companies use alternative email server software, like Zimbra.

• Approximately 85-90% of medium and small companies with fewer than 50 employees use free online services, such as Gmail or Yandex.

3. Accounting systems. Large businesses – 30-35% have implemented SAP, 60-63% use 1C, 2-5% use other solutions (Oracle, Favorit, Kolvir). Medium and small businesses – 98% of them use 1C. I leave 2% for other solutions or they do not use accounting automation at all.

4. Electronic document management and process automation systems.

For large companies: 10-15% - Documentolog (Kazakhstan), 45-55% - Lotus Notes, 10-15% - EMC/OpenText, 10-15% - other solutions (ELMA, Tengridoc, Evridoc, ARTA, Directum).

For medium companies: 1-3% - Documentolog, 35-45% - Lotus, 15-20% - other solutions, 20-28% do not have such a system.

Small businesses, for the most part, about 90% do not use EDMS, replacing it with email or verbal instructions. As for CRM, Microsoft, Oracle Siebel, AmoCRM, Salesforce solutions are widespread in the market - 98%.

5. Infrastructure and security management systems. Since such systems are not essential for business existence, they are mainly implemented by already mature large and medium-sized companies, and not all of them. In my estimation, 70-80% of large companies and 40% of medium-sized companies have them. For small businesses, these systems are not relevant. The main suppliers of infrastructure management systems are Microsoft Active Directory - 85-90%, LDAP open-source - 10-15%. All hardware, routers, switches, servers - 99.9% - are of foreign origin (Cisco, HP, Huawei, Dell, IBM, and others). Antivirus protection systems, DLP, and SIEM - 99.9% are of foreign origin (Kaspersky, Dr.Web, etc.)

6. The market for production information systems is less familiar to me. But I can suggest that the situation there is similar to the one described above. More than 90% of the market is occupied by solutions from foreign manufacturers (Schneider, Schlumberger, GE, and others).

What conclusions can be drawn from the above figures?

Currently, almost 95% of the needs for necessary corporate software are met by foreign suppliers – SAP, 1C, Microsoft, IBM. About 5% or even less - there are offers from domestic companies. Not very rosy figures. But it looks even sadder recently, when after contracts concluded from 2015 to 2018 for SAP, 1C, and Microsoft products worth more than 75-80 billion tenge, for large companies in the state and quasi-state sector, all other needs are financed on a residual basis: whatever the budget allows. And in the structure of our economy, the state is the customer of more than 80-85% of IT services and products!

Can this situation be justified by the fact that our domestic producers do not have a competitive alternative to SAP, 1C, Microsoft, IBM? Partly, I think yes. But, on the other hand, where would it come from if even for the software that is available on the market from our suppliers, for example, in the business process automation and document management market, funding is allocated either on a residual basis or customers demand significant discounts? Our IT managers have a firm and entrenched stereotype that Kazakhstani software cannot be expensive. Therefore, it is not shameful to pay billions to global brands, but it would be illogical for ours to charge the same for similar software.

Is there a chance for domestic corporate software developers to survive in the long term with this approach? Can a company receiving 10 million tenge for its software product compete with a foreign company receiving 100 million tenge for its similar software product?

The answer is obvious - it cannot! After paying mandatory expenses for salaries, rent, and taxes, very little will remain from 10 million tenge. There will be no investments in R&D, new directions, or aggressive advertising.

In Western companies, R&D expenses account for up to 40-50% of net profit because it is the only chance for survival in the face of fierce global competition. Unfortunately, for most of our IT companies, the agenda is quite different – how to make money, get dividends, and save them in a personal account. Few are focused on long-term prospects and increasing the company's capitalization.

In this article, I aimed to show the current picture in corporate software as a top-down view. On a national scale, the current situation looks very bleak – almost the entire market is occupied by foreign manufacturers, whom our state and quasi-state company leaders "indirectly" support by spending huge amounts annually on licenses or services.

And here the question is not whether it should be paid. Probably, it should. They will even justify their actions by saying that there is no domestic alternative to SAP, 1C, or Microsoft. Here I would like to say that while spending huge amounts on foreign software, it should be understood that our domestic software should not be cheap if we demand it to compete with foreign ones.

Also, in my opinion, IT leaders of state companies should look a little further, 5-10 years ahead. Do we want to have strong domestic IT companies developing their corporate software, competitive in the international market, having their R&D center, engaged in scientific research or new technologies?

Such companies will only appear when they have:

- financial stability and sustainable growth,

- faith in the inviolability and sanctity of private property in our country,

- faith in the fairness and rule of law in our country,

- state support, at least at the initial stage. Start by ensuring that business does not compete with software developed with state funds.