Business Model Development for TDP-ERP SME Cloud Product

Transcription

1 Business Model Development for TDP-ERP SME Cloud Product By: Gergely Balazs December December 2012

2 Business Model Development for TDP-ERP SME Cloud Product The Bachelor Degree in International Sales and Marketing Author: Gergely Balazs Assignment: Bachelor Project Supervisor: Christian Preuthun Pedersen Characters: Submitted: 28 December 2012 December 2012

3 Table of contents 1 Introduction Problem formulation Delimitation Scientific approach Choice of scientific paradigm Choice of models and methods Reflection Quality Assessment and Source Criticism Process Reflection Product description The main characteristics of the SME sector SME categories Size of the SME sector Characteristics of the SME Sector Political factors of the SME sector (Political) The financial situation of the SME sector (Economy) Managerial characteristics (Social) ERP systems in the SME sector (Technological) Conclusion of SME sector Bookkeeping and accounting Internal bookkeeping and accounting External bookkeeping The range of provided services Provided services of the external bookkeepers Market size of the bookkeepers Pricing strategy Relationship and partnership Competition on the bookkeeper market Conclusion of the bookkeeping sector The characteristics of the Hungarian bank sector Strategy of Granit Bank Pillars of growth Strategy of Granit Bank Sales channels of Granit Bank December 2012

4 5.4 Channel expansion Conclusion of the bank sector and Granit Bank IT sector in Hungary Financing ERP implementation Software developers of the SME cloud system Libra Szoftver Sales channel of Libra Szoftver Consortium of TDP-ERP and Global Solution Sales channels of TDP-ERP Conclusion Establishing partnership In depth understanding of the customer`s requirement In depth understanding of the partner`s requirement Reduction or elimination of cost of sale Value-added chain Value addition through partnership to the end users Conclusion of the partnership SWOT analyses Business model Key partners Key activities Key resources Value proposition Customer relationship Channels Customer segment Cost structure Revenue stream Conclusion Bibliography... i Appendix 1: Personal interview with Istvan Cieleszky... iv Appendix 2: Notes from SME Academy Conference... vi Appendix 3: Personal Interview with Istvan Harkai... vi December 2012

5 Executive Summary The Cloud SME product is developed by the international consortium of TDP-ERP and Global Solution. The development phase is 13 month; the expected date of product launch is the beginning of The project is partly financed by the EUREKA_HU_12 grant offered by the New Szechenyi Plan. The product provides integrated and complex solution for the SMEs in order to reduce their resources spent on administration activities. The project has several stakeholders; Granit Bank provides banking services, Libra Szoftver adds the modular ERP system. The bookkeeping services are planned to be done by quality partners. The agreement concerning the collaborative product launch has not been done yet, therefore it is necessary to evaluate how the partners can benefit from the partnership and create a business model as a basis of negotiation. The analysis covers the SME sector in order to find the main characteristics and needs. The bookkeeping industry is evaluated from the aspect of competition on the market, pricing and the relationship between the clients. Granit Bank is one of the main stakeholders within the product launch. The SME cloud product is planned to be the part of the bank`s product range and to be sold through the existing sales channels. The analysis covers the sales strategy of the bank and the value creation. The ERP system is developed by Libra Szoftver and the consortium of TDP-ERP and Global Solution. The main characteristics, core competences and the sales channels are investigated. The second part of the analysis is moving from the individual level of companies to the level of possible long term partnership. The aim is to investigate the additional values and benefits concerning the product launch in partnership. The findings clearly shows, that the product launch in a partnership creates more value for the clients and partners, reduces the cost of sales and increases the sales possibilities. It is also important from the sales aspect. Granit Bank as a newly established financial institute is still acquiring clients. The sales channel of the bank is not enough to penetrate the market. The resources are booked on the regular business activities; therefore it is necessary to use alternative methods for client acquisition. Targeting the existing clientele of the partners gives the possibility for sales activities at low cost. It also creates a win-win situation to the partners. The quality bookkeeping services positively affect the lending activities of Granit Bank, which evaluates the loan application based on the ledgers, reports and books. The ERP system is special in a way that some modules can be accessed by the SMEs, and the bookkeeping module by the bookkeepers. The data is provided from the cloud server base. The bookkeepers can withdraw the data from the database to the bookkeeping module, which saves time adding those manually. Libra Szoftver can target the micro and small segments. Other benefits are acquiring the customer needs from different channels. The business model should be built on the basis of partnership concerning the sales possibilities and the required quality of the services. The key partners in the business model are the consortium of TDP-ERP and Global Solution, Granit Bank, Libra Szoftver and the bookkeeping companies. The key activities contain individual and centralized activities. Due to the core competences the partners should deal with tasks concerning the services they provide, such as help and support December 2012

6 function. The partnership should be managed by TDP-ERP. The centralized activities are similar to the tasks of project management, it has defining and organizing part which is creating the overall strategy and objectives. It is done by consensus of the partners. Within the planning the tasks should be broken down to the individual level. The controlling function is done by TDP-ERP, which is responsible for comparing the targets with actual results, and make action in case of deviation. The overall quality should be measured also by collecting feedbacks from the end users. The key resources at the beginning of the product launch are mainly provided by the partners. The cost of sales and marketing activities is planned to be covered by part of the revenue of sales. This is the reason why in the first stage of the sales the existing sales channels should be used targeting the clientele of the partners. The product provides several values to the clients such as cost savings, increasing competitiveness of the SME, quality bookkeeping and online banking services. The cloud system enables the managers to have a real time access to the company results everywhere at any time requiring only an internet connection. The partnership creates values for the partners concerning the increased sales, R&D activities or strengthening the client relationship with extended services. The partners have already established relationship between the clients. In order to strengthen the relationship with the end users, communication channels are established. It is necessary also to collect the client feedbacks and develop the services offered to them. The sales are done through the channels of the partners targeting existing clients. The strongest relationship exists between the bookkeepers and their clientele. This is the reason why it is important to increase the amount of bookkeeper partners. The trust is the basis of relationship selling, which enables increased sales activities through the bookkeepers. The targeted customer segment of the TDP-ERP cloud concept is micro small and medium sized enterprises which do not have ERP system and using the services of external bookkeepers. The main costs of the partnership after the product development phase are the management, marketing and sales activities. The establishment of agreements with bookkeeping companies also requires additional costs. For better control over the costs budgets should be created according to the common strategic objectives. The revenue is the sum of the sales price, which contains the fee of basic banking services, the bookkeeping and the ERP license. TDP-ERP receives royalty on the basis of the sales price. The royalty also covers the cost of centralized activities. December 2012

7 1 Introduction The consortium of TDP-ERP and Global Solution started to develop an innovative product concept targeting small and medium sized enterprises (hereinafter referred to as SME). The project is carried out within the EUREKA, which is an international organization aiming for raising the productivity and competitiveness by supporting the R&D activities. The purpose is to get closer the companies and research institutes from the member countries, and initiate partnerships between them. The TDP-ERP SME Cloud project is financed by own resources and 45 percent of the development costs expected to be funded by the New Széchenyi Plan within the EUREKA_HU_12 grant. The development phase of the project has been started in November The expected date of market launch will be in 2014 depending on the outcome. The background of the project idea is the need discovery of the SME sector. The research covered the main business activities and processes and the incurred costs. As a result the SMEs are spending way too much covering their administration tasks, which contains regular business processes such as billing, invoicing. The other administrative expenses concern the costs of banking services and meeting the taxation and reporting requirements settled by the legislation. The high administration expenses reduces the competitiveness of the sector, because the companies need to spend a lot on administration instead of developing new products and services or investing in marketing activities. The main characteristics of the activities are the multiply, repetitive processes, where a single data added and used multiply times during the business. Without an ERP system the managers and other employees of the SMEs have no up-to-date knowledge about the performance, liquidity and other relevant information, which are required for decision making and daily business management. In order to be competitive on the market, they need to have a better control over the costs. Based on the aforementioned characteristics, it is assumed that the SME sector requires a cheap and innovative solution for business activities, such as accounting, sales or purchase transaction processing, controlling or payroll. The research involved the banks and bookkeepers as well. They are facing problems concerning the SME sector. The bookkeepers need to do repetitive tasks due to the paper or excel based SME administration. Almost all the transaction related processes done within a company should be done again by the bookkeeper, which results a repetitive processing of the same data. It increases the internal costs due to the time consumption, in the other hand the SMEs need to pay more for the service and due to the price sensitivity do not buy other services from the bookkeeper. In the banking sector the aim is to decrease the costs concerning the financial transactions. Instead of personal administration their aim is to increase the use of online banking services. The banks are important elements of the SMEs daily business by handling their daily financial flows and activities like transfers, cash, credit, investment management, and the data from the bank are used for financial forecasting and parts of the bookkeeping. 1.1 Problem formulation The project is expected to be partly financed by the EUREKA_HU_12 grant established by the New Széchenyi Plan. The requirement concerning the application is a publication about the project in an optional topic. The purpose is to fulfil the aforementioned requirement. The other purpose of the project is settling down the main elements of the business model of the TDP-ERP December

8 SME Cloud product launch. The complex product involves services provided by several partners; therefore the planning of the model is important before entering to the market. The goal is to evaluate the possibilities and create a basis for further agreements with the partners. During the development phase the bank agreed with the concept, but the final decision has not been made. There is no agreement with bookkeeping firms, and there is only verbal agreement with Libra Software about the ERP system, which indicates the requirement of creating a basic business model as a starting point of the agreements. In order to fulfil the purpose of the project, the following problems should be answered: What are the main values and benefits of a possible partnership? How should be the business model of the TDP-ERP SME Cloud product? 1.2 Delimitation The background of the project is a product development. The concept contains an ERP system, as one of the most innovative part of a package offered by a bank. Deep description of the ERP features is not a part of the project, since it is obvious nowadays in a business life. The features and the advantages of the ERP is well known, the project is focusing on how the complex product and its services can create value over the values of the single elements. Within the pre-development phase focus group interviews has been made to develop the product concept and measure the willingness of the bookkeepers participation. The analysis had positive results, therefore the high level of willingness and interest are assumed in the project without further analysis. The developed product is planned to be sold on the Hungarian market. However the Consortium contains the Polish Global Solution, the company is irrelevant in the product launch activities in the domestic market concerning the sales activities. There is an agreement to develop and launch the product on the Polish market based on the Hungarian results. This future plan is not part of the project. Global Solution is introduced in the project as key partner within the partnership as appreciating their quality and hard work in the product development. 1.3 Scientific approach Choice of scientific paradigm The chosen scientific paradigm is the social constructivism in the project. The explanation of the main reason in a simplified way is first to understand the reality, and in the second part of the project try to re-construct. The development of the business model first requires understanding the status of the SME sector, the specification of Granit Banks, the ERP developer s and the bookkeeper s business. On the ontological level the reality is social construction. The aim during the project is to know the reality, especially the areas for providing benefits not just to the clients but also to the partners in order to create the model with the purpose of establishing win-win situation. On the epistemological level the reality is acquired through the researcher, which is therefore relative. Through the research methods and techniques the researcher should gather enough information in order to understand the interests of the involved parties creating a basis for the recommendations. December

9 1.3.2 Choice of models and methods The basis of the project is desk research supplemented by personal interviews and internal communications. During the project the main research method is the qualitative, however for a better understanding quantitative data are used as well. The reason of the interviews is the reinforcement of the information gathered during the desk research. The business model development requires focusing on value creation, individual strength of the partners and their sales potential, especially the sales channel and the relationship between their clients. The analysis is structured as it follows in order to solve the problem: 1. Analysis of the SME sector The importance of the SME analysis is to find out the market size of the sector using segmentation and identifying the characteristics applying the PEST analysis. In order to find out the needs of the SME sector the analysis is done concerning the following research question: What is the size of the market? What are the main characteristics of the SME sector? 2. Analysis of the bookkeeping sector Within the product concept it is necessary to find the main characteristics of the sector. The analysis covers the relationship between the clients and service providers, the range of offered services and the elements of the sales strategy such as pricing and sales channels. During the analysis the theories of relationship management and Porter`s Five forces model is used to evaluate the competition. The research questions in this part are the following: How is the competition in the bookkeeping market? How is the relationship between the clients and bookkeepers? 3. Analysis of Granit Bank The complex product will be a part of the product portfolio of Granit Bank. It is necessary to analyze the strategy and the way of customer acquisition in order to find out if Granit Bank has the established sales channel for selling the product. The research questions in this part are the following: What is Granit bank sales strategy? What kind of channels the bank is using in order to acquire new clients? 4. Analysis of the ERP developers The analysis covers the characteristics of the ERP developers with a strong focus on the sales activities. It is important to find out whether the companies have sales channel and good customer base. The research questions are the following: What are the characteristics of the developers form the sales aspect? 5. Evaluation of relationship The final part is built upon the result of the analysis of the stakeholders from the aspect of relationship management. In this section it is necessary to analyse how the concept can be improved by an established partnership. In this part Brennan`s partnership approach is used to December

10 determine the values, benefits and the essence of the establishment. The research questions are the following: How the partners can create values and benefits by establishing partnership? What are the required activities in order to sustain and improve the partnership? 1.4 Reflection Quality Assessment and Source Criticism Methods and models assessment The analysis contains two main elements; it starts with investigating the individual level of the stakeholders. The second part is the analysis of the possible partnership. The first part is descriptive. The aim is to understand the main characteristics of the SME sector and business of Granit Bank, TDP-ERP, Libra Szoftver and the bookkeeping industry. In the first part segmentation is used to analyze the market potential regardless of industry. The SME sector is investigated also from the managerial behaviour in order to get a clear picture. The analysis concerning the bookkeeping industry focuses mainly on the relationship and the competition using Porter`s Five Forces model. Granit Bank is analyzed form the aspect of the growth strategy and the sales organization, while TDP-ERP and Libra from the core competences and sales activities. In the second part Brennans` partnership approach is used in order to analyze the values and benefits of the possible partnership. The approach is ideal to find out how the partnership creates values for both the partners and the customers. The findings are collected within a SWOT table. The applied models resulted enough information in order to understand the reality and based on it reconstruct the business model. Source assessment The sources for the analysis are gathered via desk research and interviews. The used online materials are from official entrusted sites such as KSH (Central Statistic Office), HFSA (Hungarian Financial Supervisory Authority) or other company websites (K&H, Granit Bank). There is no available statistical data concerning the competition on the IT market, which is a weakness of the project. The interviews were done with two acknowledged person from the bookkeeping industry. The credibility of their words is high. During the research and analysis in the online articles and projects the author found the same statements than during the interviews. It strengthened both the data and information gathered from online materials and from the interviews. Validity and reliability The research is mainly qualitative rather than quantitative. The results are valid; those answer the question on a high extent. The research provides a good basis for collecting the findings and makes the recommendation on a basis of those Process Reflection At the beginning of the project it was hard to find relevant topic concerning the SME Cloud Project, which can be useful for the company as well. The business model creation seemed to be a good choice, but due to the business secret it was not allowed to use lot of the previously gathered information. During the analysis I tried to use only relevant theories instead of adding December

11 too much which are irrelevant concerning the main problem. The value creation of partnership part was added only in the middle of the analysis into the problem statement, because I realized, that the business model cannot stand without it. After all the final result is close to my expectation, which was creating a business model as a basis for further agreement with the partners. The time management of the project was definitely wrong, the project was finalized more than 7 days after the planned deadline. 2. Product description The product is developed by the consortium of the Hungarian TDP-ERP and the Polish Global Solution. The product concept contains an ERP cloud system which includes online bank services provided by Granit Bank and bookkeeping services offered by external bookkeepers. The basis of the ERP system is the Libra S3 owned by Libra Szoftver designed for small and medium enterprises. The system has a modular architecture which enables the clients to get a customized product due to the requirements and company specifications. The TDP-ERP Cloud system is planned to have only the most important modules, the billing, invoicing, cash register, banking and stock modules. The speciality of the system is that the bookkeeping module can be accessed by the bookkeepers and the reporting and features of controlling by both, the client and bookkeeper. The implementation of the system does not require huge investments from the clients such as internal server. The ERP is running on cloud system giving the ability to the owners and managers to have access regardless of place. The only requirement is having a computer, tablet or iphone with internet connection. The concept is linking together the elements, and provides a common online user web interface for the different services, which makes easier solving the tasks of the company, and providing good control and knowledge about the actual results, and business performance. As an assumption in the complex, integrated product the users should only add a data once to the system, which will be processed in different modules of the ERP. During the business activities the added data can be viewed any time, and it will be used and modified during the processes. The data required for bookkeeping will be withdrawn from the database and from the bank to finalize bookkeeping, balance sheet, profit and loss account, income statement, VAT registry etc. The bank provides the relevant data and sheets to both the ERP system for reporting and to the bookkeeping firms. This solution reduces the process time, the costs, and gives a better control to the managers over the company. December

12 3 The main characteristics of the SME sector 3.1 SME categories According to European Law The category of micro, small and medium sized enterprises (SMEs) is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding EUR 50 million and/or an annual balance sheet total not exceeding 43 million (2003/361/EC). The quoted definition is the general description of the SMEs. Within the recommendation the micro, small and medium sized businesses are defined by the number of employees and the turnover or balance sheet total: Table 1: Displaying SME Categories Category Employees Turnover Total Balance Medium EUR 50 m EUR 43 m Small EUR 10 m EUR 10 m Micro 0-9 EUR 2 m EUR 2 m Source: Adapted from 2003/361/EC The used categorization in the Commission Recommendation was implemented by the Hungarian legislation as well. 3.2 Size of the SME sector During the analysis it is important to differentiate and calculate the amount of the registered and the active companies. At the end of 2011 the number of the registered companies were 1,79 million (KSH, 2012). This amount contains both the sole proprietorships and joint ventures. In 2012 the number of sole companies were 1,06 million and the joint companies were almost 0,6 million. The amount of the joint ventures started to grow compared to the sole proprietorship from the end of 2007 as a result of the reduction of minimum foundation capital from HUF 3 million to HUF 0,5 million concerning the limited liability company (Llc.) and from HUF 20 million to HUF 5 million concerning the companies limited by shares (Plc.). The ratio of the registered and active companies is approximately 30% of the sole and 66% of the joint companies. It results approximately active sole and active joint ventures. Table 2: Table Displaying the SME Sector in Hungary 2012 Sole Proprietorship Joint Ventures SUM Micro (%) 95,5 % 92 % Micro (nr.) Small (%) 0,5 % 6,6 % Small (nr.) Medium (%) 0,001 % 1,3 % Medium (nr.) Source: Own production December

13 From the aspect of establishment, closure and bankruptcy the sector shows stagnation in the last 7 years regardless the effects of the economical crisis (European Commission, 2012). This result does not mean, that the Hungarian economy responded in a positive way for the crisis. The number of the companies was stagnating before the crisis and during the last 5 years the government made several actions in order to keep the number of the companies such as maximizing the administration time for company establishment. After the regulation the establishment could have been done within 1 hour. At the beginning of 2012 this rule has been changed by requiring the prior control of the National Tax Authority in order to filter the founders who had previously tax debt or whose activities were against the law. This action has a positive effect on the sector; however it will decrease the amount of the established companies. 3.3 Characteristics of the SME Sector The support and development of the Hungarian SME sector is a never ending story in the politics. There have been many different attempts to improve reducing the competitive disadvantages of the sector without breakthrough results. The sector is facing several problems, such as low capitalization, lack of funding, circular debt and low efficiency and productivity. Often dealing with administration tasks, which exceeds their resources (KSH, 2011). The analysis of characteristics includes the political, economical, social aspects Political factors of the SME sector (Political) The government is aware of the importance of the SME sector. It actively supports the sector by establishing guarantee funds in order to bear the risks with the banks in case the SME cannot repay the loan. Another funding alternative is the grant, which contain European and Hungarian sources. Generally the SMEs can apply for grants with support intensity vary from 20 up to 100 % for innovation, research and development, organization development, market entry etc The positive aspect of the grants are that the investment is only partly financed by own resources The financial situation of the SME sector (Economy) In the Hungarian market, as general in the other European countries, the strongest player is the SME sector. On the labour market 74 % of the 2, 7 million people are employed by SMEs. The micro sized companies are dominating in the employment rate covering % of the overall employment, followed by the small and medium sized enterprises with % (KSH, 2011). The SME sector is important concerning the Hungarian Gross Value Added (GVA) with its 56% of the overall output. The difference between the sole proprietorship and the joint ventures in the sector can be shown by the revenue; the joint ventures resulted HUF billion, while the sole companies only HUF billion. Governmental intervention concerning the consumer debt in foreign currency hit negatively the SME sector in In the previous years the Hungarian banks offered CFH based loans to households with lower interest rate than the HUF loans. The crisis affected negatively the economy and increased the risks of repayment. The financial crisis in the euro zone led to increased sovereign risks, which in turn brought significant growth risk premiums and contributed to the major appreciation of the CFH against the euro ( Hungarian Financial Supervisory Authority, 2012). The amount of the debt dramatically increased, many households could not pay the loan. The government set the CFH-HUF exchange rate below the real market rate and let the households December

14 repay the loan on the basis of the fixed rate. Another regulation allowed the change of CFH loans to HUF loans using the above mentioned rates. The intervention had two results; first of all the bank sector suffered losses, second the households used their savings in order to pay the debt, which decreased the demand for goods on the market. The SME sector as suppliers is still suffering from the bad market environment and conditions. In the SME sector the capital supply is low, the companies are often underfinanced. In many cases the efficiency and productivity are low. Of course in the financial situation the mentioned lack of managerial business knowledge has also a negative impact. The Hungarian companies are producing mainly to the domestic market; therefore the unstable economy has also a bad impact on the sector. The SMEs are normally financing themselves internally by reinvesting the yearly profit, because it is hard for them to get a bank loan. Due the negative market conditions and concerning the size and management knowledge of the micro and small companies, the banks evaluate the lending as high risk activity (KSH, 2011) Managerial characteristics (Social) In the SME sector it is common that the owner cannot differentiate the company interest with the own interest. The company income often viewed as a personal. It means that running a business is always self-interest; the goal is to increase the personal income instead of the revenue of the company. It affects negatively the basic financial management knowledge by lack of differentiating the accounting and financial approach. The main objective of the owners is to increase the expenses and reduce the invoiced revenue in order to pay less tax and increase the grey income (Harkai, 2012). This management attitude has a negative impact on the economy by strengthening the black market. The mentioned behaviour also affects the performance measurement and results companies with limited or zero profits. The background of the problem is the lack of managerial and business knowledge in the sector. Normally a company is viewed as temporary cash cow without long run planning and strategies. In the business life a common mindset to optimize the resources and decrease the costs, however in the Hungarian SME sector, especially in the micro segment the aim is to increase the costs in order to reduce the tax to be paid. Some of the SMEs are running without strategic or financial plans. Often it is experienced that managers and owners have a limited knowledge of the actual business performance of the company. This affects negatively the planning, managing and decision making activities (Demcsak & Harkai, 2012). The lack of business knowledge also negatively affects the liquidity of the companies, which often ends up with insolvency or bankruptcy. This is one of the main reasons of the circular debt in the economy. According to the theories of management planning and control systems, one of the main problems within the SME sector can be demonstrated. The main purpose of the management control systems to use the resources and assets in an effective and efficient way. The control activities are only small parts of the overall system. First of all the managers should know the company, its capabilities and resources, which gives a basis for strategic planning. Of course a good strategy requires knowledge about both; the external and internal characteristics and elements. Some of the Hungarian companies, especially the micro and small enterprises are already failing at the first step by having limited knowledge of the company (Balazs & Guangyu, 2012). The business strategy is always designed on the basis of actual or present status of the organization, however the contents of the strategy is always something predicted or forecasted; a December

15 wanted future direction and status. In order to increase the effectiveness of the strategy, managers often add objectives and targets, which can be measured during the period of the strategy. Those can be budgets, forecasted or targeted results etc... The essence of the control system is measuring the results, evaluating those according to the planned and initiating actions in order to react due to the variance between the actual and the planned. It is more than obvious that the strategic planning and management control activities require elementary business knowledge or intelligence, which is not really common in the Hungarian SME sector ERP systems in the SME sector (Technological) Within the segment of large firms, the ERP usage is covered 100%, in the SME sector it is only 40% (Toth, 2009). The ERP penetration is approximately 68 % in the medium, 21 % in the small, and 4% in the micro sized enterprises sub-sectors. Figure 1: Frequency of ERP usage within the SME sector Small Enterprises Medium Enterprises Micro enterprises Source: Own production It can be assumed the frequency of using ERP system is increasing by the size of the enterprises. The cause is related to the growth of the organization and the internal characteristics such as financial background or the amount of different business processes. A small or micro companies cannot afford and do not require complex ERP solutions. In the medium sized sub-sector the companies are using integrated solutions for covering 5-6 processes, in the small sized subsector the result is only 1-2 (Fekete, 2009). 3.4 Conclusion of SME sector The SME sector has a strong economic power in the Hungary. There are more than active SMEs, which gives a big market potential. In the last few years the financial crisis affected negatively the sector. The SMEs are producing mainly for the domestic market. The private sector used their savings for paying back the loan which result a decrease in the market demand. The government tried to intervene in order to strengthen the competitiveness of the sector with insignificant success. The sector depends on the bank loans and different EU funding schemes in order to finance the investments. The managers are lacking business knowledge in the SME December

16 sector especially in the subsector of micro sized companies. The ERP penetration within the micro and small sub-sector is relatively low, which is definitely positive concerning the SME cloud project. 4. Bookkeeping and accounting The difference between the meaning of bookkeeping and accounting should be described in order to have a better understanding. From the side of the activities, basically there are four entities: Data register: Person who adds and registers the data in the bookkeeping system concerning the transactions of the companies. Bookkeeper: The bookkeeper is responsible mainly for making reports, books and ledgers according to the Act C of 2000 on Accounting. Accountant: The accountant has wider tasks and responsibilities than the bookkeeper. The accountant is analysing and evaluating the financial data and creates information from those. In a medium size company the accountant deals with financial strategies, costing systems or controlling. Auditor: The auditor is examining the accounting system and the outputs from the aspects of validity, reliability of the information and the activities from a legal point of view. In the Hungarian system there are internal and external bookkeepers and accountants. It requires the differentiation and explanation of the two systems. 4.1 Internal bookkeeping and accounting The internal bookkeeping contains all the activities concerning data registry, accounting and bookkeeping within the company. Depending on the size of the organization the tasks of data registry, bookkeeping and accounting might be done by a single or several persons. On the Hungarian market these kinds of companies are mainly using ERP system in order to reduce the cost and other resources of administration activities. The internal bookkeeping and accounting is not relevant for the introduced SME product. 4.2 External bookkeeping The micro and small sized enterprises mainly outsource the bookkeeping to external bookkeepers. The data registry and accounting is done internally, and the reports, books, ledgers are created by the external bookkeeper according to the legal requirements. As a matter of fact within the sub sector of micro and small enterprises the spread of ERP systems are very low; only approximately 4-5% of the active companies are using those (Toth, 2009 p.1). It has a negative impact on the administration processes, because first the invoices, bills are manually (paper based) registered within the company, and the transactions registered again at the external bookkeepers in order to create the reports, books and ledgers. The accounting related activities are mainly done by the manager or owner of the SME, but as it has been written due to the low level of business and managerial knowledge the main activities such as financial planning or control are basically undone. December

17 4.3 The range of provided services The external bookkeepers are providing the companies mainly with the basic services required by the law. All the companies in Hungary should create statements about the operations, asset, financial and income situation at the end of each business year (2000/C, 2012). The format of the statements depends on the NET Income, Balance and number of employees. According to the regulations the bookkeeping activities should be done by authorized and registered bookkeepers or accountants except for companies having less than HUF 10 million Net income in the previous 2 years. The audit service is compulsory for companies using double-entry bookkeeping, except the net income was under HUF 200 million, and the number of employees was less than 50. The government is planning to increase the amount of minimum net income for the next few years, which will reduce the amount of companies require compulsory audit. It will have an effect on the bookkeeping market, because some of the auditors might start doing bookkeeping also Provided services of the external bookkeepers The bookkeepers are providing basic and additional services. The basic services mainly cover the requirements given by the law concerning SME administration obligations of reporting and tax admit. Figure 2: Bookkeeping services Source: Own production The provided service depends on the service contract. Often the SME clients require more for the price than the basic services, especially consultation and business advices. The bookkeepers defend themselves by providing the services described in the contract, not more and not less. For additional services the client should pay extra. Often the clients turn to the bookkeepers before establishing a company in order to get relevant information concerning the possible company forms and the tax liability (Harkai, 2012). 4.4 Market size of the bookkeepers The market size of the registered and authorized bookkeepers is approximately in Hungary, there are companies doing bookkeeping as main business activities (NGM, 2012). According to the law the authorized bookkeeper should have an accounting related diploma and 3 years of experiences within the field of bookkeeping, accounting or controlling. In order to follow up with the legal changes concerning the accounting rules, the registered December

18 members should participate on a compulsory accounting course once a year (200/C, 2012). The registration of the bookkeepers is done by the Ministry of National Economy. According to the amount of active companies and the bookkeeping firms, there are approximately 20 companies for a bookkeeping company in average. This result however does not show the clear picture of the market, because there are many unregistered bookkeepers working on the Hungarian market (Harkai, 2012). The result was calculated from the number of active companies, which contains the enterprises with less than HUF 10 million net income. These companies, at it has been written before, does not require registered and authorized bookkeeping services, often the owner or one of the employees is dealing with the bookkeeping and other administration related tasks. It can be concluded that less than on average a bookkeeper has less than 10 clients in average. In practice the number of clients depends on many factors like type or size of the company, financial details, number of employees, number of invoices, recipes etc... (Cieleszky,2012). 4.5 Pricing strategy Before the analysis of the pricing it is important to differentiate the two most common types of bookkeeping companies. On the Hungarian market according to the bookkeepers there are dabblers and bookkeepers. (Harkai, 2012) The first one is registering the transactions into the book, and simply withdraws the different reports from the bookkeeping software. The aim is to reduce the time spent on the bookkeeping activities for the companies, regardless the quality. The real bookkeepers are doing quality bookkeeping; the transaction registering is only the basis of the real task. The aim is always to reduce the amount of tax obligation, and provide the authorities and the owner with correct reports according to the legal requirements. This is why it is often said that the business performance of a company always depends on who is doing the bookkeeping. The theoretical and practical knowledge concerning the accounting law is important within the bookkeeping business. The bookkeeping companies are using special pricing. The main factors affecting the price is the time spent on the service activities and the sympathy of the owner (Harkai, 2012). Of course other factors are also relevant such as receiving the data on paper base or by ERP system, but normally these are the matters of time consumption. The sympathy is an uncommon specialty compared to other businesses. The reason is basically the establishment of partnership between the company and the bookkeeping firms, which will be described in the next section. There are two main price setting strategies in the industry; the dabblers or low-price companies mainly try to keep the price as low as possible. They are using fixed, menu-based pricing depending on the company form, number of invoices, recipes per month. These kinds of companies are taking strong online marketing effort in order to acquire clients (Cieleszky, 2012). The price of the basic bookkeeping service starts from HUF 5 000, which implies that high quality cannot be expected. In order to keep the price low, the companies are reducing their costs and the time spent on the activities. The bookkeeping due to the saving has a low quality and it is more transaction recording then a classical bookkeeping. Often the office is placed at the private residence or in a garage in order to reduce the costs (Harkai, 2012). The other type of bookkeeping companies provides high quality services to the clients. The basic monthly fee depends on the financial results, size, form and industrial category of the SME. The price is not fixed; the bookkeeper is arbitrary setting the price by considering the required time consumption of the service. The behaviour and sympathy of manager or owner of the company has a huge impact on the final price. Often the bookkeeper is overpricing the service in case of December

19 lacking sympathy (Harkai, 2012). This is a method of customer relationship management, where as a starting point it is important to find the right customers. These kind of bookkeeping firms do not spent huge marketing effort in order to acquire new clients. Normally the satisfied clients recommend the service to other businesses; which enables the bookkeeping firms acquire new clients in a way of word by mouth marketing. 4.6 Relationship and partnership The typical client bookkeeper relationship is built up on trust, which is also the basis of the long term commitment. Often it is said, that the main reason of the close relationship is that the bookkeeper knows all the financial details and tricks done for the client concerning the reports, books, ledgers or tax admit, therefore the owner does not want to take the risk by leaving the bookkeeper (Herczeg et al. 2012). The clients are cancelling the service contract in case of mistakes in the bookkeeping, lack of communication and consultancy, bad overall quality of the service and loss of trust (Demcsák & Harkai, 2012). Due to a research 95 % of the SME owners would change the bookkeeper in case of loss of trust, which clearly shows the most important element of the relationship (Herczeg et al., 2012). The other reason of the long term relationship is the aspect of quality. There is no basis for comparing the services on a basis of quality. Until the SME is not charged by the tax authority because of mistakes in the reports or late delivery, the bookkeeper is assumed to provide a good service, even if there are quality differences concerning the outputs (Harkai, 2012). The practical and theoretical knowledge of the bookkeeper affects the quality of the output and the amount of taxation. In this manner an SME can save a lot finding the ideal bookkeeper. There is no basis for measuring the quality on quantitative data, which is the reason why the SMEs are finding the bookkeepers by word-by-mouth (recommendation of business partners). The relationship between the SMEs and the bookkeepers is strong with the aim to create partnership. The companies rely on the work of the bookkeepers and their advices concerning taxation, legal or financial problems. The knowledge of the bookkeepers is useful for compensating the lack of business and managerial intelligence of the owners and leaders of the SMEs. The described partnership is not that simple as it has been described. There is a misunderstanding concerning the pricing and provided services between the SME and the bookkeeper. The owners and managers expect consultancy and advices for the price they are paying for the bookkeeping; however those are additional services, which are not part of the basic price. The service contract clearly states what the price covers, but still the owners require more services. This is one of the weaknesses of the partnership. According to theory of creating customer relationship management the bookkeeping companies are trying to select the most valuable customers. The evaluation is done basically on the financial aspects such as profitability or the cost of serve the clients (Huth&Speh, 2010). In this manner the bookkeepers often decide not just on financial aspect but also on the subjective personality as it have been described at the pricing strategy. However it sounds a bit strange, by thinking it over the bookkeepers would like to establish long term relationship between the clients. The long term commitment increase the potential future benefits for both of the parties, therefore it is reasonable to eliminate those clients who are unable to fit into the requirements of cooperation. December

20 4.7 Competition on the bookkeeper market The competition on the market is analysed using Porter s Five forces model. The competition in the industry is affected by potential entrants, bargain power of the buyers and suppliers and substitute services. The model is useful to demonstrate the specialities of the bookkeeping market. Figure 3: Competition in the market Potential Entrants Suppliers Competition within the Industry Buyers Substitute services Source: Adapted from Porter (2008) Force 1: Barriers to entry The entry is easy and requires low resources. According to the law in order to work as a registered and authorized bookkeeper the requirement is accounting related education and 3 years of experience. From the cost aspects at the beginning the office can be located at the home residence of the bookkeeper. The biggest expense is buying the accounting software, which consists of basic entry fee and monthly payment for the licence. As a summary entering to the market is quiet easy and does not require large investments. The loyalty of the clients is high; therefore starting a bookkeeping company is done by penetration pricing strategy offering the services at fixed low prices or by taking the existing clientele from the previous bookkeeping firm. Due to the mentioned main characteristic; the relationship is strong between the bookkeeper and the client who are following the person in case of opening a new company. Force 2: Threat of substitute service The offered main services of the bookkeepers are the same. Those differs only on the basis of price and quality, however the last one is hard to measure. The bookkeeping firm is bearing the switching cost in case the client is changing the service provider. In practice it is easier for the bookkeeper to redo the books, reports and ledgers in the middle of the financial year than continue the work of the previously contracted company. Force 3: Bargaining power of the clients The clients are looking for quality or price. The low price bookkeeping companies are mainly providing services to micro sized enterprises, while the quality is important for the small and December

21 medium sized businesses. The price is only fixed at the low price bookkeeping firms, while the other service providers evaluating the price based on different aspects. The clients by evaluating the competitors often ask for recommendations from the business partners in order to find the ideal bookkeeper and to be sure concerning the quality. The clients do not change often bookkeeping company, because of the built up trust and also evaluating the risks of changing for lower quality service. The client migration is not common in the industry. Force 4: Bargaining power of the suppliers On the market the bargaining power of the suppliers is strong; the bookkeeping companies can afford to evaluate the client and pricing the service on a basis of client behaviour. However there are more than registered bookkeepers and registered bookkeeping firms in Hungary, and the offered services are the same the bargaining power is strong. This is a deviation from the other industries. As it has been written before, even if there are other companies offering the same service, due to the recommendation from business partners the SME does not want to take the risk to try an unknown bookkeeping company. There are attempts to somehow measure and improve the bookkeeping companies from the aspect of quality. The Association of High Quality Bookkeepers continuously makes success by providing trainings, education and newsletter in order to increase the quality of the member companies. The association has more than 120 registered members. This number rapidly increases month by month (Harkai, 2012). Force 5: Competition within the industry The competition within the industry is specific; there are lots of companies providing standard services which make strong rivalry between them. Within the industry there is no clear differentiation strategy in a manner of differentiating the services from the others. The aim of the quality bookkeepers is to increase the client satisfaction. Some of the bookkeeping firms does not even have a website, and do not spend on marketing (Cieleszky, 2012). The word-by-mouth is enough marketing for them in order to acquire new clients. The companies are put efforts on keeping the existing clients, however on the other side the clients are rarely changing the bookkeeping firm. 4.7 Conclusion of the bookkeeping sector The bookkeeping is an important element of the SME administration activities. Due to the legal requirements there are services can only be provided by the bookkeepers such as making reports, books, and ledgers. The sector offers other services as well, since they are financial experts. However they offer the same services, those differ by price and quality. The competition in the market is strong. Some of the bookkeeping companies try to differentiate themselves by the quality of the service; however it is hard to measure it. The companies take huge effort to have a good reputation, because rest of the new clients are acquired based on the recommendation of the existing ones. There is normally a strong relationship between the bookkeeper and the SME, switching service provider happens only in case of strong dissatisfaction. In general the SMEs do not want to take the risk of finding a new bookkeeper, since the quality is unknown; therefore there is a risk to change the bookkeeper for another one with lower quality. There is a need in the sector for differentiation and a potential to offer extended services such as consultancy. December

22 5. The characteristics of the Hungarian bank sector The economic crisis affected the banking sector also. In the past 13 years 2011 was the year, when the sector suffered first time losses. The reason of the negative performance was the repayments of foreign mortgage loans on a fixed HUF-CFH exchange rate, the rising of bad loan provisions and the implemented industry taxes. The banking sector reacted on the market changes in different ways. Some of the banks decided to reduce the costs by closing branches, and started to follow the trends and focus more on developing the online banking solutions. Due to the fact that only approximately 8,9 per cent of the Hungarian bank system is owned by the Hungarians, it is obvious that the foreign owners like UniCredit Group SpA, Intesa Sao Paolo SpA, Raiffeisen Bank International AG or Erste Group Bank AG are more cautious investing or developing radical new solutions and services in Hungary (Bloomberg, 2012). The decline in the Hungarian economy hinders the demand for financial products, and in this way affects negatively the profitability, quality of the portfolios of the banks, and making the financing possibilities more limited and expensive. As a matter of fact it has a negative impact on financing especially lending to the SME sector. In the private sector the result of the crisis, especially the repayment of the bank loans, and due to the decreasing real income by the inflation decreasing the consumption on the market. The effect of this in the bank and SME sector is the decreasing SME investment activities which results decreasing lending activities for the banks (HFSA, 2012). As a result of the declining lending services it is important for the banks to find new services and acquire customers or reduce the internal costs in order to maintain the profitability or at least reduce the losses. Within the industry the banks follows the international trend of providing online banking solutions, and in a way switching from personal administration to online. This way is definitely reduces the overhead costs of the banks by requiring less branches. All the banks in the Hungarian market offer e-banking solutions for private and business clients. For the larger enterprises using SAP, Oracle or Microsoft ERP system it is possible to connect directly to the banking interface and execute the transactions. The rest of the SME sector is still managing and executing the transactions manually. 5.1 Strategy of Granit Bank Granit Bank is a fully Hungarian owned bank placed in Budapest. The bank is part of the Demjan Group of Companies. In 2010 the Magyar Tőketársaság Zrt. (Hungarian Capital Company cplc) bought the Milton Bank. The new management implemented new strategy with a main focus on the SME and private sector. The bank has only one branch; however it built up partner relationships with companies like Brokernet, KPMG, Hungarian Development Bank Plc. which are acting on the market as banking agents (Granit Bank, 2012b). The main reason of having one branch is a cost saving decision and the overall philosophy which says; provide the clients with more service cheaper than the competitors. According to the one-branch-strategy it is quiet important to improve the online solutions, and implement better or cheaper services to be competitive with the other banks in Hungary. The bank is focusing on acquiring customers; the applied pricing strategy is the penetration pricing. The charges and fees of the banking services are the lowest on the Hungarian market. The prices might be raised when the bank gained enough market shares. Granit Bank tries to differentiate the products and services and focus on innovation. It was the first bank implementing real time virtual customer support using web-cameras. The strategy is continuously focusing on IT development, and creating new services for the customers and clients. December

23 5.2 Pillars of growth Strategy of Granit Bank The strategies of the banks are similar to each other. The key element is increasing the number of customers like other businesses. The difference at the banks is the type of customer from the aspect of acting as a creditor or debtor. As a basic model the bank gains capital from the clients and lending those to others. The profit is the difference of the interest of deposits and loans. It is very simplified description of the banking activities, but stands here for a better understanding of customer acquisition. A newly established bank first takes the effort to gather as many clients as possible, in order to start investing or lending. The growth strategy of Granit Bank has three pillars: Innovative solutions, Lending to focused business segments, and Client acquisition. Figure 4: Pillars of Gránit Bank Growth strategy Innovative solutions Growth Strategy Customer acquisition Focused segments Source: Adatpted from Hegedüs (2012) Innovative solutions The innovative solutions has two main aspects; first by developing new online products the onebranch disadvantage can be reduced, second the services are developed based on the market demands. The innovation activities only concerning IT development. The bank does not have IT developer. The product development is done by subcontractors. The bank buys only the license of the product; the further development and maintenance is the duty of the subcontractor. Customer acquisition The main objective of the bank is increasing the amount of deposits. The penetration price strategy serves this pillar by providing the regular banking services for lower cost than the competitors. The acquisition is hard task even if the bank offers innovative solutions at low price. The legal background of personal presence at concluding the banking service contract requires increased number of banking agents. Lending to focused segment December

24 In order to keep the high quality of the lending portfolio the bank targets reliable SMEs, and stable large sized organizations with governmental guarantee. The lending as it has been written requires a careful evaluation of the clients. The present status of the SME is evaluated on the basis of different financial ratios from books, reports and ledgers made by the bookkeepers. 5.3 Sales channels of Granit Bank The bank acquires customers through different sales channels. First of all Granit Bank has one branch which also works as headquarter. In November 2012 a new customer centre was opened in the WestEnd City Centre. The features of the centre are limited and not similar to a regular branch; it does not offer cash related and other classic banking services. The future client can get information about the services, and conclude banking agreement within few minutes. The other sales channels are the contracted companies which are acting on the market as banking agents such as Brokernet or KPMG. The client visiting the office of the previously mentioned companies and getting information or can conclude banking agreement. The partner businesses are receiving fixed commission after each new client. The final channel is acquiring clients by phone call or online application. In these cases a bank representative is visiting the future client at his/her workplace or home in order to conclude the contract (Granit Bank, 2012). Due to the law it requires personal presence and verification for opening a bank account and establishing the agreement. This is the main barrier of the fully online expansion and customer acquisition strategy of Granit Bank and other banks. The bigger banks such as OTP, Raiffeisen, Unicredit, K&H or GE have the infrastructure for acquiring new customers by local branches at several geographic locations in Hungary. K&H bank has more than 200 (K&H, 2012) while OTP has more than 400 (OTP, 2012) branches in Hungary compared to Granit Bank, which has only one. 5.4 Channel expansion According to the Act on Credit Institutions and Financial enterprises, there are two types of activities. The first group contains financial services, which can be provided only by financial institutions. The second is the supplementary services including the banking agents. There are two types of banking agents: a, The agent acts on behalf of the bank. The bank is liable for the activities of the agent, who is providing financial and supplementary services. b, The agent is promoting the financial and supplementary services provided by the bank. The bank in this case is not liable for the activities of the agent. The main purpose of using agents in the bank sector is to increase the financial related activities and give the possibilities to the bank to acquire more clients. 5.5 Conclusion of the bank sector and Granit Bank The Hungarian bank sector was hit by the economic crisis. The banks acted in different ways on the effects of the negative market atmosphere, but for all of them the cost reductions became an important element. Granit Bank is relatively new on the market. The main objective of the bank is to acquire new clients; however it has only one branch. The bank offers innovative online solutions to the targeted segments and low prices due to the penetration pricing strategy. The customer acquisition is done by online advertisements, internal sales representatives and banking agents allowed by the law. The bank does not have extended sales channels, which is a December

25 weakness concerning the fact, that the SME Cloud product is planned to be a part of the Granit Bank portfolio. 6 IT sector in Hungary On the Hungarian market both the international and national ERP developers sell products. The large international IT companies such as Oracle, Microsoft and SAP covers the ERP market in the large sized companies sub-sector. The key players in the SME sector are SAP, Progen, Microsoft, Epicor, Libra Szoftver, Infor, QAD (Fekete, 2009). Due to the fact of the amount of micro and small firms there is a good market potential within the SME sector for small ERP systems with modular architecture. The IT industry has a good sales perspective in Hungary. Approximately 68% of the companies within the SME sector are planning development investments in Concerning the intention of the investments the IT developments are on the first place since about 30% of the SMEs are planning such an investment (K&H, 2012b). 6.1 Financing ERP implementation The main barrier of the ERP implementation in the SME sector is the price. The sector is price sensitive concerning the costs of developing the IT infrastructure. A regular ERP system requires additional costs such as hardware costs (servers), additional wages (IT developers), and the expenses concerning the training of employees. In Hungary the IT implementations are financed mainly by three different sources: own source loans EU/Governmental grants The most popular of the sources is the EU/Governmental grants offered within the New Széchenyi Plan (hereinafter referred to as NSZP). The action plan is ending in The main purpose of NSZP is strengthening the economy and increasing the employment. Within the plan several grants were established concerning the development of business environment. The SMEs can apply for grants covering from 25% to 70% of the overall expenses depending on the company size, financial background and the expected increase of employee rate and revenue. Companies prefer the grants compared to the bank loans and -due to the liquidity matters within the sector- to own sources. The micro and small sized enterprises do not require the implementation of expensive ERP systems. Even if they choose the grants to finance the implementation, they can use only limited features of the system. The implementation of ERPs which are not suited for the companies can easily turn into failure. Other aspect is the cost of maintaining the system, which often places a heavy financial burden on the SME. The IT sector recognized the special needs of the micro and small sized companies, and started to develop modular systems, which can be easily suited for the specifications and characteristics of the SMEs. Concerning the financial aspects the companies can get the system or the selected modules for a one time fixed price or for entry/installation fee and monthly license fee depending on the pricing. The technology innovation in the IT industry enables the SMEs reducing the costs of purchasing and maintaining the hardware by using cloud solutions. The cloud ERP systems do not require expensive implementation and internal server background. The only costs appear over the December

26 purchasing price or license fee are the education of the employees, computers and internet subscription. The user can access to the system from anywhere at any time; the only need is the device and internet coverage. The ERP developers recognized the cost saving function of the cloud system, and started to offer the existing or new systems on the cloud. 6.2 Software developers of the SME cloud system The product developments contain three stakeholders; the international consortium of TDP-ERP and Global Solution and the subcontractor of Libra Szoftver. The design of the product concept and the specifications are made by the consortium on the basis of the Libra 3s ERP system developed by Libra Szoftver. The decision of using an existing ERP system was the time and cost concerns. It is expensive to develop a new system from the beginning, and contain wide range of risks Libra Szoftver More than 600 companies are using the LIBRA 3s. Libra target segment is the small and medium sized enterprises in all industries. The main characteristic of the system is the flexibility; the ERP is built up by modules which can be configured due to the specialities, characteristics and requirements of the enterprises (Libra, 2012a). Libra has more than 28 years of experiences in ERP system development, which makes them a strong market player in Hungary. Libra provides IT systems both to the SME sector and to the bookkeeping firms. The bookkeepers use the software to create the books, reports and ledgers for the clients. The customer acquisition on the SME sector has a straightforward effect on the sales of the bookkeeping software; the more companies are using Libra ERP, the more bookkeeping firms purchase the bookkeeping system in order to reduce the time consumption of the work. The connected systems increase the efficiency and effectiveness of the external bookkeeping activities. Libra recognised the importance of the price sensitivity within the SME sector. Following the IT trends the company is planning to develop cloud system in order to lower the costs for the clients Sales channel of Libra Szoftver Libra Szoftver has a creative and efficient marketing and sales strategy. The company established partnerships with Hungarian universities, colleges and other education institutes. The content of the agreements are educating the students for using the Libra ERP and bookkeeping systems. At the moment more than 9000 university students learnt the features and use of Libra S3 system which is the basis of TDP SME Cloud System development (Libra, 2012c). Behind these agreements the company planned the future sales strategy. According to the change management theories and concerning the barriers and difficulties of the ERP implementation, the managers and other employees who learnt the Libra S3 system in the school might chose to use it at the company as well. December

27 The sales channel of Libra Szoftver has 3 pillars; sales representatives, distributors, partner ERP developers. Figure 5: Sales channels of Libra Szoftver Libra Szoftver Sales representatives Distributor chain Partner IT developers Source: Own production The sale is mainly done by the sales representatives, who are working as ERP consultants as well. The sales of ERP require deep knowledge of the system, but also the ability to find and analyse the needs of the clients. Libra built up partnership with 14 distributors around Hungary and with 11 software and ERP developer, who are competitors on the market. The reason of partnering with competitors is the essence of the Libra ERP system, which is built up by modules. Due to special client requirements, it is cost effective to buy a module or sub system from competitor than develop a new one for a single buyer. The ERP developers only sell exact Libra modules, not the whole system. December

28 6.2.3 Consortium of TDP-ERP and Global Solution The consortium of TDP-ERP and Global Solution designed an innovative integrated solution involving all the key elements of the financial administration; the bank and bookkeepers. The product concept contains banking and bookkeeping services together with an ERP system for the SMEs. Figure 6: SME cloud concept Bookkeeping services Banking services ERP system SME cloud concept Source: Own production The aim of the consortium is to develop the product and enter to the market in According to the agreement between the software developers, the license of the modified ERP will be owned by Libra Szoftver, which is getting a licence fee after each acquired clients. The owner of the know-how of the service based product is the consortium. TDP-ERP is the project owner and main participant in the EUREKA consortia project. The main activities are ERP system development, information technology development and consultancy. Within the field of ERP development, TDP-ERP has a wide range of knowledge and experiments in product customization, operation and maintenance of network infrastructure and ERP implementation. The company provides services in several industries to SMEs and large enterprises like TriGranit Development Ltd., Tököl Airport Zrt, Euroinvest Ltd, Bakony Power Plant Ltd., WestEnd Property Management Ltd. or Badacsony Winery Co. TDP-ERP is presented in seven countries (e.g. Romania, Slovakia, Slovenia, and Croatia), the largest non-domestic market is Poland. TDP-ERP gathered relevant experiences in different ERP system design. The company has a good knowledge of the IT market in Hungary, especially the competition, the range of the offered products and the demand of the SME sector. The company proficient in project management; the used method is a five stage cycle covering the main activities, which is part of the general mapping, comprehensive analysis, design, development, implementation and maintenance. This ensures that the product follows, and often even foregoes the needs of the SMEs due to the environmental changes. TDP-ERP had five employees at the beginning of the product development. The project required more human resource; therefore six more employees were hired. The number of the staff was dramatically increased for the duration of the project, which ends up in December The plan of TDP-ERP is to assign the new employees to tasks related to product launch and administration after closing out the project. December

29 6.2.4 Sales channels of TDP-ERP The main portfolio of TDP-ERP is to provide services such as system development or maintenance. The company was established with the purpose of ensuring the IT needs of the Demjan Group of companies. Almost all the clients are affiliates. In this manner TDP-ERP can be seen as an IT department of the Demjan Group. In order to get the SME Cloud Product to the market it is necessary to establish the sales channel, which is resource consuming. The company would be basically a new entrant on the ERP market which requires hiring sales representatives, agreeing with agents or establishing a distribution channel. It is necessary also to spend on marketing activities as well. 6.3 Conclusion There is a good market potential within the IT sector. Approximately 68% of the companies within the SME sector are planning development investments in Concerning the intention of the investments the IT developments are on the first place since about 30% of the SMEs are planning such an investment. The sector is price sensitive, the micro and small sized enterprises cannot afford the implementation due to the high expenses. The industry recognized the needs of cheap but quality system, therefore the development is tend to move to the direction of cloud computing, which does not require internal server base. The other positive aspect of the cloud system is the mobility, it can be accessed from anywhere at any time having internet connection. Concerning the ERP developers of the cloud project, only Libra Software has an established sales channel in Hungary. 7 Establishing partnership The basis of the successful product launch is the quality of the established partnership. However the development phase of the TDP-ERP SME Cloud project contain a pilot version of product launch and testing, it is important to build up the business model and strengthen the relationship between the partners and clients. The essence of the relationship building is that the transaction costs are reduced, the quality is improved, while the management costs stays on a lower level (Egan, 2011 p 189). The positive side of the external collaboration the different knowledge, skills and other assets what the partners are adding to the jointly developed and launched product. This affects not just the internal business aspects, but also the value creation to the clients. The total value of the developed product is more than the value of the added services individually. The difference is given by the collaboration. According to the theory of Brennan the members of the partnership acquire different short and long term benefits from the collaboration. Without attempting to be comprehensive there are wide range of benefits, such as the aforementioned cost advantages, especially the marketing and R&D costs, fast response on client needs or increased possibility to get to the market by establishing several sales channels (Egan, 2011 p.196). Within the product launch the aim is to establish horizontal relationship between the partners and clients in order to maximize the benefits. The result of the analysis clearly shows the individual strength and weaknesses of the partners and the SME sector. The analysis of the possible partnership is done using the partnership approach of Brennan (Egan, 2011 p.196). December

30 7.1 In depth understanding of the customer`s requirement The partnership enables Granit Bank, the software developers and the bookkeepers to share the knowledge about the SME sector and their needs. According to the trust between the bookkeepers and the clients, there is a good possibility to gather and share relevant information about the main business activities, the barriers of financial developments. Since the clients are honest with the bookkeeper about their problems needs to be solved, those information can be used by the bank to develop new financial products suited for the general needs of the SME sector. Libra Szoftver and the consortium of TDP-ERP and Global Solution can also use the information from the bookkeepers for product development. However the companies are close to their clients by giving them IT advices, maintaining IT help desk or taking part in the ERP implementation, the information of the needs concerning the SME sector from the bank or the bookkeepers are useful for product development. The bank has a good knowledge about the financial situation of the macro economy and the financial situation of the SME sector. This information is important to develop the pricing strategy on the basis of the financial background. 7.2 In depth understanding of the partner`s requirement The understanding of the partner needs is not part of Brennan`s approach, but it is required in order to maintain the horizontal collaboration by knowing the requirements and providing possible solution for those. The core business of Granit Bank is increasing the number of customers and simultaneously the deposits, and lending money to the clients. The objective of the bank is to maintain the quality of the lending portfolio. The decision concerning the loans is done based on the financial background and business plan of the SME. The bookkeepers are key element in this evaluation, since the ledgers, books and reports are created by them. There is a strong dependency between the bank and the quality of the bookkeeping services. The bank prefer having clear information of the actual financial performance and the future forecast and targets and also an entity with good business and accounting knowledge as security for the positive outcome. The business knowledge and intelligence of the SME managers and owners are low. The bookkeepers have the ability to provide them with advices concerning the financial related activities. A quality bookkeeping service in this way can easily affect positively the lending activities of the bank. It creates benefits for the bank by having a good bookkeeper who creates realistic books, ledgers and reports, and provides the SME sector with valuable and useful advices. In the other hand the SME require quality from the bookkeeper, since it is hard to measure, partnering and being recommended by the bank can provide the bookkeepers with extra value and quality towards to the clients. Libra software has existing sales channels towards to SMEs and bookkeepers. The company is focusing on adding values to the clients; therefore it has agreements with business and financial consultancy and business development firms. In order to strengthen the relationship between the clients, Libra Szoftver offers more than ERP system and related IT services. The complex SME product enables the company to offer the clients bookkeeping and banking services. The benefit of the new product is that Libra Szoftver can target new customer segments, the micro and small sized companies, who do not require complex ERP system, only modules for 3-4 main activities. December

31 7.3 Reduction or elimination of cost of sale From the aspect of sales channels all the partners, Granit Bank, Libra Szoftver and the bookkeepers are interested in acquiring new clients. On the individual level each company has their own sales strategy and established sales channel. The establishment of partnership might offer benefits in a way of increasing the sales in a more efficient way by using the partners sales channel to get the product to the market. The product as it has been mentioned before will be the part of Granit Bank portfolio, but it does not mean necessarily that only the bank can sell the product on the market. The regular sales activities are focusing on acquiring new customers. According to the Leaky bucket theory the businesses are losing their clients by focusing too much on acquiring new one (Egan, 2011 pp.73-74). The strong focus on sales activities reduces the quality of client services and decreases their satisfaction. In this way the cost of sale increasing since new customers are acquired, but old loyal customers are lost. The partnership between the partners enables the sales of the product through different channels by selling the product to existing customers and in this way increases their satisfaction. The complex product offers more than the individual services. The sales to existing customers reduce the marketing and sales costs, because there is no need to invest in establishing new channels and target new clients. The aforementioned statement is not exactly true, more precisely in order to acquire new clients for the Cloud SME product the partners` sales channels are used targeting the existing clientele. It results extended sales possibilities, and increased quality of services to the clients. From the sales aspect bookkeepers are part of the system, however agreements have not been made with them yet. The involvement of the bookkeepers into the sales activities has good potential due to the strong relationship between the clients. 7.4 Value-added chain Within the collaboration the partners focus on activities of the value-added chain what are their core competencies, other aspects can be letting to do by the trusted partners. This is applied at the SME Cloud concept as well. The key activities concerning the elements of the complex product are delegated to that partner, who is professional on the given field. Granit Bank is providing banking related services and sells the complex product through the existing sales channel to new and existing customer. The bank do not deal with ERP related helpdesk function or consultancy which are planned to be done by Libra Szoftver. It is the same concerning the bookkeepers, who are adding only the bookkeeping related services. The value addition is done by the individual services and by the complexity and integrated solutions of the product. It concerns the future development of the concept. All the partners are focusing on activities which are their core competencies, which increase the quality of the overall product. In a partnership there is a need however for an entity that is responsible for managing the overall activities such as quality control or sales and marketing. The SME Cloud concept is special in a way, that there are more partners from different industry. The plan is to establish a quality bookkeeper chain which dramatically increases the number of the collaborating enterprises. Without control and management the overall quality can be decreased. The different decisions concerning the product cannot be done all the time with agreement between all the stakeholders. It would also decelerate the common progresses. December

32 7.1.4 Value addition through partnership to the end users The customer value consists of benefits and sacrifices (Hutt & Speh, 2010, pp ). The benefit has two forms; the core and the add-on. 1. Core benefits: The core of the SME Cloud product is the complexity. It provides all the administration related services to the SME regardless of size or industry; banking, ERP and bookkeeping in order to decrease the resources spent on administration activities, and increase the effectiveness and efficiency. It enables the management to plan, manage and control the activities of the enterprises, and have a real time overview of the performance regardless of time or space. 2. Add-ons: The additional benefits provided by the individual service and product element. It contains the benefits of the ERP system, the cloud solution, online banking services and the bookkeeping services. The aim is of course to provide the best quality which is also an important value to the client. Since the characteristic of the offered complex product assumes a long term commitment from the client, there are benefits such as continuous service developments according to the requirements. The sacrifices have three forms: 1. Purchase price: There is no exact concept concerning the price of the complex product. It depends on the added services given by the bank and the bookkeeping services which will be part of the agreements between the partners. In general the pricing strategy is planned to be bundling pricing, which means that the total price of the offered services is less than individually purchasing them. The pricing depends on also whether there can be an agreement using fixed prices for the services by the bookkeepers, which will be hard to agree on concerning the expected number of bookkeeping partners. The bank can easily add a basic package for low price, which goes also for Libra Szoftver, who agreed on providing the ERP licence for HUF per month which is very low price on the market. 2. Acquisition costs: The basis of the product is the cloud concept, which those not require additional costs such as purchasing internal servers. However the SMEs are facing with costs concerning the implementation; the education of employees. 3. Operating costs: The whole concept idea is to reduce the operating costs concerning the administrative activities and in a way increase the effectiveness and efficiency of the enterprises. From the aspect of operating cost the product provides benefits rather than sacrifices. 7.5 Conclusion of the partnership The collaboration provides extended values and benefits to the partners and the clients. From the sales aspect it gives the possibility to use the existing sales channels and target existing and new customers with the product. It increases the information sharing between the partner organizations, and positively affects the understanding of the client requirements. The in depth understanding of the stakeholders improves the relationship building. December

33 8 SWOT analyses The SWOT analysis is used to summarize the findings. The analysis is done from the view of the product organization rather than from an individual company. The main reason is that the overall approach contains the strength weaknesses, opportunities and threat on both the individual and collaboration level. It would also be hard to prioritize the partners, since the added services are equal, and all the stakeholders in the product launch are equally important. The aim of a partnership is exactly to use each other strength against the weaknesses. Figure 7: SWOT analysis STRENGTH WEAKNESSES Complex, innovative product Professional partners Product Covers all administrative activities Multiplied sales channels (partnership) Ability to capture the client requirements Lower cost of R&D activities (partnership) Strong relationship between the clients and bookkeeping companies Quality is hard to measure Lack of agreements between the partners Weak sales channel of Granit Bank Lack of sales channel of TDP-ERP Libra targeted mainly medium and large enterprises No clear business model Several stakeholders OPPORTUNITIES THREATS Product fulfils the SME needs Not industry specific product Possibilities for cross sale and up sale activities Large market Price sensitivity IT investment is a priority in the SME segment Economic crisis Unstable SME sector Liquidity problems, low competitiveness, circular debt Low level of managerial knowledge in the SME sector Price sensitivity Source: Adapted from Kotler et al. (2009) December

34 9 Business model The business model is designed on the basis of the analysis and the requirements of stakeholder cooperation. The development of business model is vital in order to enter to the market with the product and maintain the product management and sales activities. Due to the amount of stakeholders and the different business lines it is important to design the model concerning the competencies and tasks. From the financial aspect the ideal model provides benefits and profitability to all of the stakeholders by establishing a win-win situation. It is not just a sum of services therefore it is necessary to coordinate the activities of the stakeholders, managing the product related activities such as sales or marketing. According to the basic business model the concept is designed and developed by TDP-ERP, however the product will be a part of the portfolio of Granit Bank, which actually adds only the banking services. Figure 8: Business model canvas Key partners Key Activities Value proposition Customer relationship Customer segment Key resources Channels Cost structure Revenue Stream Source: Adapted from Osterwalder (2012) The model contains the main elements of a business model. December

35 9.1 Key partners The SME Cloud project contains several key partners. Each of the stakeholders has different roles and competences. They add various services to the complex product. The key partners are involved not just in the development phase, but also in the market launch and in the service provider activities in the future. The key partners should be the following: Gránit Bank Libra Szoftver Consortium of TDP-ERP and Global solution bookkeeping companies National Development Agency (NFÜ): financing the product development Figure 9: Key partners of SME cloud project TDP-ERP System design and development ERP development LIBRA SZOFTVER SME CLOUD Project Financing Banking services Bookkeeping services NFÜ GRÁNIT BANK BOOKKEEPING FIRMS Source: Own production 9.2 Key activities The complex product has two levels of activities; first of all there is a level of individual services provided by the partners, and a level of the complex product. Even known the project owner is the consortium of TDP-ERP and Global Solution, in the business model it is not enough to cover only their activities. The individual activities are all the services provided by the partners; banking services by Granit Bank or ERP development and maintenance by Libra Szoftver. The activities concerning the complex product are more important and necessary to identify in order to have a successful partnership. December

36 The key activities concerning the complex product launch are related to the way of managing the partnership. The regular business activities such as sales and marketing or quality management and control should be centralized; managed by one entity on a basis of consensus. Managing the partnership is similar to a project management; where the aim is having a control over the individuals and teams. The main elements are the common planning and managing. The partners should share a common vision and develop the strategy according to achieve it. In order to define the key activities, the Project Management Manual is used as a framework, which contains three main areas of the project management which is used to identify the key activities of managing the partnership. Figure 10: Key activities Planning and Managing the Partnership Define and Organize Plan Track and manage Adapted from: Harvard Business Review (1997) Define and organize Within the partnership it is important to define the overall vision, mission, objectives and the strategy. In the complex product all the services are equally important, which means that the dissatisfaction of a partner risks the product launch. The activities of the definition part should be done in consensus. On the strategic level the development of common marketing and sales strategy concerning the cloud product is necessary. The product is the part of Granit Bank portfolio, however it should be marketed through own channels of the partners as well targeting the existing clientele. The implementation of the common strategies requires defining key performance indicators, targets, the way of measuring activities and the controlling. The complex product requires continuous improvements and development in order to maintain or even increase the competitiveness. The internal communication between the partners is vital concerning the cooperation. Plan The activities related to planning are assigned to the partners. The overall strategy should be broken down to individual levels by specifying the tasks for the partners which are necessary to achieve the overall strategic targets. The effectiveness and efficiency of the partnership requires defining the tasks and responsibilities for the members. Behind the main activities concerning the services there are December

37 additional tasks, which should be defined. The service providers should provide all the regular services such as help and support activities, what they do in their business for the given price to the clients. Track and manage The measuring and controlling activities are the relevant concerning the tracking. It is important that TDP-ERP is responsible for these functions concerning the overall performance. In case of deviation of the targeted and actual results, action should be initiated on the level of partnership or at the individual companies. The managing activities contain the administration and coordination. 9.3 Key resources The main resources concerning the product launch are the capital and human resources. TDP- ERP finances the development from own and EUREKA_HU_12 sources. The product launch requires additional sources to cover the expenses. Instead of expensive marketing activities at the beginning of the product penetration, the sources of partners should be used. All the partners have existing sales channels and clientele; therefore first those clients should be targeted with the product. In order to do this, it is important to establish agreements with bookkeeping companies. The resources concerning the services of the product concept is provided by the individual partners. It means that the internal costs of the main and related services should be covered by the partners individually. All the members has existing capital and skilled human resources to provide high quality service and support activities. 9.4 Value proposition The complex product provides values to the SMEs and additional partners. The value stream in the business model covers both sides. On the client side the SMEs using ERP system reducing the amount of resources spent on administrative tasks. The system enables the managers and owners to have a better control over the activities and process. The information from the system can be used for planning, controlling and managing activities. The data flow between the elements of the system (bank, bookkeeper) dramatically reduces the time, and optimizes the administration. The involvement of bookkeepers adds value also by improving the business knowledge of the SME sector. The bookkeepers have a good financial knowledge to analyse, interpret and explain the results to the managers and give advices concerning the required actions. The bank provides the SMEs with cheap and quality services; therefore the companies can save on the administrative costs of banking activities. The good quality of the bookkeeping services positively affects the loan application of the SME by having clear and professional books, ledgers and reports, which are the basis of the loan evaluation. The business model creates values and benefits for the partners as well. Since the agreements have not been concluded concerning product launch, it is necessary to propose those to the partners as well. Over the benefits of the common sales and marketing activities, the extended sales channels of the partnership add more benefits. The concept is that the bank, bookkeepers and the ERP provider adds basic services to the complex product and keeping the opportunity for cross-selling and up-selling activities; sales of additional modules or consultancy. The bank December

38 purpose is to have a high quality lending portfolio. The offered ERP and bookkeeping services increase the quality of the SME business activities. The clear reports and real time controlling tools together with the quality bookkeeping and financial advices definitely reduce the lending risk for Granit Bank. The benefits of involvement for the bookkeeping firms are the reduced time spent on the bookkeeping activities which is one of the main cost drivers of the industry. By providing the bookkeeping services within the product concept the companies can provide more to the clients for the same price than before. From the aspect of pricing the bookkeepers will be able to make higher margin due to the fact of reduced time and costs and keeping the existing prices or offer additional services to the SMEs. 9.5 Customer relationship The purpose of the complex product is providing the SMEs with quality services for low price. In order to keep the high quality it is important to get customer feedbacks and requirements for improvement. The basis of the relationship is however done on the individual partner level. The communication activities concerning the service elements should be assigned to the bank, bookkeeper or ERP provider concerning their core competencies and profession fields. The centralized communication would require a shared service center, which increases the costs. The communication platform is part of the ERP system where the client can communicate online with the bank, bookkeeper or ERP provider in case of questions or problems. On the centralized level it is required to collect the feedbacks from the clients, which helps to improve the services. In the business model the existing strong relationship between the client and the bookkeeper on the market is important. The owners and SMEs are not changing often the bookkeeper because of the established trust and the unknown quality of the services on the competitors side. The established trust would increase the effectiveness of the sales activities using relationship selling. 9.6 Channels The main sales channel where the product is sold should be done using the bookkeepers as sales agents. The reason is the established relationship and the trust between the clients. The complex product can be offered through this sales channel. Using the trust for selling the product has a business ethics concern. Due to the fact that the product represents innovative solutions and high quality, which increases the competitiveness of the SME, there is no doubt concerning the ethical aspects. The amount of acquired customers depends on the number of established partnership agreement with bookkeeping companies. The probability of success is directly proportional to the agreements. It is important to build up a quality bookkeeping chain and sell the products through those companies. The chain development requires high financial resources in order to find the bookkeeping firms which provide quality services. Concerning the time and cost consumption, agreement with an already established association would be beneficial. Association of High Quality Bookkeepers has more than 120 registered members all around Hungary. The partnership agreement would create a good basis for the sales activities. It is recommended to involve the association. The SMEs should be targeted from the side of the bank and ERP producer as well. The product will be the part of the bank portfolio, which means that the bank should make also huge marketing effort to promote the product. In case the SME contacts the bank with a request to buy December

39 the product, the bank should let the client choose the bookkeeper from a list of existing partners, or the client prefer keeping the existing bookkeeping firm, than establish a new partnership through the new client. This solution enables the client to keep the trusted bookkeeper, and in the other hand the sales channel might be widen by inviting the bookkeeping company to the partnership. 9.7 Customer segment The offered complex product is able to meet the demand of micro, small and medium sized organizations regardless of industry. It is required however to focus on specifying the segment. According to the planned sales channel the low budget bookkeeping companies should not be partners due to the low level of quality. It would negatively affect the overall product quality, and would create an intensive price competition between the partners, which is not the overall objective. Concerning the sales and marketing activities, the targeted SME should have at least adequate business knowledge in order to understand the core benefits of the product. Targeting SMEs with limited knowledge would increase the marketing expenses and decrease the return on the marketing investments. The target segment should be the small and medium sized enterprises which does not have ERP system and using the services of external bookkeepers. The sales possibility is positive due to the fact that the IT investment has a priority in the SME segment. The partnering agreement with bookkeeping companies would increase the effectiveness and efficiency of the targeting activities. From the aspect of segmenting it is clear that the product is useful from the SMEs regardless of industry or size, however companies with internal accounting and bookkeeping department probably are not interested in purchasing the product. This is the reason why instead of focusing on segmenting the end users, the focus should be switched to the bookkeeping industry. 9.8 Cost structure The most relevant costs in the product launch period are the administration and marketing costs. The overall management, measurement and control activities are done by the consortium of TDP- ERP and Global Solution. It is obvious that the Polish company cannot be involved in the aforementioned activities on the Hungarian market. It is important to differentiate the costs on the individual level and the expenses concerning partnership. The cost management on the individual level are assigned to the partners. The centralized marketing, sales, management and controlling activities should be assigned to TDP-ERP, who is responsible for the aforementioned tasks. At the end of the development phase 6 employees will be available at the company, which gives the employee basis to work on the collaboration related activities. The costs of the centralized product launch and management contains the following costs for TDP-ERP: Employee salaries Percentage of the overhead costs (calculated by the total overhead divided by the employee number assigned to the management activities) Marketing expenses (advertisements) Sales expenses (establishing agreements with bookkeeping companies) December

40 9.9 Revenue stream The basis of the revenues is the sales price of the complex product. By setting the price it is important to take into account the price sensitivity and cost reduction aims of the SME sector. Within the price the ERP licence fee, basic banking and bookkeeping services are implemented. It contains also the royalty fee for the consortium of TDP-ERP and Global Solution, in which the coverage of the costs concerning the centralized activities should be built in. Due to the legal requirements the service agreement between the SME and the Bank requires an individual contract. This affects the pricing method of the product which should be the following: Free basic banking services in case of buying the SME Cloud system, since the bank purpose is to acquire new clients. The main income of the bank is the cross selling (e.g. interest income of loans, transactional fees etc.) Price of the SME Cloud product which contains the basic bookkeeping fee and a margin over the elements in order to pay the royalty fee to the TDP-ERP consortium. This method of pricing creates win-win situation for the partners, which are able to offer more services over the basic product. The possibility of up-selling gives the opportunity to the partners to provide additional services to the clients; additional ERP modules, consultancy or banking services. It is a question however that the basis of calculating the royalty fee for TDP-ERP should contain the up-sales, or only the sales price of the basic complex product. 10 Conclusion The SME Cloud product is developed in a consortium of the Hungarian TDP-ERP and the Polish Global Solution. The development is financed by own and EUREKA_HU_12 grant sources in a 55% to 45 % share. The product contains several services and involves many stakeholders. The main partners are the TDP-ERP and Global Solution, Granit Bank, Libra Szoftver and the bookkeeping firms. Maintaining and developing the quality of the product requires close relationship between the partners which should be the basis of the business model. The partnership gives values on both the individual and collaborative level. The requirements and needs of the end user; the SME sector can be attained through different channels and due to the information sharing it enables the partners for continuous development of their core competences. The total value of the developed product exceeds the value of the added services individually. The difference is given by the collaboration. Within the product launch the aim is to establish horizontal relationship between the partners and clients in order to maximize the benefits. The partnership enables Granit Bank, the software developers and the bookkeepers to share the knowledge about the SME sector and their needs. Libra Szoftver and the consortium of TDP-ERP and Global Solution can also use the information from the bookkeepers for product and business development. In order to maintain the partnership it is required to understand the needs of the partners, and provide them with benefits. Granit Bank requires clear basis for evaluating the loan application which is done by the bookkeepers in a form of ledgers, books and different reports. The bookkeepers financial knowledge can be used by the SME sector in order to compensate their lack of business knowledge. It reduces also the risk of the lending, since the SME has a professional financial background and control over the activities. The aforementioned activities December

41 directly affects the financial performance of the companies, and keeps the high quality of the bank`s lending portfolio. One of the main characteristics of the competition in the bookkeeping industry is the aim to provide the clients with high quality services. The complex product gives the possibility to the bookkeeping firms to differentiate themselves from the competitors on the basis of quality and range of services. Being recommended by a bank increases their potential to acquire new customers. The benefit of the new product is that Libra Szoftver can target new customer segments, the micro and small sized companies, who do not require complex ERP system, only few modules to cover their activities. The partnership reduces the cost concerning the sales activities. All the partners are interested in acquiring new customers. The collaboration enables that the sales of the complex product is done through the existing sales channels to the existing clientele. It gives benefits to the bank, ERP developer and the bookkeeper by widening the services to keep the clients and increase their satisfaction. The sales to the existing clients reduce the marketing and sales cost, because there is no need to invest in creating new channels. The involvement of the bookkeepers into the sales activities has good potential due to the strong relationship between the clients. Concerning the value-added activities within the collaboration the partners should focus on their core competencies and the other tasks should be done by the trusted partners. The key activities concerning the elements of the complex product are delegated to that partner, who is professional on the given field. Granit Bank is dealing with banking related services, while the ERP developers main task is the IT related activities. The bookkeepers should focus only on their regular business. The partnership should be managed and control in order to achieve the overall objectives and keep the high quality. The client values consist of benefits and sacrifices. The core benefit of the SME Cloud product is the complexity. It provides all the administration related services to the SME regardless of size or industry; banking, ERP and bookkeeping in order to decrease the resources spent on administration activities, and increase the effectiveness and efficiency. The additional benefits provided by the individual service and product element. It contains the benefits of using ERP system, the cloud solution, online banking and the bookkeeping services. The sacrifices are the purchasing price, acquisition and operating cost. According to the price sensitivity and liquidity problems of the SME sector the price is a monthly fee without the regular implementation fee used in the IT business. The pricing strategy is bundling, therefore it is cheaper to the SMEs to buy the complex product instead of purchasing the services individually. From the cost aspect the implementation of the SME Cloud product eliminates the cost of expensive internal server system. The product is developed to decrease the cost of administration. The business model is built upon the partnership. The project owner is TDP-ERP, but the business model should cover the involvement of the partners as well. The key partners of the product launch are the consortium of TDP-ERP and Global Solution, Granit Bank, Libra Szoftver and the bookkeeper companies. The key activities on the individual level contain the core competencies of the partnering organizations. In order to increase the effectiveness and efficiency of the product organization, there is a need for centralized management and control activities, which are assigned to TDP-ERP. December

42 The key resources are the capital and human resources of the partnership, which should be distinguished on the individual and collaboration level. Even known the key activities require sources, at the beginning of the product launch first the existing clientele of the partners should be targeted with the product. The revenue from the sales provides the financial background of the centralized activities. The SME cloud product provides values to both the end users and the partners. On the client side the complex, integrated product reduces the cost of administration activities. The ERP gives a better control over the processes and performance of the SMEs. The information from the system can be used for planning, managing and controlling activities. The cloud concept can be accessed from everywhere at any time requiring only internet connection. The financial knowledge of the bookkeepers compensates the lack of managerial knowledge within the sector. In general using the product improves the overall business and competitiveness of the SME. Over the benefits of the common sales and marketing activities, the extended sales channels of the partnership add benefits to the partners by increasing the client base. The product contains basic services and gives the opportunity for up-sale activities to the partners. The activities of the bookkeepers affect the lending activities of the bank which is using the books and ledgers for evaluating the SME loan applications. The bookkeeping companies can save the time spent on data register, because using ERP system the data required for making the reports can be easily withdrawn from the cloud database. It reduces the resources and gives the opportunity to acquire more clients. Libra Szoftver can target new segment with the product, the micro and small companies. The customer relationship should be done on individual level concerning helpdesk and support functions. The ERP system has a communication feature in order to communicate online with the bank, bookkeepers or ERP developer. The existing strong relationship and trust between the bookkeepers and the clients should be used for relationship selling. In order to acquire customers it is important to sell the products through the sales channels of the partners and simultaneously conclude agreements with bookkeeping firms or bookkeeping association. The sales depend on the number of established agreement with the bookkeepers. The offered complex product is able to meet the demand of micro, small and medium sized organizations regardless of industry. It is required however to focus on specifying the segment. According to the planned quality requirements, the low budget bookkeeping firms should not be partners. The targeted segments are micro and small enterprises which are using external bookkeeping services. From the sales aspect it is positive that the IT investment is prioritized within the SME sector. The main costs of the partnership after the product development phase are the management, marketing and sales activities. The establishment of sales agreements with bookkeeping companies also requires additional costs. This is the reason why the sales should be done by targeting first the customer base of the partners, and covering the future cost by the revenues from the sales. For better control over the costs budgets should be created according to the common strategic objectives. The basis of the revenue is the sales price which contains the ERP licence fee, basic banking and bookkeeping services. TDP-ERP receives royalty after the sales which cover the common managing, sales and marketing expenses. The basis of calculating the royalty does not contain the individual income from the up-selling activities. December

43 Bibliography Act C of 2000 on accounting, (Pdf) Available at: (Accessed 27 November 2012) ACT CXII/1997. Act on Credit Institutions and Financial Enterprises. (Online). Can be retrieved at: cial_enterprises_1996.pdf (Accessed 17 December 2012) Ankli, R.E., Michael Porter s Competitive Advantage and Business History. Business and Economic History, Second Series, Volume 21, Business History Conference. (Pdf.) Available at: (Accessed 27 November 2012) Balazs, G., Guangyu, X.,2012. Performance measurement in the responsibility centers. (Assignment). June Horsens, VIA University College. Bloomberg, Hungary s Banking Sector Unprofitable for First Time in 13 Years. (Online). Can be retrieved at (Accessed 19 October 2012) Cieleszky, I., Bookkeeping in Hungary. (Interview). (Personal Communication, 05 October 2012) Commission Recommendation 2003/361/EC of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises Demcsák, M. & Harkai, I., KKV Könyvelése,Piac & Profit Akadémia. (Conference.) Budapest, Hall of Budapest Chamber of Commerce and Industry. (Conference, 03 October 2012) Doing Business, Economy Profile: Hungary. (Online.) Available at: HUN.pdf (Accessed 19 November 2012) Egan, J., Relationship Marketing. 4 th edition. Harlow: Pearson Education Limited. European Comission, Enterprise and Industry SBA Fact Sheet 2012 Hungary. (Online.) Can be retrieved at: (Accessed 22 November 2012) Fekete, G., Hegemoniaja visszaszerzesere torekszik idehaza az SAP. (Online). Can be retrieved at: (Accessed 20 December 2012) Granit Bank, 2012a. About. (Online). Can be retrieved at (Accessed 27 November 2012) Granit Bank, 2012b. Partners. (Online). Can be retrieved at (Accessed 27 November 2012) Harkai, I., Bookkeeping in Hungary. (Interview). Personal Communication, 19 November 2012) i

44 Harvard Business Review, Project Management Manual. Harvard Business Review, 6 October, Hegedüs, E., A Gránit Bank üzleti modellje, szerepe a vállalkozások finanszírozásában.(pdf) Can be retrieved at Hegedus_Eva.pdf (Accessed 14 December 2012) Herczeg, B.,Csite, A., Mike, K., A könyvelő-ügyfél kapcsolat és a piac szerkezetének hatása a könyvelőkre. Hétfa Kutatóintézet. (Pdf). Available at: (Accessed 02 December 2012) HFSA, Risk Report. Hungarian Financial Supervisory Authority. May (Pdf). Can be retrieved at (Accessed 02 December 2012) Hutt, M.D. & Speh, T.W., Business Marketing Management B2B. 10 th edition. Mason: South-Western, CENAGE Learning. KSH, Statisztikai Tükör. VI.évfolyam, 19. szám. (Online.) Available at: (Accessed 25 November 2012) KSH, A kis- és középvállalkozások helyzete a régiókban. (Online.) Available at: (Accessed 10 December 2012) K&H, 2012a. Branches. (online). Can be retrieved at: (Accessed 27 November 2012) K&H, 2012b. It fejlesztesek allnak a kkv beruhazasok kozeppontjaban. (Online). Can be retrieved at: II negyedev/az_it _fejlesztesek_allnak_a_kkv_beruhazasok_koezeppontjaban_.html (Accessed 11 December 2012) Kotler, P., et al., 2009.Marketing Management. Harlow: Pearson Education Limited. Libra, 2012a. Libra 3s Vállalatirányítási Rendszer. (Online). Can be retrieved at (Accessed 5 December 2012) Libra, 2012b. Cégünkről. (Online). Can be retrieved at (Accessed 5 December 2012) Libra, 2012c. Oktatasi intezmenyek. (Online). Can be retrieved at (Accessed 6 December 2012) NGM, Könyvviteli szolgáltatást végzők (regisztráltak) névjegyzéke. Nemzetgazdasági Minisztérium. (excel). Available at: (Accessed 20 November 2012) Osterwalder, A., Business model canvas. (Online). Can be retrieved at: (Accessed 17 December 2012) OTP, Branch Locator. (Online). Can be retrieved at (Accessed 27 November 2012) December 2012 ii

45 Porter, M., The Five Competitive Forces That Shape Strategy. Harvard Business Review, January (Online). Available at: Harvard Business Review (Accessed 20 December 2012). Szerb, L.&Ulbert, J., The Examination of the Competitiveness in the Hungarian SME Sector: A Firm Level Analysis. (E-book.) Acta Polytechnica Hungarica. Vol. 6, No.3, Available at: (Accessed 22 November 2012) Toth, Sz., A KKV-k és az ERP rendszerek Magyarországon. (Pdf). Available at: erp.pdf (Accessed 26 November 2012) December 2012 iii

46 Appendix 1: Personal interview with Istvan Cieleszky Bookkeeping in Hungary Participants: Istvan Cieleszky (bookkeeper and auditor) Gergely Balazs Place: Budapest, Egressy Street 75. Date: 05 October 2012 The interview started with a short introduction and product description. Due to the continuous conversation the answers are reconstructed from the notes. Istvan Cieleszky agreed on using the interview for the project purpose. Q: What are the main tasks of a bookkeeper? A: The tasks are always concluded within a service contract. The bookkeeper provides always services according to that. In general the bookkeeper registers the data of transactions, creates the books, ledgers and reports. Often the clients require consultancy concerning the taxation or company establishment. The bookkeeper should always do the work according to the legal requirements. Q: What are the main bookkeeping related activities on the client and the bookkeeper side? A: Basically the client should register all the transaction concerning the business activities. It means that it is necessary to making bills, invoices, registering the daily cash transactions, making bank transfers etc... There is a wide range of activities. Of course it is important to provide the bookkeeper with the documentations. On the bookkeeper side it always starts with sorting and selecting the records, adding those to the bookkeeping software, withdrawing the bank transactions from the bank, and creating the books. The most time consuming is the data input. Q: How the bookkeeper setting the price? A: It depends on the bookkeeper. The quality bookkeeping has its price. There are many unqualified bookkeepers on the market who are making the books for few thousand HUF. It depends on the client what he/she wants for his/her money. Normally the price depends on the size and form of the company, the financial details, the amount of bills, recipes, the form of taxation and the additional services if required. Q: Are the price menu based or fixed for different services? A: No. The bookkeeper is always guessing the time consumption and evaluating other aspects in order to give the final price. Q: What are the other aspects? A: For example sympathy or available resources for the work. Q: Does the sympathy really matter? December 2012 iv

47 A: The bookkeeping is a long term commitment. Companies are not often changing the bookkeeper, who knows a lot about the company. Of course we would like to select also our clients. Q: How is the communication between the clients and bookkeepers? A: Mainly we are communicating by phone or by . Normally the client visits the bookkeeper once a month. Otherwise sends the documents by post, and we can also withdraw the banking transaction from the banks. Q: How is the competition on the market? A: There is a strong competition, especially because of the increased amount of low-budget bookkeeping companies. Luckily we have still the possibility to evaluate the clients before concluding the service contract. Q: Is there any marketing activities concerning the bookkeeping companies? A: Some companies have website and launching online advertisements. Within the business life the clients are communicating with each other, and asking for recommended bookkeepers in case of changing the bookkeeper or establishing a company. The serious owners and managers know the price of the quality, so they do not believe in advertisements offering bookkeeping service for very cheap price. Q: What do you think about the product concept? Do you have any recommendations? A: The idea is good. It reduces the time spent on data input on the bookkeeper`s side. Also it would save our costs, since we have employees doing only data input. It is important that the ERP modules should not be able to make the bookkeeping, only the data input on the client site. I am not sure that the clients would trust in cloud system, even if it saves costs. It is important to assure the clients about the data protection. According to the concept it is necessary to find out the interests of the clients and bookkeepers and find the balance between those. The bookkeeper similar to other businesses would keep the existing clients and acquire new ones. It would be a good idea if the bank would evaluate the documents provided by the partner bookkeepers as trusted documents. December 2012 v

48 Appendix 2: Notes from SME Academy Conference Piac&Profit KKV Akademia Piac & Profit SME Academy Date: Place: Budapest Chamber of Commerce and Industry, Budapest, Krisztina korut 99. Presenter: Istvan Harkai, Maria Demcsak Pitfalls of the SMEs The SME do not make financial plans. The managers and owners do not have adequate business knowledge. The owners often lacking knowledge about the company performance. Wrong decision making based on the limited knowledge. The SMEs cannot afford the implementation expensive ERP systems. The owner is fully responsible and reliable from the date of the company establishment. Often the owners are choosing wrong company forms, and wrong bookkeepers. They do not use consultancy services. The bookkeepers are professionals in finance and accounting. Their knowledge is available however the SMEs do not often use that kind of services. The choice of bookkeeper is always contain risks; the client cannot be sure what kind of service will be provided. Partnership is an important part of the bookkeeping business. The clients do not often change the bookkeeper. The reason is the built up trust, however dissatisfied clients are acting in the same way. The reason is the stereotype that the bookkeeper knows a lot about the company and the business activity, therefore they do not want to take the risk changing the bookkeeper. The clients are cancelling the service contract in case of mistakes in the bookkeeping resulting penalty from the tax authorities or when lacking of communication and consultancy, bad overall quality of the service or loss of trust The bookkeeper can do additional services in order to help the business of the SME like cost analysis, analysis of the financial effects of decision making, buyer-supplier analysis. However the activities are limited due to the features of the software used by the bookkeeper. The misunderstandings concerning the provided service range are often causing problems. The bookkeeper is always providing the services concluded in a service contract. The clients often expect more for their money than simple bookkeeping activities. They require financial advices, consultancy etc... It is important to make it clear at the beginning what kind of services will be provided. Appendix 3: Personal Interview with Istvan Harkai Bookkeeping in Hungary December 2012 vi

49 Participants: Istvan Harkai (authorized bookkeeper, president of the Association of Quality Bookkeepers) Gergely Balazs Place: Erd, Angyalka Street 1/A. Hungary. Date: 19 November The interview started with a short introduction and product concept description. Due to the continuous conversation the answers are reconstructed from the notes. Istvan Harkai agreed on using the interview for the project purpose. Q: What are the main problems on the SME market from the bookkeeper point of view? A: The main problem is the low level of business knowledge the managers and owners are having. This affects negatively the overall business atmosphere within the sector. The lack of knowledge affects of course the decision making, planning and other activities. Sometimes we cannot even talk about strategic or financial planning and controlling. It is hard for the managers to distinguish the company money from the own money. They aim for own wealth instead of looking at the company as an individual entity. I always tell to my clients that treat the own business in a way that they would sell it. From this point of view they can concentrate to increase the value of it. The grey market is also increasing on the market in order to take out the money from the company without taxation. It is done by selling products without recipes or bills. Q: How is the relationship between the bookkeepers and the clients? A: The relationship can be described as a long term commitment. Since it is hard to differentiate the bookkeepers by quality, the clients do not want to take the risk of switching to the new one. However it is the only way to find out the differences between the levels of the provided services. The clients would like to feel themselves secured in a way that the books, ledgers and other reports are done due to the deadline and legal requirements. Q: What is the reason of changing bookkeepers? A: It is done in case of lack of trust, bad quality work, penalties from the tax authorities because of mistakes in the books, or high level client dissatisfaction. Some of the bookkeepers do not have insurance covering the caused damages to the client, and of course the clients do not sue the bookkeeper who knows a lot about the activity of the companies (Author`s explanation: the bookkeepers know a lot about the grey market activities of the clients), even known that the bookkeeper should keep the business secrets. Q: What can you tell me about the competition on the bookkeeping market? A: The bookkeeper profession is very stressful. The whole year is busy according to the monthly, quarterly and yearly reports, and the VAT admission. There are many new entrants on the market. As a president of Association of Quality Bookkeepers I visited many bookkeeping offices in Hungary. Often I experienced that the office is located in a garage or at the private home. The entry does not require huge investments. The competition is really strong especially because of the dabblers who are offering bookkeeping at HUF Of course a quality job cannot be expected for that amount. It is also hard to differentiate the quality of the services; at least there December 2012 vii

50 is no ideal measurement for that. Mainly the bookkeepers try to focus on increasing the client satisfaction. If a client satisfied, there is a good possibility to recommend the bookkeeper to business partners. This is the only way the quality bookkeepers can acquire clients, which is getting harder from year to year. Q: What are the requirements to make quality bookkeeping? A: Until there is no penalty from the tax authorities, the customer believes that the service has a good quality. However there are other aspects. The knowledge of the bookkeeper affects the output of the financial results in a way of amount of payable taxes, choice of suitable company form or financial advices. It is also important how the bookkeeper is communicating with the clients, how the office looks like etc... The main essence is the knowledge. The bookkeeper should follow the changes of the financial laws, which are changing quiet often nowadays. As a legal requirement the bookkeeper should be a member of a chamber. In order to keep the licence it is required to take part on trainings. As a matter of fact many of the bookkeepers do not do this and still have the licence, and even if they lose it, nothing happens, they can still making books and ledgers. There is no control over these activities, which is a main reason why the quality differs a lot within the industry. Q: What is the main purpose of the Association of Quality Bookkeepers? A: I established the association with the vision of increasing the quality of the members` business activities. The main objectives are the actions against the dabbler bookkeepers, professional help to the members in bookkeeping, creating a culture for the bookkeepers and represent the bookkeepers` interest. We also organize trainings for the members and providing them with online newsletters. The future plan is to acquire positive recognition in the market, which means that being a member of the association is a guarantee for the high quality. We set up minimum requirements for joining to the association, such as local inspection in order to evaluate the location, accessories of the bookkeeping office. This is important, that the office should show the professionalism, it means that when a client enters to the office, should have a positive first impression. We require also the official registration and the profession insurance. Over the quality the bookkeeper should provide more services than the regular bookkeeping. We have establishment with different organizations in order to offer more to our clients. Q: How is the pricing in the industry? A: In Germany there are fixed prices for the services. In Hungary the low budget bookkeeping companies using menu based pricing, offering fixed prices for the different services. The quality bookkeepers prefer evaluating the clients before agreeing on prices and services. Since it is a long term relationship, we evaluate the price also on sympathy. In case of unwanted client instead of saying no, we give a high price. The time consumption of the work is an important driver of the final price. It depends on the type and size of the companies, the amount of recipes, bills etc... The most time consuming activity is selecting and sorting the transaction document and add those to the bookkeeping software. When it is done, starts the real bookkeeping. It is important to say, that the quality has always a price, however it is not always true that the high price equals to high quality as well. Q: What do you think about the SME Cloud Concept? A: It is a good idea concerning reducing the time consumption of the data input. The bookkeepers can benefit from it by offering more quality services. It would definitely increase the competitive advantage. However it is necessary to say, that the SME sector is not ready for the concept, either the bookkeepers. The average age in the bookkeeping industry is about years. The December 2012 viii

51 old bookkeepers do not have trust in the modern technological solutions. They are afraid also from learning something new. There is a lack of complex thinking in Hungary. People do not want to innovate or try something new. December 2012 ix

52 December 2012 x