Software success story

One Lebanese IT company has beaten moribund local demand for IT products by carving out niche markets in the Gulf

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Lebanon-based information technology firm Software Design Consulting Group (SDCG) is a rare success story in the country’s landscape of IT developers and implementers with a combined domestic and regional approach. Bucking trends of decline suffered by the Lebanese IT industry, in 2004 the firm realized a 16% growth of business and is rallying even stronger this year, projecting a near 50% increase in results based on its performance from January to mid-August. The company’s field of activity is software development and the implementation of Enterprise Resource Planning (ERP) solutions for corporate customers at the upper end of the small and medium enterprise market. ERP is an umbrella term for software that assists businesses in optimizing the integrative management of all facets of their activities, including planning, manufacturing, sales and marketing. Within SDCG’s concentration in this market, its core products are an accountancy and inventory system dubbed Dolphin and a modular ERP package, Visual Dolphin, a particularly successful specialized variant of which is tailored for the advertising industry.

Setting up in Saudi

A large contribution to SDCG’s recent growth came from the development of its business in Saudi Arabia, said founder and general manager, Michel Nseir. “Starting from early last year, we focused and put a lot of emphasis on Saudi Arabia, and in less than one year, our sales in Saudi Arabia could reach 70% of what we turn over in the Lebanese market today. We estimate that by 2006, our revenues from the Saudi market will be twice those of the Lebanese market. We have very high hopes in the Saudi market and the results are very positive.”

Lebanon, where SDCG started 20 years ago with Nseir taking up programming for local companies, last year accounted for about 55% of the firm’s sales, according to SDCG data. Since the company ventured into regional markets in the mid-nineties, exports were an existential part of its growth and jumped from about 20% in 2001 to nearly 40% in 2002. The leap in the export share was fueled by good sales in the Gulf region but was also in part attributable to an 18% contraction in SDCG’s business in the difficult Lebanese market in 2002. Nseir, who has for years been very outspoken in addressing IT industry issues as a board member of Lebanon’s Professional Computer Association, leaves no doubts in his critical assessment of the operating conditions for IT companies here. “I am seeing a very black picture for Lebanon in this sector, and even for the near future, I do not see any hope regarding the development of this technology at the level of software development, at the level of the IT consumer, or at the level of communication,” he said.

In the IT entrepreneur’s perception, the present situation represents a marked downturn from vibrant days in the 1990s. Until about four years ago, people in the Lebanese business community typically were enthusiastic and companies were forward looking and ambitious in acquiring the best and most futuristic products, Nseir said, but enthusiasm for IT in the business community has waned and been replaced by an attitude of making do with what one has. What makes the situation extra hard to bear for Nseir is that Lebanon’s information and communications technology adaptation a decade ago had been ahead of other countries in the area. As other countries began catching up in the late 1990s, competition toughened between Lebanon, Jordan and Gulf countries from around 2000 as far as implementing IT and attracting IT enterprises. But today, Lebanon is lagging behind many other Middle Eastern countries in most aspects of IT, such as computer and internet usage and all aspects of communications technology. The Gulf catches up

“Lebanon didn’t evolve while in the Gulf, things progressed much faster. That affects our market in software development in Lebanon,” Nseir lamented. “We feel not just a slowdown. The budgets have shrunk to an extreme and so has the customer awareness. Companies have other priorities today. Regarding telecommunications, people have become fed up and we are going backwards while other countries are going forward. That is really bad.” Conversely to its gloomy assessment of Lebanon’s IT evolution, SDCG nonetheless maintained a strong emphasis on serving the Lebanese market, treating it as a testing ground for its products before exporting them. This includes offering products and implementation to local customers at promotional prices. The SDCG commitment to its domestic customers has resulted in a gradual resurgence of its sales here over the past three years to a market position that is today “doubly good,” Nseir said. “That is on one hand because we are achieving normal growth and on the other because the competition is no longer as efficient as before. It is losing ground and disappearing slowly.”

As he tells the story, the ranks of local software firms that SDCG used to compete with in Lebanon have contracted from more than 20 companies in 2002, to no more than five serious contenders today. This is in addition to foreign companies that remain present in the market. The latter, however, are priced in another league than local firms and their marketing interests are directed primarily towards winning the larger tenders for IT solutions, a market segment where little has been happening in recent years. Despite having devised special prices for the Lebanese market, SDCG’s Dolphin and Virtual Dolphin suites were continually higher priced than products of the local competition, Nseir said, attributing his company’s strengthened position in the home market to the fact that mid-sized corporate customers here had no alternative to choosing SDCG due to the fact that they needed a supplier and service provider that was reliable over the long term and thus could not be sure of other software developers and implementers in that respect.

SDCG claims to have a clear market leadership with a share of 30% in the Lebanese market for ERP products, up from 18 % some years ago. In its specialized segment, the high end of the mid-sized market, the company declares to hold an absolute majority share of the market with 50%. For 2005, the company’s cash flow estimations show that it anticipates its revenue in Lebanon to increase by at least 40% and grow far beyond the levels it achieved before the local IT market weakened so dramatically after mid-2001.

Lebanon’s mid-sized corporate market as Nseir defines it is comprised of firms with a turnover of between $1 million at the lower end and $30 million at the upper end. In terms of IT needs, this represents a client size of four users at the low end and 30 to 40 concurrent users in the segment that SDCG targets above all others. The company targets clients at the lower end of the mid-sized market but not the small business segment where it concedes that its basic solution packages, selling at $3,000 to $4,000, are priced above what most small businesses require. Taking it regional

From the outset of developing its exports, SDCG had been aspiring to both regional and international expansion. It opened its first office abroad in Dubai in 1998, when the emirate was just beginning to attract tech companies. Today the UAE market for IT solutions continues to be important to SDCG but while being large, booming and highly interesting on one side, Nseir characterizes it also as being marked by extremely heavy competition. One feature of this competition is that due to the UAE’s high share of foreign employees and mid-level managers in particular, market conditions in Dubai involve a cultural element. This cultural element influences purchasing decisions, where many IT buyers in companies are predisposed towards suppliers from their own cultural and national background, which somewhat limits the market for SDCG to firms with some affiliation to Lebanon, Nseir said. The answer to the challenge was to penetrate a market niche where SDCG had almost no competitor. This proved to be the development of the Visual Dolphin Advert suite tailored to the needs of advertising agencies. It is a market whose large regional players, usually subsidiaries of global advertising conglomerates, are headquartered in Dubai and centrally purchase software for their MENA networks. This is the niche that SDCG dominates. “The top six advertising agencies are our customers today. There are opportunities to sell ERP packages in Dubai, but this business would not have been enough for Software Design to thrive there without the specialized packages for advertising agencies,” Nseir said. An existential factor in the growth of SDCG was focus in concentrating on the mid-sized market, a narrow product range and a few target countries. “Focus is nothing that we learned lately, in the right meaning of the word. In our way of understanding the term, we limited the products to a few and limited the territories and focused on getting many customers from a limited number of territories rather than getting one customer in each country,” Nseir explained. Another part of the business recipe was that the firm practiced vertical integration by developing its own products and augmenting that through offering implementation and customization of its products. This helped SDCG in succeeding where less vertically integrated competitors run aground in difficult periods and according to Nseir, the firm’s revenue today arises to about 40% from the development of software, 40% from implementation, and 20% from customization. Cash flow management and an emphasis on marketing rounded off the instruments that allowed SDCG to expand in the Lebanese market under adverse conditions and confirm its presence in Gulf countries. Europe on the horizon

For the future, SDCG aspires to gain a foothold in some European markets, looking primarily at central Europe.

As the company experienced its latest surge in business growth, it increased staff from 39 at the end of last year to 55 today, and plans are for the headcount to reach 60 by end of 2005. As part of its human resources development plan, SDCG has recently also adopted a theme of training fresh graduates in search of grooming the firm’s next generation of developers. “It is actually very new for us that we are investing a lot in beginners and preparing a new generation who will be in charge of our offices in the future. Our HR strategy is to develop new skills in Lebanon and prepare [trainees] for sending them to the Gulf countries after two to three years,” Nseir said.
 

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years. Send mail

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