VideoIt's no secret—to IT vendors, anyway—that the "midmarket" represents a golden opportunity to win sales as large companies rein in spending. Now, experts say, that opportunity may be even more golden as midmarket firms brace for a spending spree. Small-to-midsize businesses (SMBs), which number 5.6 million in the United States alone, accounted for 54 percent of all IT spending last year, according to technology research firm IDC, in Framingham, Massachusetts. Between October 2002 and October 2003, their spending increased 11 percent, to $86 billion, says AMI Partners Inc., a research company in New York. And 40 percent of SMBs plan to increase IT spending this year, a much higher percentage than for large companies.
Much of that spending will go for enterprise software, especially customer relationship management (CRM) and enterprise resource planning (ERP) products. While some vendors have served this market for years—and others have paid lip service to it—analysts expect a lot of action in this space in 2004. "This battle for the midmarket is bloody, and it's only going to get bloodier," says John Moore, vice president of enterprise advisory services at ARC Advisory Group Inc. in Dedham, Massachusetts. With the high end now deemed mature, midmarket companies hold a new allure.
Having survived the recession, many midmarket companies are considering major IT investments for the first time since the Y2K scare. Michael Lauricella, program manager for SMB technologies at The Yankee Group, says, "No one [in the SMB space] is decreasing their IT spending this year."
That's a big switch from the typical SMB pattern of buying new technology only if the old stuff breaks. What's driving the change? "There's a lot of antiquated infrastructure out there, and SMBs are identifying the need to upgrade," says Lauricella. Often, they take the plunge because they want functionality their old systems won't support, such as wireless networking or an integrated CRM initiative. The bottom line, says Lauricella, is that "the market's ready, and the software vendors are ready to serve it."
Sounds simple enough. But as in any blossoming relationship, the truth is far more complex.
For one, this is a broad market, and companies at the low end have vastly different needs, budgets, and resources than those at the high end. No one can even agree what the middle looks like. Aberdeen Group Inc., a Boston-based research and consulting firm, defines "middle-market enterprises" as those with annual revenues of $50 million to $1 billion. Siebel Systems, a leading CRM vendor in San Mateo, California, sets the SMB ceiling at $350 million. "There's a big difference between a 5-to-20-person company and a 100-person company, and from there to a 500-person company," says Sheryl Kingstone, The Yankee Group's program manager for CRM strategies. She's referring not only to key factors such as IT budgets and staff, but also to the front-line troops whose needs must be served by CRM. For example, larger companies will have specialized sales, marketing, and customer-service teams; at smaller companies, individual employees may handle multiple functions. That has a big impact on how software should be designed.
Because SMBs have smaller IT budgets than their large-enterprise brethren, short-term cash flow—rather than long-term payback—is often the top factor influencing a software investment. Many smaller companies expect almost real-time ROI on their technology expenditures (see "ROI: The Long and Short of IT," at the end of this article). They may outsource IT entirely, or rely on a small in-house staff that's too busy to undertake major new initiatives. They may face major headaches in trying to integrate new solutions into their ancient systems. And they can't spend a lot of time learning.
"Often in this market, the right amount of training is no training," says Rich Reimer, Siebel's director of product marketing. "The solution must be so simple that everyone gets it." Finally, says Lauricella, there's usually no margin for error. "An hour of downtime for an SMB can be a major catastrophic event," he says.
Despite those barriers, vendors are targeting SMBs in almost every technology category, from storage solutions to sales-force automation to security. The field includes some of the biggest players in the business: IBM, Microsoft, PeopleSoft, and SAP have all launched multiple midmarket offerings in the past year or two. (However, not everyone has jumped into the battle. "Oracle is still saying its sweet spot is the upper enterprise," says Kingstone. The database maker's sole SMB solution is NetSuite's NetLedger, a hosted offering.)
There's no better illustration of the midmarket's sudden popularity than the buzz in the CRM market. Until a couple of years ago, CRM—software that helps businesses organize, manage, analyze, and share sales and customer information companywide—was strictly high-end territory. But as large corporations finished making their initial big CRM investments, the overall market shrank nearly 25 percent in a single year, from about $3.7 billion in new license revenues in 2001 to $2.8 billion in 2002, according to Gartner Inc., a Stamford, Connecticut-based research and consulting firm. Meanwhile, SMBs spent almost $750 million on CRM in 2002, says Gartner, and that figure is rising.
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