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Stuck on the Middle

Enterprise software companies try to lure smaller customers with tailored products and lower prices.
Anne Stuart, CFO IT
March 15, 2004

It'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.

Despite early (and well-publicized) disappointments on the part of some large customers, smaller companies remained intrigued by CRM, and suddenly many CRM vendors were just as intrigued by those smaller potential customers. As a result, Siebel, IBM, Microsoft, PeopleSoft, and SAP, among others, have launched their own smaller-company CRM offerings. But they're also competing with a slew of smaller CRM vendors, many of which targeted the midmarket from the start, such as Best Software, which offers SalesLogix; FrontRange Solutions; Onyx Software; Pivotal; and, perhaps most notably, (But watch for fallout: Gartner predicts that by year's end, 50 percent of the current crop of CRM vendors targeting midsize businesses will merge, be acquired, leave the market, or narrow their focus to one industry.)

When offered in a hosted model, in which the customer can rely on the vendor or a third party to run the software and simply tap into its capabilities via the Internet, CRM can now be obtained for less than $100 per user per month. Purchased outright, the software can run from a few hundred dollars per user to six figures for a broad deployment.

Vendors insist their SMB solutions aren't just "CRM lite"—that is, their original products with the good stuff stripped out. Instead, they say, the software has been tailored to the midmarket's needs. For instance, the products are often tightly integrated with Microsoft Outlook and Exchange, widely used in SMBs. Some also work well on mobile and wireless devices, such as cell phones and the handheld computers increasingly used by traveling salespeople and field personnel. And CRM software aimed at midsize companies tends to be far simpler to install and use than the versions made for big companies.

Still, those leading the CRM midmarket have plenty of work to do. For instance, The Yankee Group's Kingstone says Microsoft has "a great vision" for its Microsoft CRM solution, launched in early 2003—good enough, in fact, to have won 3,000 customers. But many of those buyers haven't actually deployed the software yet, she says. "For smaller companies, it's still a little too complex," says Kingstone, adding that the solution also needs better integration and customization capabilities.

Meanwhile, midmarket CFOs should keep in mind that their new popularity comes at a price. They must be vigilant about monitoring the total costs of enterprise-software initiatives, says Barton Goldenberg, president of ISM Inc., a Bethesda, Maryland, consulting firm specializing in CRM. While products are often sold on their simplicity, the final price may nonetheless include consulting, training, and change-management expenses, and the company may need additional hardware and communication technologies to make the new software dovetail with existing infrastructure. In fact, says Goldenberg, "implementation remains the single most expensive cost," a truism that used to be the very reason smaller companies took a pass on enterprise software in the first place.

Anne Stuart is a Boston-based freelance writer whose specialties including business, technology, and law.

Midmarket Misconceptions

SMB enterprise software projects are far more likely to succeed if everyone involved steers clear of these three midmarket myths.

Myth 1: All SMBs want to become big companies.

Not so. "Some are happy to be a $30 million company, and they're going to be a $30 million company the rest of their lives," says The Yankee Group's Sheryl Kingstone. Such companies typically focus on retaining and serving their existing customers, rather than growing quickly by acquiring new ones. They should beware of veiled sales pitches that amount to: "Don't worry, you'll grow into it."

Myth 2: Smaller companies need fewer and smaller applications.

Not necessarily. Midmarket companies typically support most of the same functions as their Fortune 500 brethren: human resources, sales, marketing, accounting, and, of course, customer service.

Ultimately, industry matters more than company size, says Rich Reimer, director of product marketing at Siebel Systems, a CRM software vendor. For instance, conventional wisdom long pegged CRM technology as a necessity for giant corporations and a luxury for midsize businesses. In reality, says Reimer, "a $75 million services firm that lives and dies by relationships may need CRM more than a $5 billion manufacturing company."

Myth 3: Smaller companies are less sophisticated than giant corporations.

Not anymore. A midmarket company doing $20 million to $50 million or more in annual revenues may well be doing business globally. As Reimer points out, "They have Fortune 500 competition, and they have to be just as sophisticated," particularly when it comes to technology. True, they have fewer people and smaller budgets, but that's no longer a reason to settle for less.

ROI: The Long and Short of IT

When Fortune 1,000 corporations make major software investments, they know they may wait years to see real ROI. When midmarket companies buy IT, they want IG: instant gratification.

"You can't convince SMBs to think in a three-to-five-year time frame. It's unrealistic," says The Yankee Group's Michael Lauricella. Many expect—or need—some kind of payback within six months.

Project management is key, as is managing expectations. Barton Goldenberg, president of ISM Inc., suggests that companies planning CRM projects start by specifying how an initiative would:

Tim Cook, director of communications for the Independent Community Bankers of America, a trade group that includes a technology committee that advises midsize banks on strategy, says smaller companies should "concentrate on just one sliver of CRM, even something as small as making more customer information available to tellers." Large banks, he says, "tried to bite off more than they could chew, and when returns proved nebulous, wondered if they were sold a bill of goods." One advantage smaller companies have is that they can sit back and learn from the big boys' mistakes.