Downturn offers silver lining for smaller IT buyers

With sales to large customers in a tailspin, suppliers of enterprise software products have stepped up their efforts to target midsize customers as a way of boosting revenue in the tough economic times. But while smaller buyers are being courted with offerings designed “just for them,” vendors may not all be committed for the long term, industry observers warn.

Estimates vary, but preliminary figures from IDC suggest that despite the lagging economy overall sales of IT products to small and mid-sized businesses (SMBs) will grow 4% next year, eclipsing growth in sales to larger customers. By 2004, annual growth could hit 8%, with SMBs accounting for close to a third of all IT spending, said Ray Boggs, vice president for small business and home office research with IDC.

In the U.S., SMBs will spend $135 billion on IT purchases in 2002, comprising 30% of total IT spending in the country, according to New York research firm AMI Partners. In specific software niches such as customer relationship management and enterprise resource planning applications, the number of SMBs making purchases is doubling annually, said Andy Bose, AMI CEO.

Many smaller businesses are just now becoming comfortable with the Web, spying opportunities to use technology as a way of boosting efficiency and becoming more competitive, Bose said. Having sat on the sidelines during the Internet’s first period of rapid growth, many are now taking their businesses on the Internet, using it to connect with customers and suppliers.

“Using the Web to gain competitive advantage and as a productivity tool is just now starting to be embraced in a broader perspective by smaller businesses,” said Mark Ouellette, vice president for worldwide SMB sales and marketing with IBM’s software group, which is among those more aggressively targeting smaller customers.

Spying the trend, SAP, PeopleSoft, Oracle, Vignette, Sun and a raft of others have also been tuning and rebuilding products in a bid to tap the growth among SMBs, generally defined as companies with up to 1,000 employees. Many vendors acknowledge that the shift in focus has come at least partly because larger customers are not spending so much.

Sun said last month that it plans to make a “substantial” investment in the coming year to reach more smaller customers through its iForce initiative. The effort involves partnering with an array of independent software vendors and channel partners who build systems that make use of Sun’s hardware and software.

“Overall spending and server spending is growing faster right now in the midmarket than in the enterprise, and absolutely that has caught our eye,” said Cheryl Kelly, director of marketing at Sun’s iForce program.

Meanwhile, IBM is rolling out a family of middleware products for midsize customers under the Express brand. It started with its software for building portals, added its application server and will soon release an Express version of its DB2 database. Like Sun, it too is strengthening ties with the wide network of ISVs that it relies on to develop applications for the midmarket.

In June, Novell launched NetMail XE, a low-cost version of its e-mail software that it hopes will compete with Microsoft Exchange. Vignette recently rolled out suites of its content management applications specifically for the midmarket. The list goes on.

But midsize customers have unique needs, and it’s far from clear that these and other offerings will fit them as well as vendors claim, analysts said. SMBs have smaller IT staffs and avoid the expensive customization that’s a routine part of large enterprise purchases. They are used to close relationships with local partners. And they run different IT platforms, generally favoring Microsoft’s Windows over the Unix systems common at big businesses.

What’s more, some vendors have done a poor job of tailoring their products to meet the needs of smaller customers, said Mika Krammer, a research director with Gartner who has written several papers on the topic.

“In some cases, (vendors are) simply stripping away some of the complexity and functionality and repositioning the product, and that has not been a successful strategy,” Krammer said.

Balancing simplicity with needed functionality can be the trickiest part of selecting IT systems, SMB customers say.

When Chad Pomeroy, CTO of health-care program provider Lumenos, began evaluating products in August to select a CRM system for his fledgling company’s sales staff of around 30, he considered vendors with which the company already does business, including Siebel Systems and Oracle. But he decided quickly that those vendors’ CRM offerings were too complex for Lumenos’ fairly basic sales needs.

“We just needed something that would run pretty much out of the box,” he said. He chose Salesforce.com, which sells a CRM system that it hosts. Salesforce.com’s subscription model helped win him over, he said: “There’s no huge upfront investment. That’s definitely something we appreciated.”

While Lumenos, based in Alexandria, Va., has been quite happy in its dealings with Oracle and Siebel, he noted, “When dealing with any large company, being a smaller fish in their pond, you may not get the response you’re looking for.”

John Wade, president of multimedia materials provider Gung-Ho, in Incline Village, Nevada, feels the same way. His company picked ManagedOps.com, an application service provider in Bedford, New Hampshire, to host his Great Plains (a vendor now owned by Microsoft) ERP applications. The “boutique ASP,” as he termed it, specializes in Windows and Great Plains environments, and is small enough that it gives him the attention he likes.

“I know the people there and I talk to them. I have my point of contact from sales, my IT has his point of contact for IT, and they’ve afforded us opportunities to talk to them along the way,” he said.

But some in the midmarket need the features top-tier vendors are accustomed to providing. Tanning Research Laboratories, (which does business under the name of its top product, Hawaiian Tropic sunscreen) decided last year it needed a new e-business system to replace a patchwork of older programs running internally and at distributors it had recently acquired. The Ormond Beach, Florida, company has more than $100 million in annual revenue and sells a product regulated by the U.S. Food and Drug Administration, which “adds a lot of complexity to the manufacturing process,” said CFO Bill Jennings.

It considered software from vendors such as Great Plains, Jennings said, but those packages lacked the functionality Hawaiian Tropic needed. But when it solicited pitches from enterprise vendors touting versions of their products tailored for the midmarket, including Oracle, it couldn’t elicit the reassurances it needed that its deployment would come in on time and on budget.

Hawaiian Tropic chose software from SAP, on which it went live in August after a seven-month installation. Sealing that decision was the sales pitch from Plaut Sigma Solutions, an SAP reseller that handled Hawaiian Tropic’s deployment: “They proved it was a doable project. I never got that feeling from any of the others,” Jennings said.

He was also drawn to SAP’s pricing. While other vendors had complex cost structures based on the number of modules installed, SAP offered a flat, per-user licensing fee covering all the modules Hawaiian Tropic wanted to use.

But customers should be wary of lasting commitment from the biggest vendors, according to Gartner’s Krammer. Some are acting opportunistically, she said, looking to shore up revenue until the economy recovers. Returns tend to be lower from midsize customers, and some vendors may find it hard to justify sustaining development and supporting commitments in the long run, she said.

“I project when the economy does pick up, a lot of these vendors will pull back. Fifty percent of them will be getting out as quickly as they got in and reverting to their bread-and-butter enterprise customers,” she predicted.

It’s too early to tell which vendors are serious about the midmarket and doing a good job of creating tailored products, said analyst Jim Shepherd, a research fellow with AMR Research Inc., in Boston.

“If you’re an SAP or Oracle or PeopleSoft, you have a reputation for having built sales channels and support programs for very large companies. You have to convince people that you also know how to serve very small companies,” he said. “Clearly, you have to be able to say, ‘We have a different product for you, designed for your needs and capabilities.’ They really aren’t there yet.”

The new products do present opportunities for midsize companies, in part because declining sales have forced vendors to lower prices, but customers need to be cautious, Krammer said. They should choose a vendor that has been in the midmarket for more than just a few months, pick one that offers products tailored to specific vertical industries and look closely at customer references, she said. Otherwise, smaller customers may find they’ve bitten off more than they can chew.