The big benefits of medium-sized firms

Accounting for one-third of the UK economy, mid-market companies offer massive margin opportunities for the channel. They just need a little guidance from resellers that understand their needs and can offer the right advice, writes Paul Bray

Entrepreneurial start-ups may make good television and corporate brands may hog the headlines. However, it is the mid-market that both vendors and the channel are finding increasingly lucrative.

According to research for Microsoft by Burlington Consultants, there are 85,000 UK firms with 25 to 1,000 employees, that employ eight million people, generate £1.4 trillion in revenues and account for 37 per cent of the UK gross domestic product. In 2004 they spent £2.3bn on software alone, more than a third of the UK total, with larger companies (250 to 1,000 staff) accounting for almost half of this.

Jim Norton, senior policy advisor on IT at the Institute of Directors (IoD), said the key to understanding mid-market firms is that many are in a state of transition. They have demonstrated the ambition and ability to grow from a small start-up into something more substantial, possibly involving diversification into new products, markets or regions. Now they face the challenge of creating or improving internal processes and management structures to support and build on this success, such as management accounting, stock control and additional layers of personnel.

Many growing firms need systems and outside help to achieve this, according to Norton.

“In firms with less than 100 staff there tends to be an owner-manager,” he said. “At larger firms the owner-manager tends to become an owner-director and bring in extra layers of management. They have to put in a lot of internal processes that initially look like overheads, but can drive success in new products and markets if they get it right.

“IT is crucial in effectively getting through this barrier. So a reseller, especially with good sector knowledge, can offer to be the company’s partner in reaching the next level.”

According to research by the IoD for Dell, 84 per cent of mid-market firms that want to grow see IT as a vital enabler. The Burlington/Microsoft research discovered a typical curve of technology needs as firms mature.

Steve Clayton, head of mid-market technology at Microsoft, said: “Once organisations reach a certain size, investment in technology becomes less about providing communication and productivity tools, and more about critical business applications that can drive growth.”

Alastair Edwards, senior analyst at research firm Canalys, said that while small firms tend to be the most concerned about hardware, mid-sized firms concentrate on software because as they grow they realise that applications are most important to their business. Mid-market resellers may therefore need both a volume sales platform for hardware commodities and an enterprise-like applications and services offering.

Jim Sampins, director of SME technology at Oracle, said the application needs of mid-market firms can be sophisticated. “Smaller businesses look for simple solutions such as database and applications, while mid-market and corporate firms may have more complex requirements such as ID management, grid computing and business intelligence,” he said.

Tim Wells, head of marketing at IP telephony vendor AlwaysON, said: “Many medium-sized firms are waking up to remote and mobile working opportunities as they grow and recruit. This is a big opportunity for resellers.”

Stephen Agar-Hutty, chief executive of managed services reseller Preferred, said that as mid-sized firms grow they start to hit ‘corporate’ issues such as legacy systems and capacity problems.

“They often find that as one system needs to be introduced there’s a cascade of implications, from processing power and disk space to network infrastructure and interoperability with legacy systems,” he said. “The challenge is to ensure that IT plans take note of the business’s plans for growth and create appropriately scalable architectures that enable and facilitate the business, rather than boxing it in.”

Medium-sized companies are often characterised as wanting corporate-strength IT for a small business price. This poses challenges for resellers, but there are compensations.

Nick Jervis, general manager for converged solutions at BT Partner Management, said: “Medium-sized firms will still consider the one-stop shop, single supplier relationship that small businesses also look for.”

Mark Pearce, technical product manager at networking vendor Enterasys, said: “Medium-sized companies have mastered making technical and purchasing decisions rapidly, because there are fewer people involved in the decision-making process.”

There is a growing tendency for mid-market firms to order products on a just-in-time basis, more like a small business than a corporate, according to Stewart Hayward, commercial director of online reseller WStore. But he said: “They may have multiple buyers working on projects, with the reseller working almost as a co-ordinator to ensure that goods and services are delivered on time.”

Most medium-sized firms have some sort of professional IT expertise in-house. But they can seldom afford many specialists, and may have trouble recruiting top-flight IT professionals because of the limited salaries and career experience they can offer. This puts them in the awkward position of relying heavily on IT, but lacking the skills to fully exploit it, giving resellers an opportunity to fill the gap.

Peter Lunn, reseller sales manager at printer vendor Kyocera Mita, said: “In-house IT managers at mid-market enterprises are often expected to be jacks-of-all-trades. If resellers can offer a full consultation prior to the sale, with support from vendor partners, they can create the kind of ongoing customer relationship that reaps huge rewards, and offers opportunities to up-sell, or sell into other areas of the business, that can be difficult to achieve in the corporate space.”

Strategic planning tends to take a back seat to routine operations.

David Galton-Fenzi, group sales director at infrastructure distributor Zycko, said: “Medium-sized firms are competent in maintaining their current systems, but they lack the time and expertise to assess new technologies and rely on their integration partners to handle this.”

As the mid-market thrives, growing numbers of resellers are targeting it. Some are corporate VARs seeking new customers as direct-selling vendors threaten their core markets. Others are SME resellers seeking to hang on to successful customers as they grow up, or looking for larger deal sizes and better added-value prospects.

David Ellis, director of e-security at distributor Computerlinks, said: “Often resellers with a good general understanding of IT do well in the mid-market. Their skills may need to be quite broad, particularly with smaller mid-market companies.”

Wells said: “Nothing gives a company more confidence in your ability than experience with a similar organisation in the same sector. Medium-sized firms are looking for a close, collaborative relationship, and are generally prepared to pay for good service and stay with the reseller.”

The mid-market can be one of the most satisfying for a reseller’s own staff to work in, Agar-Hutty said. “One of the great things about working in mid-sized businesses is that experience comes very quickly,” he said. “With the right mix of customers one can keep the rocket scientists interested with complexity, while growing new employees through their careers.”

Selling to mid-market firms is different from a small business where the owner-manager may make all the buying decisions. Hayward warned other VARs not to speak only to the IT buyers, but to “the real decision makers who truly understand the benefits of improvements in total service”.

Clayton said: “Many of Microsoft’s partners who are most successfully selling into the mid-market talk less about single products, and increasingly in terms of the overall solution. They’re focusing on the business proposition first, and the IT second.”

The big challenge for VARs, says Agar-Hutty, is getting mid-market firms to pay for value-added services.

“Many mid-market firms don’t know what they need and won’t pay for what they’ve never had,” he said. “The challenge is to bring more expertise to the customer without making the deal unattractive, and deliver genuine added value at a cost that’s clear, explainable and pegged to an eventual benefit for the customer.”

Therefore, the channel tends to polarise into VARs offering genuine added value to larger mid-market firms, and low-margin box-shifters servicing the smaller, poorer firms, according to Agar-Hutty.

Edwards added: “Vendors want a better database of the mid-market firms they should be addressing, and the channel is the route to get it.”

Although there are still instances of vendors cutting out their channel partners and selling direct to mid-market firms, this is often the fault of over-enthusiastic sales teams rather than company policy.

Big names such as Microsoft and Oracle are researching the mid-market with the help of business organisations such as the IoD and Confederation of British Industry. Oracle has a complete software stack with upgrade path for medium-sized firms, while Hitachi recently launched a mid-market storage range.

Hayward said: “Cisco and Hewlett-Packard are both good examples of understanding the requirements of the mid-market and tailoring products accordingly.”

Ellis added: “We’ve seen the likes of Symantec, Trend Micro, Check Point and Internet Security Systems all apply effort in this area, with product segmentation and focused marketing campaigns.”

Oracle and business intelligence vendor Business Objects are actively recruiting mid-market VARs. Galton-Fenzi said: “Zycko is currently involved in several mid-market VAR recruitment exercises with companies including Asigra, CommVault, Hitachi, Intransa, Isilon, Riverbed, StoreAge and Decru.”

Not all ‘mid-market’ products were actually developed for this sector, and it shows. Ellis said: “Often vendors have tried to re-engineer enterprise or small business products for the mid-market, with mixed results. It’s important that products are designed from the ground up if they are to really address customers’ needs. Mid-market companies don’t always want ‘best of breed’, but are willing to compromise on something that gives 85 per cent of ‘best of breed’ functionality for 20 per cent of the cost.”

But Edwards and Norton believe that overall the quality and suitability of mid-market products has improved significantly in recent years as vendors have given the sector more attention. The big issue that remains is pricing, according to Norton.

“Many vendors don’t really understand the pricing and licensing needs of medium-sized firms,” he said. “Such firms don’t like capital costs, so they need a pricing model where you pay for what you use, with much lower up-front charges. That’s why the application service provider and managed services models are so attractive.”