The small to medium sized enterprise (SME) market is strong. Individually, SMEs may be suffering like their larger counterparts but, as a whole, the sector is a force to be reckoned with.
According to analyst IDC, businesses with up to 20 staff spent $75bn on IT in 2000, roughly a quarter of the overall IT spend in western Europe.
That's just companies with up to 20 staff. If you count companies with up to 100 employees, regarded by many to be SMEs too, this percentage increases considerably.
Another researcher, Prodata, estimated that the UK's IT small-business market was worth £6.7bn in 2000, up 11 per cent from the year before, and that average annual telecoms and IT spend among SMEs was up 19 per cent on the previous three years. Spending could top £10bn by 2004.
Without a doubt, the services sector is taking a greater share of the pot in the SME arena, a market populated by companies not suited, or financially able, to support the kind of IT infrastructure and staff needed to stay competitive.
As IT services such as general equipment outsourcing and web hosting become more affordable, many SMEs are seeing the benefits of off-loading certain IT tasks to third parties.
A bleak outlook
Ever since the global economy began heading south last year, traditional IT spending strategies have gone out of the window. The traditional spending slowdown in the summer was hard to discern this year because spending all year around was so dismal.
The predicted back-to-school spending in the autumn, which signals the end of summer and heralds better sales, arrived with a whimper not a roar, particularly in the PC and notebook sectors.
And now Christmas, usually the seasonal jackpot for IT sales, cannot be guaranteed to come up trumps.
Companies are not spending because survival is on the line and, if that means Johnny Advertising has to make do with last year's notebook, so be it. The tightwad attitude is particularly true in larger corporations, where any IT refresh will cost a significant amount of cash.
Gartner Dataquest recently announced that, despite a modest jump in PC sales for the third quarter, there was little to celebrate since the increase is set against Q3 2001, a period where sales were hammered by the events of 11 September.
Companies are not even confident enough to replace their Y2K machines, now almost two years old and regarded as at the end of their lifecycle.
Charles Smulders, vice president of Gartner Dataquest's computing platforms worldwide group, said: "In the current environment, and with no economic upturn expected until the first quarter of 2003, this [replacement] is unlikely to happen until the middle of next year.
"Organisations will have to bear the cost of maintaining older machines and the risk of lower productivity."
Solutions, not products
Selling products alone has become more difficult in the SME sector too. Like the big boys, SMEs are tired of products and want solutions.
Gordon Milner, sales director at distributor Ideal Hardware, said: "Trying to sell the Hokeycokey 2002 version of software to someone with the last version by pointing out the new features just doesn't fly anymore.
"They want tangible benefits because they've had 10 years of manufacturers selling them products, pocketing the money and legging it.
"This is why resellers are so valuable now: SMEs want solutions and the reseller that can do that is in a good place."
Mike Thomas, Hewlett Packard's (HP's) SME channel development manager, said: "What drives our SME programme is the feedback we are getting that says that SMEs need good advice, solutions and support.
"They are not sure of the return on investment related to the technologies they already have and increasingly they have business issues that need IT solutions, not products.
"It is a much more consultative approach now. Because many at the low end of the SME sector do not have the ability or money to support a dedicated IT team they need services."
So, if hardware sales are not going to keep the channel in Christmas crackers, services will have to do.
It's a harder nut to crack than just flogging a box and some shrink-wrapped software, but services are probably the only path to sustainable revenue. But even the services and outsourcing arena is not immune to the downturn.
IDC recently downgraded its previous predictions for consulting, systems integration and outsourcing, thanks to the depressed climate.
According to the analyst, its previous prediction of growth in the worldwide IT services industry will be down by almost four per cent to 6.7 per cent for 2002.
Reasons to be cheerful
That said, the market for outsourced IT services, despite being lowered, is still expected to grow by a healthy 14.5 per cent this year.
Since SMEs are managing to stave off the recession a lot better than very large companies, vendors and resellers are now pouring their efforts into this sector.
This is a complete turnaround from the past few years, when most big vendors paid little more than lip service to the sector.
"The SME arena has become an area of great focus for everyone, with many analysts convinced that this is the place where future IT growth will be," explained Tony Kingston, marketing manager at IT solutions and services provider Deverill.
Milner added: "Depending on the sector, the SME arena is quite buoyant, despite the climate. They have proved more lean, mean and fleet of foot, which has allowed them to react to change and opportunities far more quickly than larger companies.
"Resellers in the large-business space have been having a challenging time with a lot of projects being cancelled or postponed. The SME sector is still a place to make money, particularly out of services.
"Some of the boom services areas for resellers targeting SMEs today are data storage, security and wireless networking."
Big vendors have been slow to see the writing on the wall, but there is now a major drive into the SME sector, partly fuelled by a desperation due to falling sales to the corporate sector. Keeping them on their toes, the dreaded Dell has announced ambitious services goals.
The direct selling PC giant, which has been the only one to buck the recession, with seven consecutive quarters of growing sales, has indicated that it plans to double the revenue it makes from services in the next three years.
That figure currently stands at $3bn, 10 per cent of its annual turnover, but it has started to bolster its services operations in Ireland and the UK and is expected to hit the acquisition trail for European services companies soon.
This has led Dell's rivals to spearhead the 're-education' of many distributors and partners when it comes to SMEs.
"Every vendor I know from Microsoft down wants customer breadth," explained Milner. "They will now incentivise us and the resellers to sell to a greater variety of customers.
"Customer breadth is now used by suppliers to judge how well you are doing. While a sale is still a sale, they will look on you more favourably if more sales are going into the SME sector.
"For the past five years they have been selling to the big corporates, but they are the ones that have deferred projects.
"SMEs are attractive because they are a new income source and, to a lesser extent, because the margins are a bit better.
"To emphasise their interest in the sector, vendors are now doing mail-ins, seminars and follow-up visits with partners.
"They never did this before, even a year ago. Big vendors always stated an interest in the SMEs, but it's only now that they are doing something about it."
Kingston agreed. "Microsoft is focusing on the sector, as are the large hardware vendors, because market growth in corporates has tailed off," he said.
After its merger with Compaq, HP found itself with a whole new raft of customers, many of them SMEs. This led the company to expand and change its channel SME programmes to incorporate both HP and Compaq customers.
"There's a big SME opportunity. Our focus on this arena has increased, particularly since the merger," said Thomas.
"Both HP and Compaq had some focus on SMEs but now it's stronger because it is recognised that the SME space is the major growth area at this time. There are 3.5 million SME businesses that continue to invest in IT in the UK alone."
But it is not just the vendors that have recognised the potential in SMEs. Deverill has picked up on the SME services opportunity, recently upgrading its network operations centre and, for the first time, targeting SMEs with its remote managed services.
SME services include server monitoring, control and maintenance, reporting, on-site staff and even IT planning, design and implementation.
"There is a perception that remote management services are for big companies only, but that is not the case," claimed Kingston.
"We have identified a growing demand in the SME sector because many of them want to offload some of the day-to-day tasks. So we have lowered our offering into the '100 PCs' space where we are seeing more growth and a greater demand for outsourcing."
So why are SMEs so willing to outsource now? Historically, services such as remote systems or network management have been out of the price range of most SMEs.
The rise of web hosting and application service providers, coupled with competition between big IT and telecoms vendors looking for a slice of the pie, has helped open up the service arena to many SMEs.
An SME can have its website and e-commerce operations hosted and maintained externally for a couple of thousand pounds per month. Over the course of a year, it's a lot less than having to hire a professional.
Not only is someone else taking care of the web operations, they are dealing with the increasingly important security issues. It is certainly a load off an SME's mind, since they are in the business of doing business, not maintaining evermore complex IT systems.
The same kind of financial savings can be argued for outsourcing the running of email, storage, back-up, application, security and network servers. Right now, there is a service for everything.
"Every SME hires someone to do the cleaning, so why should they have to deal with the more mundane aspects of IT management?" asked Kingston.
"The cost savings are different for every company. For instance, if they have one guy hired to run the network, they also have to factor in cover costs for when he is sick or on holiday because the network is too important to leave unmanned for any length of time.
"For many smaller companies, access to the knowledge pool we have is one of the biggest benefits, since they can't really afford all of the expertise that they need."
Peace of mind
So what do SMEs really want from service-offering resellers, and what are resellers doing to crack the market?
"SMEs want peace of mind," explained Thomas. "Most savvy resellers offer a range of services and let the SMEs pick what they need.
"Many SMEs just need some remote diagnostics and system monitoring coupled with a weekly or monthly visit by the reseller to see that everything is OK.
"If that's the case there's no need for a lot of dedicated IT staff. Some resellers have done very well in positioning themselves as an outsourced IT department for SMEs.
"This is proving to be a good market for a growing number of resellers. The other area is running IT audits for SMEs, because most have no way of knowing how their IT is performing."
According to Kingston, SMEs want to know that they don't have to worry about IT. "They are looking for quality and reliability of service, followed by cutting costs," he said.
"For resellers looking to get into services, it is not an easy jump. It requires a significant investment in setting up the operations centre and finding the right staff and keeping them well trained."
Milner added: "I don't believe that most resellers can get into services since the cost is not insignificant. Ultimately, this cost is justified because services will pay back for those that go about it the right way.
"While I don't think that a third party can ever really claim to be your IT department, they can offer a strong mix and match of services."
Service level agreements
This brings us to the murky waters of service level agreements (SLAs). Loved, loathed and often imperfect measurements of any service, they are the only recognised protection for the SME and its service partner.
It is the SLA that decides on the level of availability: the 99.9 per cent, plus however many extra 9s customers feel they need.
A good SLA should not just list what is being paid for and the penalties, but what is not covered. Resellers should pay close attention, since a failure to plan for extra costs is the difference between sinking or swimming in the services game.
"It's vital that resellers offering services based on hardware and software from four vendors know that the SLA they offer is supported all the way up the food chain by those vendors," warned Milner.
"They have to be sure that what they promise can be delivered without extra cost to themselves."
Kingston added: "The SLA is important; clients want guarantees. SMEs are not all that clued up on them. We have a standard SLA template, but this has to be tailored to every client."
And Thomas said: "When it comes to SLAs, a lot of planning is needed. Resellers should ensure that their SLAs only match their abilities.
"They should not stretch more than they need to because this is where they end up paying above and beyond what they are earning."
Deverill (01202) 785 000
Gartner Dataquest (01784) 431 611
Ideal Hardware (020) 8286 5000
Hewlett-Packard (01344) 363 000
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