Selling technology to Australia’s small and medium businesses can be a difficult proposition. Limited revenues mean smaller budgets for acquiring new technology.
A lack of technical resources can translate to limited understanding of technology’s benefits, or scarcity or skills to implement and maintain them. Technology is often seen as a necessary evil that can do as much to hinder the business’ operations as help them.
But small business has shown its willingness to invest in new technology where there is a clear and swift return — such as the rapid adoption of mobile phones. Most small business want technology that does the job with the minimum of fuss — a goal that the IT industry has often struggled to match.
Australia’s SMBs make up 97 percent of all private sector businesses, with 1.3 million of them in existence as reported by the Australian Bureau of Statistics for 2004. It is a growing component of business — the 2004 figure is double that reported 20 years earlier.
Research company IDC Australia estimates that total spending on technology by businesses with fewer than 500 employees will hit $9.7 billion for 2005, representing 38 percent of the commercial IT market in Australia. SMB spending is expected to contract by 0.9 percent in 2006 however, before returning to growth in 2007 and 2008.
IDC’s research manager for IT spending in Australia, Jean-Marc Annonier, says that slowdown comes from natural purchasing cycles — specifically, a lag following the technology refresh process that took place across 2004 and 2005.
"We don’t anticipate a lot of hardware purchasing and servers in 2006, which means basically the market is going to shrink," Annonier says. "There is also a price effect, because prices are always going down. So in a sense the whole market is going to be very stagnant."
One area that is expected to grow substantially, however, is networking, with a growth rate between 15 percent and 20 percent in 2006 within small businesses. Annonier says the bulk of that growth will be in local area network equipment and internet-telephony applications.
"Internet telephony is actually driving LAN equipment sales, as companies’ existing switches just can’t handle the job," Annonier says. "We are looking at a lot of Gigabit equipment in the workplace, as well as replacement of older hubs."
And despite the large volumes of attention being given to Linux and other open source technologies, Annonier says there will be little activity among SMEs in 2006. One of the key inhibitors is standards, with issues such as compatibility between open source applications and Microsoft’s formats still a concern. He says that while there is a price argument that appeals to SMBs, if they are unable to exchange documents with partners and suppliers and customers, it becomes more expensive.
"These things are very high on the radar of SMBs, but they are not migrating to them. They remain very alert about it, and if there is a significant change in ease of use it might happen, but at this stage it is not going to."
Within the figures lie a myriad of other trends. Declining prices for enterprise-grade products such as storage area networks is seeing that technology make its way into the hands of medium businesses. The increasing penetration of broadband into all parts of the SMB marketplace is leading companies to think more seriously about security, and also about how being permanently connected to the online world can reshape their business.
That point is leading to a swelling of interest in so-called on-demand computing options, such as the internet-delivered applications from NetSuite and Salesforce.com, as well as other hosted applications.
IDC breaks the SMB sector down into two groupings — companies with up to 100 employees, and those with between 100 employees and 500 employees. In the latter group, IDC believes that most of the growth in the next few years will come from outsourcing services and enterprise-type software (including for supply chain management and customer relationship management). These companies are usually served by the smaller end of the systems integration and value-added resellers, and their technology resources are generally limited.
The services industry is also showing good potential within companies with more than 100 users. Annonier says in this segment customisation and managed services and desktop outsourcing become possible, and is a more realistic domain for enterprise technology suppliers. This services market is predicted to grow to be a $2.4 billion industry this year, with future growth of between 7 percent and 8 percent.
The smaller end is dominated by hardware sales, particularly portable computers, printers and networking equipment. When they buy software, it tends to be packaged solutions, such as Microsoft Office, and their primary channel is through smaller resellers and retailers such as Harris Technology and Harvey Norman.
Fierce competition at the enterprise end of the market has driven many suppliers to look at selling into the SMB space &mdash usually with mixed results. Numerous attempts by enterprise software makers to scale down have also failed, as companies have ‘dumbed-down’ their products to make them easier to implement, but failed to consider that SMBs are often as complex in operation as much larger companies. Some larger technology suppliers have also found that the cost of selling to SMBs is simply too high in comparison to the revenues that each sale generates.
Many of the biggest players in Australia’s technology industry, including IBM, SAP, Oracle, Microsoft and Sun Microsystems, have recently retooled parts of the operation to better meet the needs of SMB customers. They are running headlong into a strong group of contenders that were born in the small and mid-sized markets, ranging from MYOB and Sage in the software realm through to white-box PC makers and Dell in the hardware space.
But Annonier says there is a strong opportunity for vendors that can package their software in a very standardised way with little customisation. The key for larger vendors is in reducing customisation costs, and having a low-involvement reseller network, so servicing the needs of SMBs remains the province of smaller resellers and integrators.
"It is a very new behaviour for vendors, because until now this segment of the market has been somewhat ignored. The critical part will be the design of the channel network. Nobody at this stage has been able to design something really successful. They don’t know the space. They are used to having named accounts and going and talking directly to the customers. When it comes to talking to thousands of businesses they are able to design a marketing campaign, but they do not have the proper channel to fulfil it," Annonier says.
Selling to SMBs
Adrian Coote, CEO at listed integrator Commander, says the triggers that prompt a small business to acquire technology are not so different from those of larger businesses. Commander services both small and large companies. Coote says, however, there can be a lag of between two and three years for some technologies to filter their way down.
"That’s mainly because of cost," Coote says. "The technology starts being quite expensive, and gradually decays in price over time. The stuff that corporates are buying today will be absolutely required by small business in due course."
The sister companies Brennan IT and SecureTel have a sweet spot that lies at the higher end of the SMB market, selling to companies with between 200 and 250 users, but service clients down to 50 seats.
"Below 50 seats the business that you are talking to either does not understand about IT at all, and they see it as just purely being a cost to the business," says general manager for sales and marketing, Matthew Lovegrove. "And so you need to spend time educating them on why they should be interested in IT. And that takes time, effort and dollars. And if they do understand what you are saying, they may not have the money to invest in that. If it is security, for example, they may say they are willing to take a risk."
Lovegrove says companies at this level generally have no dedicated IT resources, or have one overworked technical support person. Decisions are most likely to be made by the business owner, or perhaps a general manager.
"That can be a positive and a negative," Lovegrove says. "On the plus side, there tends to be shorter sales cycles and you get access to the ultimate decision maker early on. But on the other side you need to spend a fair bit of time convincing that person that they have a need for IT and communication services."
Should that issue be overcome, Lovegrove says the rewards can be lucrative, as SMBs are often much more interested in partnering for the long term than their larger cousins. "You tend to get more loyalty in the SME space," Lovegrove says. "It’s a cliché, but if you can help a business out, then they will tend to regard you as a trusted adviser.
"We’ve had clients that have been with us since we first started operating. They are not as willing to put you out to tender and conduct a Dutch auction for your services. In the corporate world, from my experience, loyalty is a difficult thing to achieve. Corporate governance dictates that you need to get three quotes and go to tender."
Similarly, Coote says that Commander does not necessarily have to sacrifice profitability when chasing smaller clients. "Small businesses don’t mind paying appropriate pricing," Coote says. "They pay for value. There is an urban myth about small business wanting something cheap. That’s not true. What they are looking for is a value proposition where they can be more effective at what they do. I think small business is very aware of the difference between price and value."
Coote says that small business are also becoming more sophisticated in terms of choosing their suppliers, looking for subject matter experts rather than generalists.
"It might have something to do with the internet and information is more freely available, or because more small business are in networking groups and talk to each other and attend shows. But I think there is an increasing intellectual property within small business as to what options are available. And because small business tends to be experts in their own field, they feel comfortable dealing with someone who is an expert in their own field. They really respect expertise because that is how they stay in business themselves."
Craig Dower, managing director at reseller Harris Technology, agrees that SMBs are becoming far more tech-savvy than at any time before. "If you think of a small business today versus six to eight years ago, previously they may have had a few PCs, probably networked, and maybe a mobile phone or two," Dower says. "Today they have a website — often hosted — they use email, they are connected to broadband, they do their quarterly BAS statements and accounts online, they use notebooks and PDAs, wireless networking, have BPay facilities in place, and often transact online.
"SMBs are becoming more selective in terms of wanting better-priced hardware and software to do more. As prices drop, there is an expectation that the specifications remain high. We see more and more small businesses using wireless and broadband, and continuing to look for innovative ways to use technology. This includes looking at cost reduction opportunities through things such as VoIP."
However, Dower does expect to see fewer SMBs upgrading their desktop PCs, as they continue to move towards more sophisticated convergent devices and wireless technology that provides greater flexibility.
SMBs want to focus most of their time on running their business — not on running their IT. It is a powerful lesson for those companies smart enough to incorporate it into their value proposition, and one that plays well to the model of hosted services providers.
David Lammey, general manager, business and consumer at web hosting company WebCentral, says SMBs are looking for technology that is affordable and usable, but that can be efficiently implemented and then left to run itself. "They don’t want to continually have to give attention to things like security or upgrading software versions or trouble-shooting with the thing falls over," Lammey says.
He says that WebCentral’s products fall in to two categories — those that help their clients better run their business, and those that help them better promote their business. The latter group includes websites, online stores, and email marketing tool, and is the group that is easier to sell.
"The promoting stuff is more front-of-mind, as it is more 'aspirational' for them," Lammey says. "They are always thinking about ways to better promote their business. So that is easier for us to sell. It is the stuff that helps them better run their business that is harder to sell, because they only make those decisions when something breaks or they are in some level of distress."
Tony Heywood, Comstor business manager at distributor LAN Systems, says selling to SMBs is about reducing capital risk, increasing productivity and being able to clearly demonstate this by way of clear return on investment (ROI) modelling. "Equipment and service financing can play a big part in accomodating the SMB customer," Heywood says.
"Second, resellers need to come to terms with the fact that the cost of an SMB sale is disproportionately higher than that of a mid-tier or enterprise sale, when compared to the revenue from that sale," he says. Therefore, Heywood suggests that whatever resellers can do to shorten the sales cycle and increase the size of the opportunity will assist in counteracting this.
"In SMB, cash is tight and decision makers are often the owners of the business," he says.
Online services
One of the strongest trends to hit the SMB space in recent times has been the accelerated penetration of broadband usage.
According to the 2005 Broadband Barometer report, developed by IDC Australia and issued by the business internet provider Pacific Internet, more than 95 percent of Australian SMBs now have access to the internet, with 73 percent connected via broadband.
The benefit of having a faster, always-on connection was represented through 54 percent of SMBs reporting that having broadband made them more able to make informed business decisions. Nearly the same number reported an increase in revenue and decrease in operating costs. What they are doing with that connectivity is also changing. While email remains the most commonly used internet technology, SMBs are also heavy users of e-commerce, with more than 50 percent using it now or planning to in the near future.
Hosted solutions are now used by 10 percent of SMBs, although that figure is expected to leap by 230 percent in the next year. Pacific Internet’s report also found that 19 percent of SMBs are using industry-specific applications, with another 11 percent expected to do so soon.
All of this has been great news for companies providing hosted software, such as Salesforce.com, Sage CRM, Siebel OnDemand and NetReturn (the Australian provider of the NetSuite range of online business applications).
According to Foad Fadaghi, the research director at Frost & Sullivan, hosted applications is one of the most exciting trends in the SMB marketplace. "You are seeing a lot more functionality appear in the SMB offerings — things like hosted contact centre applications, a lot of solutions that are all-in-one ERP as well as CRM, such as Netsuite. They give a lot of bang for buck in that SMB space.
"Every business — medium, large or small — has a certain set of requirements around accounting, HR, CRM, etc. And what essentially vendors have done is cut back on the enterprise solution to address that mid-market space. But more and more, mid-market organisations are now able to get the same sort benefits from technology investment of some of the larger businesses."
This is in turn impacting on the reseller channel itself. "There certainly is a lot of pressure in the market for vendors to go direct. The hosted model suits a direct-to-market approach. Companies like Microsoft and SAP are still very much trying to come to grips with the best way to bring together a hosted solution that doesn’t cut out their extensive and powerful channel, which has been the enabler of their rapid growth for years. It’s not like they can ignore it either, because new competitors have the edge — they don’t have the cost of running a channel."
WebCentral has in excess of 70,000 accounts, with the great majority being SMBs, providing services including web hosting and POP email, through to managed application hosting services such as premium email services and e-commerce hosting. Growth has been strong. Lammey says that in the case of WebCentral’s managed email product, the company has seen 40 percent growth since January.
While Lammey says that the concept of the application service provider model turned out to be a fizzer in the dotcom boom, the fault was not with the model, but rather with the lack of broadband penetration into the business community that sought to use it. "We talk about broadband as an enabler — a catalyst. And we are only just starting to scratch the surface of that, with [internet service provider] iiNet coming into the market with ADSL2. That has a huge effect in terms of the different types of services that SMBs can pull into their business, compared to some of the traditional means of going to Harvey Norman or their local reseller, buying a shrink-wrapped box and loading it up locally."
The changes have been filtering their way through other parts of the industry. The recent announcement by Microsoft of its forthcoming Live suite of tools and applications for Windows and Office is recognition of customers’ increased willingness to access more than just information over the internet. The fact that the Live strategy will use advertising to offset its cost is an added bonus for cash-strapped SMBs.
Lammey says he is hearing a lot of expressions of interest from software developers whose applications have been tooled for internet delivery, who recognise the potential in being able to reach WebCentral’s 70,000 accounts. The company is also fielding enquiries on whether it is providing accounting and CRM applications online, and is investigating a range of other solutions, including online storage.
"Those are the sort of things that we’ll be pushing out in the near future — small, bite-sized chunks that are affordable, with no long-term monthly contracts and no huge set-up fees," Lammey says.
The online application delivery model is also generating changes in traditional IT channels. WebCentral for instance has recruited a group of so-called technology advisers, who generally provide some form of technology services to SMBs at an hourly rate. WebCentral can either bill a reseller directly at a discounted rate, or bill the end customer direct and provide a rebate to the reseller.
Coote says hosting is likely to play a bigger part in Commander’s future, as the company seeks to round out its service offerings. "Really, if they take three to four hours out of a day to manage an application, it is actually dead time for those people," Coote says.
"We fundamentally believe that a product set loaded up on a network, accessed through a broadband pipe, is going to be a compelling story for small business over time.
"We are already strong in the desktop in terms of telephone systems and data, we are a large distributor of data hardware, and we have our own network.
"For us, the optimum would be a business environment where a small business would get their total office from us — connectivity, end points and applications — and we would run
all that on our network. And that’s why we’ve been investing in our back end and network," Coote says.
Greater connectivity through broadband has however come at the price of greater risk. The Pacific Internet report found that SMBs are taking the threat from cyberspace seriously however, with more than 50 percent now using hardware and software-based firewalls, and 12 percent using intrusion protection systems.
David Peach, hardware division manager at Express Data, declares security as the big growth area among his reseller’s SMB customers.
"Security used to mean anti-virus and not much else, and then once installed it was up to the user to ensure they were maintaining their AV program," Peach says. "Those days are gone — security is now AV as well as access control, user policies, and networks that can identify a threat and react accordingly.
"User authentication and remote access is another area where we are seeing increased interest. Employers see the benefits of giving their staff remote access, either from home or customer sites, and before opening this access up they need to know that they will not compromise security. A skilled-up reseller can sell these solutions confidently, knowing that they have been refined in the Enterprise space for several years and they work."
LAN Systems’ Heywood says that SMBs are becoming data security conscious, with many now recognising the importance of protecting their business integrity. ‘This also stretches to data storage security and backup,’ Heywood says.
They are also looking to IP telephony as an application that can enhance business productivity and reduce costs. "Our partnership with IPFX and Cisco is experiencing rapid uptake of awareness in the SMB market arena. Previously, much of the business case was based around toll bypass and least cost routing. Now it’s all about business performance and applications that are the enabling factor in that area."
According to the regional vice-president for security technology company Check Point Software Technologies, Scott Ferguson, SMBs are aware of the need for security, but typically do not have the expertise or knowledge to make decision on critical security purchases.
"As more content is delivered across broadband, security will become an issue of increasing importance," Ferguson says. "The availability of affordable broadband has also spurred SMBs to utilise the web further in the course of developing their business, so the purchasing activity also evolves around other software applications and other, especially mobile, end user technologies.
"As a result, they have a high degree of reliance on their trusted supplier to make recommendations and maintain their security environment," Ferguson says.
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