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SME Philes: Fool's gold rush for vendors?
They'll be back, trying to crack the small business nut, in another 18 months…

By Jonathan Steel

Published: Thursday 25 November 2004

Small businesses make up a large proportion of UK spend on IT but have long been hard for all but a few vendors to target. Jonathan Steel asks what small businesses really want and, come to think of it, what does the industry even mean by SME?

If there's one marketing effort that has dominated many vendors' thoughts and actions this year, it's been the rush for the SME market. Much of the generosity of Big Government around the world that followed 9/11 has been soaked up; contracts have been awarded, new security technologies have been assessed and, in many cases, purchased (notwithstanding this week's Queen's speech).

Perhaps the push to make those e-government services actually work properly has yet to come but much of this round of infrastructure has been done. And with corporate spending still fairly moribund, hungry eyes have swivelled in the direction of the smaller company, where spending is growing at about twice the rate of larger businesses.

It all seems to make sense. Around 3.8 million businesses in this country (including those with one or no employees) employ 48 per cent of the workforce, and generate 37 per cent of total corporate revenues. That's a pretty big market – I wonder why we didn't think of it before?

Well, at risk of sounding a bum note in the chorus of approval, I don't think that anything much is going to change for most businesses that think of themselves as SMEs. Companies with limited technical expertise and budgets aren't going to find the IT industry opening up their box of tech goodies just yet.

The first reason is simple. Most of the big vendors that dominate the industry simply have never understood how small businesses work, how they can help them, how to sell to them and, in some cases, what to sell them.

The great majority of their experience has been serving very large customers – high touch selling, and plenty of margin available for implementation services. Big corporate is in their DNA. Of course there are some exceptions but it's usually because a pretty simple (or at least basic) product is involved, like HP in the printer market.

But what to do with slightly more complex products and solutions – networks and mobility, ERP or CRM software, security? How can vendors get companies without in-house technical savvy into the game?

Second, before smaller companies get excited about building 'solution partnerships' with the industry giants, we have to understand what the vendor community means by SME. Because of their product sets, Dell, Microsoft and Sage are examples of companies that are generally in line with the European definition of an SME – which is a sub-250 employee company (to be precise, "S" mean small (sub-50 employees) plus micro (sub-10 employees), and "M" means medium (50-250 employees)).

Most other household name vendors, however, mean sub-1000 employees when they say 'SME' (and if truth be known, only those companies that make up the 'mid-market' under the FTSE 350 and above 500 employees). One large vendor's financial services arm recently told me that they were focused more on SME services than ever before – or deals of around $10m.

This then is the second problem with the SME focus – most vendors are actually aiming at the 35,000 or so mid-market companies.

The third problem lies with the solution to the problem – setting up and supporting the channel. Getting to grips with a complex matrix of channel options addressing a massively diffuse, fragmented marketplace is a big ask of most vendors. Not to mention that most of the industry still only offers de-featured enterprise products and is worried about not owning the client interface. Or that much of the channel has limited resources when it comes to helping SMEs work out how to match IT solutions with their business requirements. And of course few SMEs have the money to spend on consultants or analysts to help figure out the path from bought product to business productivity.

And finally, the dream of a million US-style tech-enabled small businesses is scuppered by an even simpler problem – the people who own and run small businesses are much less likely to invest in technology than their US counterparts. They are less IT-savvy and less risk-oriented.

In researching the buying behaviour of SMEs earlier this year, one of the things we found was that 79 per cent of small business owner/managers we surveyed 'Did not know much about IT and didn't want to'. They didn't see it as their job and didn't have the time or want to make the effort to learn, often because they just didn't believe that they would get value for their money. That result is not that surprising, incidentally – I don't think it would be much different in FTSE100 boardrooms, which is why we still have the 'business doesn't understand IT and vice versa' conversations, even today.

The net results of this gloominess? First, most SMEs will find that their lot has not really improved. They are still largely on their own.

Second, many vendors will spend a lot of money and not get much return for it. They will continue to set up channel programmes and push money into advertising and marketing but will be back at the drawing board 12 or 18 months down the road.

Of course, there are exceptions. Some vendors have released new, SME-oriented solutions, packaged services, sophisticated channel education and incentive programmes and so on. But outside the mid-market, and until the majority of the vendor community learns how to build solutions flexible and simple enough for SMEs, to address fragmented SME markets and to educate SME buyers, the government's longed-for grassroots productivity gains will remain elusive for some time yet.