Analysis It is a story we hear again and again from the IT vendors: They are going to double down and make aggressive moves into the small and medium business space because the growth rates for IT spending are higher than they are among larger enterprises - at least when those businesses are all lumped together.
To many of us, who remember the minicomputer revolution and who know a thing or two about the midrange market, such statements seem a little odd.
The midrange systems and server market and its customer base has always been important. The midrange products from IBM, Hewlett-Packard, Digital, and many others humanized and simplified IT, so it could be consumed by companies that were not giants with big budgets for huge IT staffs and expensive hardware and software.
This created a feedback loop, whereby minicomputers and midrange systems eventually helped influence the evolution of big iron and spawned the dominant market of entry servers for small businesses - machinery that is in turn also deployed in droves by midrange and enterprise shops. It seems to me that in many ways the small business is akin to the midrange business of days gone by as far as IT is concerned - pushing the envelope on integration and low price.
The fact that companies no longer have only one server in a back room somewhere running their so-called back office applications - usually financial, manufacturing, and distribution applications - makes the differentiation between entry, midrange, and enterprise systems and the small, medium, and large customer sets a lot less of a one-to-one relationship than it has historically been.
Stuck in the midrange with you
Large enterprises deploy big iron like mainframes or giant RISC/Unix servers, but they also have data centers crammed with hundreds or thousands of entry rack or blade servers. Midrange shops have a mix of what we think of as traditional midrange gear and entry rack or blade gear.
The term midrange means a lot of different things to different people. Five years ago, HP was pumping $750 million into the SMB space to help its 210,000 global partners and provided a rare glimpse into the S and M parts of the SMB market. HP said that there were 21 million SMBs in the Americas and 79 million globally and that the aggregate budget of these SMB companies added up to $531 billion in 2003
HP projected that IT spending among SMBs would grow at 12 per cent compounded annually to hit $744bn by 2007. The midrange part of the SMB space comprised 500,000 to 600,000 companies who have between 100 and 1,000 employees. When adjusted for employee headcount, SMBs spend more money than larger enterprises on IT and they generally do not have sophisticated IT staffs.
Five years on. To help me figure out what that midrange means in 2008, I went to the two big players in this space, each equipped with huge reseller channels that span the globe. That would be IBM and HP, of course. And specifically, I spoke to Mark Shearer, vice president of marketing and offerings for IBM's Business Systems division within the Systems Division, and Urs Renggli, director of small and midmarket offerings for HP's Technology Solutions Group.
Renggli starts off by saying that SMB shops are treated as one category, and that is because they sometimes share attributes when you talk about how they consume and use IT. For instance, both small and medium shops have limited IT organizations, and their IT staffs are usually generalists, not specialists, when it comes to IT. They function as programmers and system administrators and security officers and database administrators, and they want machines and software tools that let them do all of those different tasks.
The planning, management, and deployment of technologies among SMB shops are different than at large companies, which have a lot more rules and rigor. HP believes that looking at IT shop headcount and the level of expertise is a lot better an indicator of whether an IT organization is a small, midrange, or enterprise shop - a lot better, says Renggli, than looking at whether a company has from one to 99 employees (that would be small) or from 100 to 1,000 (that would be midrange).
Something smaller than small
An aside: I was listening to Austan Goolsbee, a professor of economics speaking on the radio the other day as he discussed the economic plans of then presidential candidate Barak Obama, whom he advises, and he threw out this little factoid: 98 per cent of the small businesses in America have less than $250,000 in revenue. We tend to think of midrange shops making lots of money, but historically, I always placed the midrange between $10m and $100m in annual revenue, maybe sometimes stretching it to $250 million.
Above that, you are an enterprise. But I think there needs to be another characterization of business size, something smaller than small that talks about those 98 per cent who are just paying a few salaries. I have proposed the term pissant. So we have P, SMB, and L. If you don't want to curse, you could spell it puissant, which is French for "strong, mighty." These pissants are the workers of the small business space, no doubt about it.
Having said all that, there is something that makes the midrange still the midrange, regardless of the headcount in IT or at the company at large or the expertise level inside IT. "Competition is much more heated in midrange companies," says Renggli. "Large enterprises are chasing their business from above and small companies are nipping at their ankles from below. Midrange companies are looking for competitive advantage. They are not just trying to keep their IT operations running as well as possible."
Renggli says that about half of the sales in the company's Industry Standard Server and StorageWorks divisions, which respectively sell ProLiant and BladeSystem servers and disk and tape products, go into the SMB space, and that HP is projecting a 7.4 per cent compound growth rate in sales in the SMB space for these products over the next five years - almost double the rate of the market at large.
"There is a lot of outdated IT in midsized companies, and there is a lot of pressure to innovate," he says. "Also, IT is not as hard any more and equipment is not as expensive as it once was."
As an example, Renggli talks about the new SMB blade server setup, nicknamed "Shorty," which runs on normal wall power and packs all the IT a typical SMB shops needs into a space that a big tower server used to take up. He adds that SMB customers are not really all that interested in software as a service, that they are still very keen on IT gear on their premises supporting their businesses. "Making IT simpler, making it more affordable, is what these customers really want."
Midrange? Medium? Mid-market?
A lot of this talk will sound familiar to IBM midrange shops, of course. IBM's Shearer, without knowing it, echoes a lot of the sentiments expressed by his rival over at HP. "Everybody defines mid-market differently," explains Shearer, and ironically, we can't even agree on a single word - midrange, medium, mid-market - but we still all know what we mean. "The news now is that the mid-market is the place where revolutionary new business designs are coming into play, not just the latest processor technology."
This is why IBM has merged its various server units and put together a single entity called Business Systems to peddle various IT products to the SMB space. IBM wants to get away from talking about feeds and speeds and talk about supporting business objectives and then pitching technologies based on where customers are at now and where they want to go in the future.
Like HP, IBM says that roughly speaking the SMB space is customers with 1,000 or fewer employees, but adds some qualifiers. SMB shops expect the same IT capabilities and have the same kind of business processes as larger enterprises, but they do not have deep IT skills, they have limited funding for tech support, and they cannot afford to integrate technologies themselves.
"One of the things that we learned in talking to customers is that small and medium businesses do not think of themselves as such," Shearer says. "That's why we chose the Business Systems name, because these companies just think of themselves as businesses."
The common touch
But midrange shops in particular have some common attributes.
First, according to Shearer, is that they are decidedly different, which means the company owners and the employees have made a conscious choice to work for a small or medium business; they are often family owned businesses, and if they are not, they act like families just the same. Often times, the people who own and work at the company are the company brand, and they behave as such. They are independent, and they are just as inclined to act from their instincts as they are from deep analysis.
They have a growth attitude, and they want to invest in growth; they are looking at scale and efficiency to get there. There is an interesting subset of the midrange that Shearer calls the establishment, by which he means the midrange companies that have "made it," that have found their niche and that have built the systems to support it, but who are still looking to innovate and to recapture some of their entrepreneurial past to grow. "Obviously, the IT solutions that we offer have to reflect this, which is why we have changed our sales and marketing approach to market-driven from product centric."
Like IBM did 20 years ago with the AS/400, Big Blue is looking to raise the bar on integration and ease of use for companies in the SMB space with a project it calls the Blue Business Platform. The products will pilot in the fourth quarter, including Power Systems running the i platform as well as Linux on X64 processors. The systems will come with Web 2.0-style applications and support, and will have hooks and a common framework so application software vendors can provide a consistent way to support code. Blue Business embodies a kind of hybrid computing model that mixes local and remote processing and control.
"I believe that this hybrid computing model will find its way into all markets," says Shearer. "But it will start in the midrange and then go north into enterprises and also south into small businesses. I think we will be able to achieve a level of simplicity that is orders of magnitude better than what we see out there today." ®
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