While the enterprise market lurches through its dog days, savvy VARBusiness 500 players who embraced the midmarket now find themselves sitting in the catbird seat. Turns out that the choices and trade-offs they made, at least for the future, are paying dividends--big time.
Not only that, solution providers who spent precious time and money chasing down the big boys are, in June 2003, relegated to Johnny-come-lately status, angling to make inroads in the now-hot midmarket.
There are a number of great reasons why top solution providers are gravitating toward this sector. For starters, in contrast to enterprise spending, the midmarket is robust, growing and spending on technology, so opportunities abound. According to Anil Miglani, vice president of research firm AMI Partners, software sales to the midmarket will enjoy a double-digit growth rate in the next year: Security sales will see a 25 percent to 35 percent jump, and storage, with an emphasis on networking products, will increase at a rate of 15 percent to 25 percent.
In addition, a spot check of VARBusiness 500 winners active in the midmarket space finds a growth rate of more than two times the overall VARBusiness 500 growth rate.
Certainly, it will take them less time to close their sales--that's typical of the midmarket. Consequently, the return on investment is healthier. With fewer layers to scrutinize a project, customers with 100 to 1,000 employees can make "purchasing decisions more quickly than large organizations," says Bert Groenewegen, president of Exact Software Services' North American Division VB320. And, de facto, you're working with top management at these customers, a relationship that gives you better feedback from those signing off on the buy.
"These individuals are more closely involved in operations and are able to see the value of the software and how it is impacting the organization on a daily basis," Groenewegen says. More than 90 percent of Exact's customers are in the midmarket; as a rule, midmarket CxOs tend to be a loyal group of decision-makers.
Generating sales, perhaps, is also made easier because the midmarket is thirsting for technology solutions. Midmarket VAR Surebridge VB470 was created in 1997 specifically to address a market that chairman and CEO Peter Boni calls "underserved." Fully 100 percent of the company's revenue comes from the midmarket. Boni says these companies desperately needed the same solutions available to Fortune 1000 companies but were priced out of the market. "Enterprisewide business applications%85were previously unattainable due to high costs of implementation, hardware/software and systems management," he explains.
Similarly, there are a number of VARs hungering for the midmarket. For some of them, there was no other option--the cost of entry to play at the enterprise level was simply too high. For others, it simply made sense to focus on the midmarket where they could make a name for themselves.
It seems that every segment of the product chain wants the midmarket to thrive, but perhaps no one category more than the vendors themselves. The obvious reason: dearth of action in the enterprise market. "It's a shift. Vendors are pushing midmarket solutions," AMI Partners' Miglani says. "There are ongoing announcements from Microsoft, EMC, IBM and others."
The Flip Side
In all fairness, the midmarket does come with its share of drawbacks for VARBusiness 500 members. First, there's much more ongoing hustle to reap smaller contracts.
"The revenue per customer numbers aren't so large as when you are dealing with the Fortune 500," says Craig Schlagbaum, vice president at Verio VB118. About 60 percent of the solution provider's revenue stems from the midmarket.
Adds Exact Software's Groenewegen: "I think we would all be happy with larger sales."
Still, there is a silver lining to this scenario. Solution providers who cater to the midmarket and make the VARBusiness 500 list are accomplishing this feat by selling to a greater number of customers. And more customers mean their businesses' fate doesn't rely on only a select few.
"Having many customers vs. a few large ones diversifies our risk," Groenewegen points out.
Another hurdle to overcome: Frequently, midmarket customers are less sophisticated. They also have fewer resources and less experienced staffs.
"Because of this factor, Exact and its business partners need to provide strong training programs and [have] IT support systems in place," Groenewegen says. "In many respects, [we] serve as the IT support in our customers' businesses."
Morever, they need results--and quickly.
"Midmarket companies, by necessity, are clearly focused on day-to-day business issues," says Mark Metz, CEO and president of Optimus Solutions VB186, which generates about 80 percent of its revenue from midmarket customers. "Their need to capitalize on ROI is much quicker than with large enterprise companies."
Lead generation for this market, meanwhile, comes from the usual suspects: Web-site responses, partners and referrals, according to VARBusiness 500 firms. Optimus Solutions targets midmarket customers by conducting seminars in conjunction with vendors, such as IBM and Oracle, that key in on specific industries and solutions, like security and Web services. Vendors, themselves, also provide leads.
"What's unusual is the extent of the number of vendors that are providing leads," Miglani says. "They are helping VARs find the correct customers to target."
So how long can this good thing last? Several VARBusiness 500 firms expect the time horizon will stretch out at least a couple of years.
"I think the midmarket won't peak for a few years, mainly because the midmarket is always highly fractured," Groenewegen says. "No single company or product has a significant market share."
Optimus' Metz believes it won't peak anytime soon because customers are just now starting to take advantage of new technologies that manufacturers are offering. And as for Miglani, "the vendors have just started," he says. "Expect another two to three years of solid growth."
So if you're a VAR bubbling below our 500 list and hoping to place next year, a word to the wise.
