VARs Race To The Midmarket

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The "M" word trumps the "R" word. That's what solution providers in growing numbers say because the recession everyone has feared simply isn't showing up in the burgeoning midmarket. As a result, solution providers once focused on the enterprise and those catering to small business are now adjusting their business models in a race to the middle.

The fight for the "M" in SMB has been brewing for a long time, but has gained momentum in the past year as major vendors realize they don't have the resources, cost structure or customer relationships to tackle the burgeoning midmarket. As a result, solution providers determined to grow their business in an uncertain economy are adjusting their business models to better cultivate relationships with midsize businesses.

"[Manufacturers] generally view the midmarket as channel led, which offers them the benefit of expanding their coverage model while lowering their selling costs," said Mark Melillo, president and CEO of Melillo Consulting, a Somerset, N.J.-based solution provider that has traditionally focused on enterprise accounts. "It is a bit of a perfect storm in that it is not competitive with the manufacturers, the volume of accounts is significant and there are strong financial incentives available to the channel partners [from the vendors]."

Melillo Consulting, with annual revenue of about $75 million, recently signed up as a partner with open source network software vendor GroundWork Open Source Inc., San Francisco, as a way to extend its reach into midmarket accounts. Melillo, which derives about 65 percent of its revenue from selling Hewlett-Packard products and related services, needed a lower-cost, less robust alternative to augment HP's network management software, said Jeff Gibson, Melillo Consulting's vice president and general manager of enterprise management and security.

"HP is by far our biggest partner and this is no way a slam against HP," said Gibson, who noted that his HP software business this year is expected to grow by more than 40 percent. "It's simply our way of extending our market reach to areas HP software can't play [in] for whatever reasons, whether they are too big, too robust, too complex or not cost-effective."

To date, GroundWork has opened up new opportunities for Melillo in education and health-care accounts and currently he has several new deals in the works. Gibson said his strategy is to use open-source software such as GroundWork to get into new accounts and then add higher functionality as needed. "[With GroundWork], we have a low entry point. It doesn't necessarily compete against HP because it's business we weren't going to necessarily win anyway."

Melillo believes his company's enterprise heritage gives it a distinct advantage in the midmarket. "Our enterprise expertise allows us to provide more robust and effective solutions scaled to customers' needs," he said. "We have a definite advantage over those moving up the value chain in situations where experience and knowledge are important to the project."

While Melillo Consulting is moving downstream to capture a greater share of the midmarket, Heartland Technologies is stepping up from the small-business space to go after midsize companies. The Harlan, Iowa-based solution provider has traditionally focused on small business, but company CEO Arlin Sorensen said Heartland is expanding into Omaha, Neb., Wichita, Kan., and Des Moines, Iowa. To go after the lucrative midsize businesses in those markets, Sorensen said Heartland would likely acquire other solution providers with midmarket skills.

"We moved into Omaha and thought that we could grow that area by organic growth but it's been a slow and painful process," he said. "Our heritage has been totally in the small space. What we are learning is that it requires us to change a whole bunch of things if we are really to be effective."

Next: Cracking The Midmarket

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