Making The Most of the Midmarket

"I think for that middle-sized company, there's some work to be done," says Steve Ballmer, CEO of Microsoft. "But I don't choose to go into where our thinking is at this stage because, until we really do the work and have something ready to talk about, it would just be premature."

Premature? You know that this segment must be important when even Microsoft treats it so seriously that it won't unveil just anything to put a stake in the ground. So what is it about this sector, which we estimate to be worth at least $160 billion a year in terms of spending on IT goods and services through the channel, that makes it so tough to figure out? Well, for starters, there seems to be no common definition for the segment of customers that have more mass and needs than small organizations, which are simply too small for most solution providers to target cost effectively, but do not have the mass and formality that one finds in the well-defined enterprise market. U.S. Census data suggests there are as many as 100,000 companies that fit into this area. But who they are, exactly, depends on which vendor's definition you depend on.

Today, most vendors define the market as customers with 100 to 999 employees. But there are other ways to carve up the midmarket. Some companies, for example, prefer to see the market defined by a customer's annual revenue. SAP, for example, defines the midmarket as companies with revenues less than $500 million; it plans to use an array of partners to sell into the space, unlike with its enterprise approach. Other approaches to the midmarket take into account a customer's IT needs, such as the number of people who work in IT or the number of servers or desktop PCs a company has (see "Midmarket Perplexities," page 35).

But no matter how you slice up the midmarket, it is clear that there's money to be made. Consider, for example, findings gleaned from VARBusiness' exclusive 2004 Midmarket Spending study of more than 270 end users and IT and line-of-business executives and decision-makers (see "Methodology," right, for how we defined the midmarket). According to our research, 71 percent of midmarket customers' IT needs have grown in the past 12 months to 24 months. What's more, nearly 40 percent fully believe they will spend more on IT goods and services this year compared with last, while 20 percent fully expect to increase the number of VARs they work with. Already, the typical midsize customer engages with an average nine solution providers; among the very largest of midsize customers, it can be as many as two dozen. That gives some indication as to the level of complexity of solutions that midmarket customers are relying on.

Who's Thinking Midsize?

More and more, vendors recognize that the midmarket segment has not been addressed adequately. Ballmer, for one, agrees. He thinks Microsoft has done well figuring out what small-business needs are and what enterprise customers want. But it's in the middle where he'd like to see his R&D team and product developers craft more tailored solutions for midmarket customers.

"I think we've spent a lot of time over the last year-and-a-half really studying what I call that sort of midlevel, midmarket sort of complexity," Ballmer says. "We can tell you the average sizes of IT departments, the average number of servers they have, [and] we can tell you what those servers do, etc. We've spent a lot of time studying the level of complexity that that level of customer would like to deal with. And I think over time, you'll see changes in the solutions we engineer based upon that understanding."

What's ironic about Ballmer's comments is that midsize customers already see his company as the strategic player in this space, despite the fact that Microsoft lacks targeted offerings for midsize customers that rival what it has put together for smaller customers with its Small Business Server bundling. According to our research, 69 percent of midsize customers view Microsoft as strategic, followed by Cisco (47 percent), Dell (47 percent), HP (44 percent) and Intel (41 percent). The world's largest company, IBM, is thought of as strategic by just 29 percent of midsize companies, despite a massive effort to further penetrate this market. And even worse, fully 80 percent of midmarket customers say EMC is unimportant to their IT strategies and missions, at least at this point, something the Hopkinton, Mass.-based vendor takes very seriously.

"While we have been the gold standard for storage solutions among the large-enterprise customer set, [penetrating] the midmarket is among our top, if not our top, opportunity," says EMC executive vice president Howard Elias.

Like others, EMC has conducted some research to better determine why midmarket customers do not perceive it as a top go-to player, at least not yet. What surprised the company was how well-known the EMC name was to these customers. Unfortunately, most midmarket firms perceive EMC as too expensive for them. Elias hopes to dispel that notion by enlisting more partners that can sell customers on the cost-effectiveness of EMC's Clariion product family. It's just one of many initiatives you can expect from the vendor community to unfold over the remainder of 2004 and the course of 2005.

What Vendors Are Doing Now

Although still perceived as a big-enterprise customer's best friend, IBM has, nonetheless, made notable progress in the past year penetrating the midmarket segment, according to IBM.

IBM Software, for example, says that it has attracted 10,000 new SMB customers in the first half of 2004"twice the number of new customers attracted in the first half of 2003 and more than all new SMB customers in 2002. Of the new customers, IBM enjoyed its biggest gains among customers in the banking, life-sciences and wholesale industries, where the company saw double-digit sales growth.

One big reason for the momentum is its Solutions Builder Express portfolio launched earlier this year, which offers hardware, middleware, servicing and financing tailored to the SMB market needs. The Express offerings, which aim to be quickly and cost-effectively acquired, installed and managed for fast ROI, coincided with IBM Software's decision to realign late last year and organize brands and product lines according to industry segments, including the SMB segment.

"We realized that these customers purchase in many different ways, and we needed to figure out a robust way in which we could enable [them] to purchase from IBM," says Kevin Hooper, director of SMB sales and business development for IBM Software.

Building a portfolio, however, was only half the battle for IBM. "We have educated our sales force so they can speak the language, and we're educating our partners to understand the pain points within the SMB customer segment," Hooper adds. "We now have 3,000 partners enabled to build and sell the Express solutions."

The continued investment is part of IBM's Small and Medium Business Advantage, a larger $500 million initiative to provide marketing and sales support for Business Partners selling into the SMB market. To that end, IBM introduced its Jump Start program, a limited-time offering that has helped Business Partners quickly adopt and employ assets in the Solutions Builder Express toolkit. Partners were chosen according to certain criteria, including solution area and industry focus, and given direct access to Solutions Builder Express development support.

Another enterprise player making a move on the midmarket is SAP, which recently tapped longtime channel maven Donna Troy to serve as senior vice president of SAP's global SMB business. In addition to growing market share and fine-tuning SAP's midmarket strategy, Troy will be tasked with developing and managing a global partner channel.

SAP has engaged more than 430 partners delivering vertical-industry solutions on top of its mySAP All-in-One midmarket offering, while it has cultivated a 650-partner network for its small-business solution called SAP BusinessOne. The former product line is a scaled-down version of the enterprise-grade MySAP Business Suite that gives customers applications integrated and ready out of the box. Partners add vertical functionality on top. The latter product line, a set of line-of-business applications, is targeted at small companies and home offices. SAP has put into place key partnerships with American Express Tax and Business Services, IBM and others to lead distribution of the new products. And BMC, another enterprise software company, is engaged in a major midmarket push via its ePatrol Express effort.

"The midmarket is a growth opportunity," says William Donahoo, director of worldwide channel program development and marketing at BMC Software. "There are many midmarket companies out there that could leverage [enterprise-grade software] management solutions."

Obviously, customers agree: In BMC's most recent fiscal quarter, a push to get more partners selling to more market accounts yielded a 118 percent increase in Patrol Express sales revenue, compared with the company's highest previous quarter. (In addition, 84 percent of channel sales came from partners participating in the program.) BMC plans to boost its effort in 2005.

In other segments, vendors have made even more gains. Like SAP, Juniper Networks turned to outside talent to help further penetrate the midmarket, recently hiring Tushar Kothari from Cisco. Networking companies have made progress on the product front, too. Foundry Networks, Hewlett-Packard's ProCurve Networking division and 3Com, for example, all have recently unveiled or announced products that bring high-speed networking capabilities to smaller companies. Cisco, too, is now thinking smaller. Its Linksys division, for example, has recently unveiled several new switches and storage devices, all designed for the midmarket space. And in July, the company added the SMB Select Partner designation to its Channel Partner Program, which recognizes and rewards partners that focus on the SMB space.

The security sector also has concentrated on the midmarket as companies that want broader networking capabilities quickly realize the necessity of keeping them safe. Symantec has been a pace-setter in both the consumer and enterprise markets, but has not made as much noise in the midmarket, though it does have products targeted at small businesses: Norton Anti-Spam, Anti-Virus and Firewall products and its Client Security solutions.

One miscalculation many security vendors made when they first targeted the midmarket was to assume that selling repurposed enterprise security solutions would be adequate. But the lack of integration capabilities and the headaches they caused forced vendors to go back to the drawing board. The result is that numerous midmarket security solutions are now available from vendors such as Check Point, SonicWall, Sun and others. Sun is especially trying to make gains.

At Sun, channel efforts aimed at the midmarket are being retuned with the recent promotion of Greg Stroud to oversee the company's key partnering efforts. "We believe there's a tremendous amount of upside for Sun Microsystems in the midmarket," says Stroud, vice president of iForce partner sales. "The addressable midmarket for us is huge."

Accordingly, Stroud is intent on recruiting additional channel partners in key vertical segments, such as health care and manufacturing. "What I am interested in doing is finding players that have unique value propositions in these verticals because we have a whole new suite of products that are causing a lot of stir in the marketplace," he says.

With additional reporting from Alexander Wolfe, Carolyn A. April, Luc Hatlestad and Cristina McEachern.