Giant VARs Break Into Small Biz

It may rank No. 1 on the VARBusiness 500, but that doesn't necessarily mean IBM Global Services (IGS) has all the answers. In fact, it's still trying to figure out how to make major inroads into the wildly lucrative small and midsize (SMB) market. Of course, IGS is not alone. Most members of the VARBusiness 500 are trying to figure out the secret, too. That's no surprise when you consider that

the market is $150 billion and growing at 15 percent each year, according to IBM research. And there is no shortage of potential customers: Some 23 million small businesses populate the nation, according to the Small Business Administration.

"Resellers have always tried to go after the low-hanging fruit,the larger the company, the better,but as the market landscape is reshaped, it's causing us to relook at where the opportunities are," says Jeff McKeever, chairman and CEO of $1.8 billion MicroAge Inc., parent of MicroAge Integration (VARBusiness 500 rank: 19), in Tempe, Ariz. (See "Midmarket Target," page 90.)

And who can afford to pass up an opportunity the size of SMB? MicroAge serves the market today, "but we don't really make money there, and that creates a problem," McKeever says. "If you look at who's there, it's tomorrow's clients, so we're looking for ways to serve them in a more profitable model, including e-commerce as a key element of that strategy."

"Everybody is focused on SMB now, from very small service providers to the Big Five [accounting/ consulting firms]," says Scott Ferber, director of worldwide marketing for small and medium business services at IGS. They are being lured by the 40 percent of SMB IT spending,or $60 billion annually,that goes straight to services, he says.

The SMB Battle

IGS, which boasts billions of dollars in SMB sales, says it's doing fine with midsize businesses, which it defines as companies with 500 to 1,000 employees. "We've had a lot of success in the midsize market, providing consulting services, such as systems integration and outsourcing," Ferber says. The trouble is, 80 percent of the $150 billion market is spent by small businesses (50 to 500 employees) and very small businesses (VSBs,fewer than 50). "You can't scale those services down to companies with less than 50 employees," he says. "We recognize we're not going to get to that market just with IBM blue suits." That presents big opportunities for VARs that partner with IGS.

IGS executives are working furiously to figure out just what it will take to succeed in the SMB market. "We're reevaluating and reassessing the SMB marketplace and opportunities," a company source says.

IGS isn't standing still while it develops its strategy. It has launched a number of initiatives targeting the SMB space. One of those efforts is the creation of a new breed of IGS business partners called services providers. Announced at the Business Partner Executive Conference in February, IBM will provide leads and access to its intellectual capital to the service providers, which are experts in core areas that will resell IBM-branded services, such as e-business.

IBM has certified three partners so far, all of them large players, including Kinderhook Systems Inc., an intranet consultant/developer based in New York. "We're not yet dealing with the two- or three-employee partners that maybe we should be talking to eventually," says Joseph Ziade, director of distribution channels for IGS. But he still expects the large partners to grow IBM's SMB business. One such partner, which is in the process of becoming a services provider, has some 5,000 small and very small businesses that want e-business, he says.

"Dot-comming" SMBs could be a gold mine. Less than 15 percent of U.S. small businesses have e-commerce capabilities, according to market researcher Access Media International Inc., New York.

IGS also hopes to gain ground in the SMB market by hosting applications. Instead of buying applications, an SMB would essentially pay a monthly subscription fee and access applications over the Internet. "Network-delivered services are the offerings that are going to be key to addressing the SMB and VSB spaces," Ziade says. The company is already making available applications developed by its Lotus subsidiary.

In addition, IGS has 40 to 50 application-hosting pilots under way that are targeted mainly at SMBs. It's running a variety of applications, including financial, human resources and enterprise resource planning from vendors, including Great Plains Software, J.D. Edwards Corp. and Oracle Corp. IGS will determine which applications have the strongest demand and make decisions about how to proceed in the third quarter, a company source says. IGS also plans to announce several new and expanded partnerships for SMB application hosting next week at the PC Expo trade show in New York.

The company doesn't want to simply increase its number of business partners, however, which now stand at more than 45,000. "We're not limiting ourselves to targeting a number of partners. We're working to identify the partners we will need to sell, resell, market and deliver those offerings," Ziade says.

To give its partners more ammunition in the SMB battle, IGS is bolstering content, applications and tools on a Web service called Global Partner Info (GPI). It will include promotional materials, foils, configuration tools and other elements. GPI isn't focused exclusively on partners that target SMBs, but Ziade expects those players to be big users because smaller VARs don't get face time with IGS sales reps. IGS declines to say how many partners are using GPI now.

While IGS tries to figure out how best to tap the SMB space, it is under pressure to make decisions quickly. The market is hopping with competitors that are already finding success by leveraging small VARs.

Ahead of the Game

Roughly 25 percent of Hewlett-Packard Co.'s $47 billion revenue, for example, now comes from SMB, and that figure is growing, says Kim Tchang, HP's SMB director for North America. "In the past six months, while everyone has been trying to figure out how they're going to win in this market, we've grown 35 percent in total sales [to SMBs]," she says.

Rather than try to reach SMBs directly, HP decided a while ago that the market was too heterogeneous and fragmented to serve directly. So it built a sales force that calls on specific products and VAR programs.

HP is ahead of IBM's GPI Web service with its Profit Engine, a Web service that offers VARs leads, marketing materials, sales strategies, templates for proposals and a host of other data and programs to win in the SMB market. It also added a "consultative selling" training module this month. Roughly 3,500 VARs now use the service, which is free to any VAR that sells more than $100,000 in HP products annually. Those VARs are the recipients of 100,000 Web referrals a month, a number that Tchang expects to grow.

HP is betting that VARs, particularly small ones, are best positioned to serve SMBs. Its channel partners, understandably, feel the same way.

"I've found a preference by most of my clients to deal with similarly sized businesses," says Stephen Allen, president of $1.3 million Integrated Technology Systems Inc., New York. You won't find the nine-person VAR on the VARBusiness 500 because it didn't make the cut, but you will find it doing bang-up business with accounting firms, schools, law offices and real estate developers.

"We work with a lot of five-, 10- and 25-person firms," Allen says. "They may be delighted to have an IBM or Xerox call on them, but they rapidly find that they don't get the personal attention they get from a VAR that's the same size as their business."

Allen looked at Compaq Computer Corp., HP and IBM before switching from Digital Equipment Corp. to HP four years ago. He believes HP has a better understanding of the SMB market. That's reflected in products developed specifically for that space, as well as VAR tools, like Profit Engine. Allen says the service saved him some $25,000 on sales and marketing materials for a recent trade show that he would have had to contract with third parties to develop.

Allen, who has been a VAR for 15 years, isn't worried about IGS or its partners taking away business. "I don't think there is a formula for the SMB market," he says. "It's thousands of small businesses in vertical markets that require a knowledgeable VAR who understands their particular needs. A 10-person travel agency has very different needs than similar-sized legal, accounting or medical practices. One VAR cannot handle every kind of SMB need."