Saturday, December 02, 2006

Cracking the SMB code

Small and Medium businesses have been the holy grail of High tech and software companies for quite some time now, but the quest is far from ending.

"If you would ask me what part of the market is most underserved by technology companies today, I'd tell you it's small and medium sized business. . . and so I think it's a very, very big bet“ - Steve Ballmer, CEO, Microsoft

Indeed, the opportunity is large: with 11m+ SMBs in the US only spending more than $300B in IT...but so far nobody managed to "crack the code" and current sales model are facing diminishing returns:
(1) HT companies have little insights in their SMB customers (e.g., potential, share of wallet) and therefore have difficulty to segment them and serve them effectively
(2) The existing direct (tele)sales model coverage is failing to provide adequate returns as companies face increased pressure to lower cost of sales. There are several reasons supporting this trend:
- Sales rep. do not have the time (up to 100 companies per rep.) and the skills to sell high value solutions. The time they spend with customers is usually limited to transactional core products sales, generating lower margins
– The resource allocation is not always matching the opportunity (geography, customer segment, vertical...)
– The rules of engagement for technical resources (solution or product specialists) are not clear. These resources tend to be involved on ad hoc projects rather than on the highest opportunities
–Sales reps tend to operate independently from the channel, leading to inefficient leverage of resources
(3) On the channel side, the traditional transactional sales model does not provide enough margins to partners

This last point is the premise of a radical change. Today, VARs are the key to the SMB segment and their business model is collapsing, opening new opportunities for them and for technology providers.

To survive, VARs need to change their business model and move from product sales to services. This can be done in two ways: selling solutions or providing managed services.

This is a fundamental change for the VARs, requiring them to evolve their skills and organization. In particular, partners will need to:
- develop integration capabilities to be able to deliver solutions with good economics
- adapt their sales process to be able to articulate a clear business value to line of business managers (instead of IT managers)
- Adapt the marketing materials (webminars, events...) to focus on specific business issues, not technical issues)

In addition, success will require the VARs to develop privileged relationships with a limited number of high tech vendors (to gain visibility and support) and to create dedicated practices to build specific areas of expertise

The transformation has started - and any vendor providing technology helping VARs to develop their services offering (i.e., software packages for SMBs requiring 15-20 of integration services, platform to provide managed services) will reap a significant portion of the profit pool.


D Pleasance said...

I think you're right on. The whole SMB opportunity is becoming the key battleground and opportunity area for high tech companies. They've been focused on this for several years, but are just now beginning to get the mix of products/services plus go-to-market model that they need to start being successful. Still lots of work to be done to get the economics right and align resources appropriately so should be a fun time for the next 3-5 years as we try to figure this out.

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