IBM Has Its Eyes on the SMB Prize

There’s gold in the SMB market, and IBM officials say they’ve made real gains in the lucrative space

There’s gold in that the small- and medium-sized business (SMB) market. That was one key point made at IBM’s recent SMB Analyst Summit, held in Rye, New York. Big Blue wasn’t willing to declare its SMB success a fait accompli, of course: after all, it still isn’t as reflexively associated with the midmarket (in the minds of midmarket buyers, at least) as is Dell Computer Corp. In this sense, IBMers acknowledge, there’s much work to be done.

One analyst who attended the event, Richard Ptak, a principal with Ptak, Noel, & Associates, says he came away encouraged by the strides Big Blue has made in the SMB space, as well as the strategy—based on what IBM general manager Steve Solazzo calls “making the midmarket special”—it continues to employ in this vital market sector.

“Viewed from any perspective—financial, market share, partner growth—the metrics clearly demonstrate that this business unit is accomplishing its goals,” Ptak points out, citing IBM’s SMB revenue growth of 20 percent in the third quarter. “[That] represents one of [IBM’s] fastest growing market opportunities.”

Nor is this all, says Ptak, who argues that Big Blue’s SMB efforts in emerging markets have been even more impressive. “[T]aking India as an example, the annual SMB market growth rate [in that country] is estimated at 18 percent, [while] IBM’s [year-to-date] growth exceeds 40 percent, nearly doubling the average market growth,” he argues. “Ratios for the other three countries either are a near match or exceed this figure.” Redmonk analyst Michael Cote, on the other hand, was less sanguine. “IBM has a problem: their brand and technology are strong up and down the market, but it's common knowledge that only large enterprises buy from IBM,” Cote on his Weblog. “That tale was told many ways during each session this afternoon by IBM execs and even customers and partners.”

The problem, he says, is one of scale: “[IBM has] been working on it for several years now[,] … making the mid-market and—to a lesser extent[,] it seems—the small-market think of IBM when they need technology and business services. But, everyone still realizes that there's still work to do before the IBM brand has as much prominence in SMB mind-share and purchasing decisions as, say, Dell.” IBM can point to a few promising success stories. For one thing, says Ptak, it quickly got hip to the way in which SMB customers—in spite of their comparatively diminutive scale or resources—want many of the same things as their larger enterprise brethren. This is one area in which IBM’s enterprise muscle amounts to a distinct help and not a hindrance. Enter Big Blue’s Express line of products—a series of lightweight, partially wizard-ized versions of WebSphere Application Server (WAS) and DB2, among other technologies, designed specifically for midmarket customers. At this month’s SMB analyst event, Ptak indicates, Big Blue’s SMB team said it was exploring other innovations along the same lines.

“IBM is now looking to further leverage other internal resources as [partners] work to reach and influence their customer’s customers. The goal is not simply to strengthen the partners’ competitive advantage but to provide their channel partners with more core products and services that can be resold, extended, or enhanced to better meet SMB needs.”

Rethinking Partnerships

Redmonk’s Cote, on the other hand, thinks IBM needs to rethink its partner-centric SMB model.

“I've always been a bit flummoxed [about] IBM's partnering strategy in the SMB area. My concern isn't that they do it poorly—according to what I've heard today, they're quite good at it,” Cote writes.

What troubles him instead, he says, is that IBM has historically tried to drive most of its sales through its partners. “Their core competency in this space then becomes creating the technology and services that partners sell and then maintaining those partner relationships,” he indicates. “The question in my mind however is what IBM's giving up in tacit and operational knowledge by outsourcing so much of the relationship with the end-user and customer.”

There’s a lot to recommend this strategy, Cote writes—it helps IBM simultaneously boost its margins, mitigate its risk, and emphasize its core competencies, for example—but there’s also a danger here, too.

After all, SMB customers, unlike enterprise buyers, aren’t all that interested in discrete middleware and hardware technologies, Cote stresses: they want applications (i.e., solutions)—and they want them cheap.

“[T]he SMB problem boils down to both coming up with new technologies to match SMB's wants and new packaging [or] deployment [models]—like hosted [software-as-a-service]—for those offerings. The margins there are small, and the market model needs to rely on a high volume, which means less customization and lighter, if any relationships, with customers,” Cote concludes. “[T]he majority of IBM's revenue is still from a small group of larger, very large, customers—the sort of people who spend [$20 million] each year with them. I call that out because all of this thinking revolved around the opposite of that type of business culture.”

Ptak, for his part, sees an IBM SMB group that’s firing on all cylinders. “IBM is clearly investing a lot of time and effort to get things right. The company has revamped its sales compensation program to encourage use of business partners. Additionally, IBM Global Finances is interested in not only providing creative financing programs for partners and their customers—including a highly attractive ‘invoice to cash’ program to reduce the time before a partner gets hard cash for a sale—but also putting in place programs to help educate partners in the benefits of various financing options,” he points out.

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