Mid-sized businesses an untapped IT market

It’s not that they don’t get any respect. IT vendors just don’t seem to understand them.

When it comes to information technology designed to suit their specific computing needs, medium-sized businesses in Canada are on the outside looking in.

Most experts say businesses with between 100 and 499 employees represent the most lucrative and untapped IT market in Canada. But where and what are the IT products for medium-sized companies? These days they’re typically scaled-down versions of large business IT hardware, software and services or scaled-up small business products. And a lot of it doesn’t exactly fit the bill for medium-sized companies.

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Market perception or, more accurately, visibility may be a key factor.

Even the so-called experts who are the key advisors to IT vendors don’t always agree on what are the dynamics and trends in the middle business market. Consider a recent piece of research from IT market researcher Ipsos-Reid, entitled, IT Business in Canada: 2006 Mid Market an Large Enterprise Opportunity. The report purports a decline in overall “mid-market” or medium-sized business spend from 2005 to 2006.

IDC Canada, a competing market research company, begs to differ, however. Researchers there contend the medium-sized market for IT continues to grow – overall from C$5.5B in 2006 and on to C$6B by 2010 for a compounded annual rate of 2.5 per cent. Likewise, researchers at Info-Tech say they saw last year and this year “a modest increase in spending” by buyers in this segment.

What do they buy?

Again, there’s some disparity. Ipsos-Reid says about 18 per cent will spend less on “hardware and infrastructure,” presumably things like desktops, servers and network gear and more on software and services. But IDC Canada counters by saying items such as desktop computers, notebook PCs and network infrastructure are the spending priorities of medium businesses.

Info-Tech observations land somewhere in the middle. Hardware acquisition may increase but spending may, in fact, be less because of the commoditization of things like PCs and network equipment. It means that more product function and feature can be purchased for a cheaper than ever price.

Ipsos-Reid and Info-Tech researchers agree this is a market of mixed and often contradictory messages.

“What I have found when doing buyer-base surveys is that it is not uncommon to discover that what corporations across Canada plan to do is not always in sync with what analysts project they will do,” says Lise Dellazizzo, vice-president of information technology for Ipsos Corp. in Toronto.

John Sloan, a senior research analyst for Info-Tech in London, Ont., further suggests unbudgeted spending by medium-sized companies is quite common. Many medium-sized companies budget conservatively but when a critical IT need emerges there’s often no choice but to spend, even though the investment wasn’t planned or anticipated.

“This is a very diverse market,” says Mr. Sloan. “And it’s not like everybody is buying the same thing.” Different businesses look for different technology. Some companies compete on a global scale and require the latest and greatest. Others get by with as little computing as possible.

One type of medium business is definitely not the model for all. Some of these companies behave like a big business while others are more like a smaller counterpart. And there’s everything in between.

The IT-enabled processes and applications of a medium-sized company can be every bit as complex and sophisticated as those needed and used by a much larger company, says Mr. Sloan. The difference is that they fewer people employed to support and manage it. It means finding products that have big business function at a small business price.

The last point is extremely important. There is definitely a limit to what a typical medium-sized company can spend. According to Mr. Sloan, approximately two-thirds of what a business in this segment spends on IT is dedicated to maintenance and management – activities carried out by an IT professional staff. About a third is spent on products and anything that reduces the need for operational support – the helping hands of IT staffs – is likely to get a good hard look by a medium-sized business customer. Gains in efficiency and productivity are golden for customers in the mid market.

In the grand scheme of IT, a medium-sized company also happens to be a pretty big spender. On average these organizations spend more than C$1M a year, according to Ms. Dellazizzo’s research.

While at first glance that seems to be a surprisingly large number, it does add up, says Mr. Sloan. He calculates that support, maintenance and other IT services for a typical Canadian company that earns C$30M annually can top $750K. Included in that tally might be an enterprise resource planning (ERP) application that can cost about C$175K a year just to maintain, while a fairly basic four-person IT department adds another $250K or more. Add in annual business communication costs – voice and data services – that can easily top C$90K to purchase and manage, and then factor in new equipment and software purchases and C$1M gets spent pretty easily.

For IT vendors, the mid market may be confusing but it is worth giving special attention. In her report, Ms. Dellazizzo describes it as “the most significant revenue-generating engine in Canada when it comes to IT spending.” While large businesses spend more per capita, the mid-sized market has greater volume. There are nearly seven times as many medium-sized companies than large in Canada.

“ (It) seems to me that unless you are a vendor with clearly established relationships at the upper-upper levels of corporate Canada, if you are looking for growth – you might want to look at making serious inroads into the mid market,” says Ms. Dellazizzo. To do that, IT vendors had better start figuring them out.

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