SMEs driving IT Recovery

Barron’s writes:

So if the world’s global conglomerates aren’t driving a tech recovery, who the heck is? Answer: Small and medium-sized businesses, or SMBs. Just as the SMB is the salvation for a broader economic recovery, the smaller companies are the ones kick-starting tech, says analyst Jaime Roca of Precursor, an independent technology-research boutique.

Consequently, those IT vendors who were the biggest suppliers to the SMB going in to the tech depression will be the biggest winners coming out of the slump, Roca says. This group has the earnings power and incentive to increase their tech spending prior to the end of the year and well in to 2004. For the most part, most of the SMB companies did not overindulge in massive software and hardware upgrades during the bubble to the same extreme extent that their enterprise-class brethren did, and that means they will be generating more of a demand now, he adds.

In a September study of large and SMB spending, Precursor concluded that small and medium-sized firms (100-1,000 employees) have increased their capital spending, including tech, at a rate eight times faster than larger corporations.

Thus, the research shop has identified a group of IT vendors who are most likely to benefit, calling it the “growth pack.” They are: Microsoft, Intuit, International Business Machines, Dell Computer, Symantec and Lexmark.

Unsurprisingly, software and services will gain the biggest share, with hardware following and telecom scraping for crumbs, he says. Companies of many sizes and stripes are trying to reduce the complexity of their networks and improve their return on investment, but the SMB is more likely to turn to fewer vendors to do so. They want what technology that they already own to work better through improved integration. And they want to add new applications and services that allow them to better track their supply chains, sales, and finances. Sound familiar?

But they aren’t likely to go to a dozen vendors to do so. This is why Microsoft and IBM stand to do well. They are already providing a lot of these things to small and medium-sized businesses. In fact, Microsoft best serves the smallest businesses, where the least competition lies, but it is progressively moving up into the middle tier as well. Microsoft, as well as Intuit, have entrenched customer bases amid the smallest companies, where they can up-sell and cross-sell new product lines, Roca says. Intuit, for its part, has expanded well beyond its consumer-retail roots (Quicken) and is offering accounting and other back-office software for small businesses.

Roca’s colleague, Bill Whyman, thinks that Microsoft’s launch this week of its new Office System business software will be a big winner, accounting for about half of the company’s revenues and about 70% of its net profits. Along with its growth in servers, Microsoft will morph from being a PC-centric software company of its past to a networking software company of the future.

Meantime, Dell and Lexmark will continue to win the business of the SMB through their lower price strategies. Dell is becoming their supplier of choice in servers and storage, and Lexmark continues to grow through its concentration on all-in-one machines that print, fax and copy. (Lexmark also sells machines under the Dell name through a joint venture between the two). As for Symantec, its dominance in the security software makes it a staple for any IT upgrade, regardless of the size of the company, Roca says.

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Rajesh Jain

An Entrepreneur based in Mumbai, India.