IBM to Attack $300 Billion SMB Market with Partners

by Timothy Prickett Morgan

IBM is known as a leader in computing aimed at big companies, but it has always had products aimed at mom-and-pop shops, like the machines that come out of Rochester, Minnesota, for instance. But IBM's focus has often been fuzzy in the small and midsized business (SMB) market, much to the detriment of the channel partners who help push IBM's products in this space. But now, under a new $500 million program called SMB Advantage, IBM is getting focused to help partners attack this $300-billion-a-year opportunity.

IBM's internal market researchers characterize the SMB market in this fashion. Small businesses have from one to 99 employees. There are about 100 million small businesses worldwide, and in the aggregate they spent about $150 billion in 2002 on information technology, including services. The average small business spends about $1,500 a year on IT, but you sure can make it up on volume. IBM figures that the compound annual growth rate among these customers will be an average of 11 percent per year between 2002 and 2005. In the midsized tier, where companies have from 100 to 999 employees, IBM reckons there is another $150 billion in opportunity in 2002 at some 500,000 enterprises worldwide. Obviously, each midsized organization spends more on hardware, software, and services, but the average is about $300,000, by IBM's reckoning. Between 2002 and 2005, IBM figures that the "M" part of the SMB market will grow at a compound annual rate of 10 percent per year. The growth in the SMB space is 2 points higher than IBM expects the growth to be in the enterprise space, which is companies with 1,000 or more employees and which spend a lot more money. IBM has a pretty good handle on these shops, but it is interested--once again--in attacking the SMB market because of the large amounts of money involved and because, as far as it can tell, there is no dominant market share leader. (I think an honest assessment would be that IBM is worried that Microsoft, Dell, or Hewlett-Packard might figure out a way to dominate the SMB space. The interesting statistic that IBM is telling its reseller partners is that the sale of solutions--which, I suppose, means software solutions--are growing at a rate of 19 percent compounded annually. This is IBM's real target, to be sure.

In a further testament to IBM's belief that it will be able to show good growth in the SMB market, IBM's chief financial officer, John Joyce, has been breaking out the company's sales in the SMB market separately from other marketing areas when talking to Wall Street analysts. In the third quarter of 2002, when he first started doing this, IBM booked $4.4 billion in sales in the SMB sector across all geographies and businesses. Large enterprises made up the other $14.5 billion in sales (these numbers do not include the Pricewaterhouse Coopers acquisition). If the IT market is a pyramid with 100 million small businesses, 500,000 midsized businesses, and tens of thousands of large enterprises, IBM's business is an inverted pyramid that is top-heavy. SMBs accounted for only 23 percent of IBM's sales in the third quarter of 2002, and in the fourth quarter IBM's SMB sales accounted for 23.5 percent of its $21.7 billion in sales. IBM is heavily dependent on the financial services sector, with between just under 27 percent of its sales coming from that area in the second half of 2002; the public sector accounts for about 16.5 percent of its sales, the industrial sector about 14 percent, and the distribution and communications sectors about 10 percent each. While the public sector will probably spend a lot more dough on IT in coming years as e-government and homeland security drive adoption of new technologies, the manufacturing, distribution, communications, and financial services sectors are not going to grow all that much, unless something changes in the economy. The SMB market is a logical target for IBM's and its partners' growth, mostly because IBM has the marketing machine and extensive 90,000-partner channel to go after it.

The full details of the $500 million SMB Advantage program that IBM is putting together to help partners make money in the SMB space--not as easy a task as it is in the large enterprise sector--are not yet available, but partners down-channel from the master resellers for IBM's products are being given some of the high points of IBM's plans, so they can better plan what they should be doing to make money in 2003. IBM plans to divulge more of its plans at PartnerWorld 2003, its trade show for the partner channel that drives a large portion of Big Blue's revenues, in New Orleans in February. IBM is ponying up that $500 million for demand-generation and channel-partner incentives, and says that $200 million has been earmarked for demand-generation, leaving another $300 million to prop up the profits of partners that sell what IBM wants, the way it wants. IBM has created a tool called Campaign Designer that has over 130 ready-to-go marketing campaigns aimed at specific industries that partners can tap into over the Web. IBM said it will give partners access to prospects in their regions--as it has done in the past--and that it will co-market with partners using these campaign materials and telemarketing campaigns, which, IBM says, will lead to improved customer response rates and qualification of leads.

IBM has created the new incentives under the SMB Advantage program that aim to increase the profits of sales through the partner channel. Just increasing revenues is not going to excite anyone. No company wants to work harder and have no more money left, which has been a criticism of all distribution channels in these post-boom days.

The first is perhaps most interesting to the resellers and customers who use IBM's eServer platforms. IBM will introduce a new set of incentives for eServer resellers that are consistent across all of the eServer brands--zSeries, pSeries, iSeries, and xSeries. These incentives will also cover IBM's storage products, which include disk and tape arrays. The incentives will target new, competitive, and dormant accounts. According to sources who have seen this plan, IBM reckons there are 140,000 iSeries and 150,000 pSeries-storage customers in the SMB space that it can target, who don't have an eServer model installed but are actively using relatively modern IBM gear. There are another 28,000 iSeries and another 3,000 pSeries-storage customers who have vintage IBM equipment and are effectively dormant, as far as IBM and the channel are concerned. IBM has identified another 3,000 SMB accounts that have recently migrated to another company's products, which it wants to win back. This latter area is the one that all of the channel partners will clamor to, since it includes companies that spend $2 million or more on IT hardware, software, and services, and that currently spend less than 5 percent on IBM stuff.

The sum total of these accounts does not even scratch the surface of the 100.5 million SMB accounts in the world, but this is the beginning of IBM's plan. How it will attack the SMB market at large is an interesting question, with a number of possibilities--some of which will not make partners happy, like going direct sales with inexpensive hardware and software.

IBM will also announce a program aimed at selling software in to the SMB space, called Value Advantage, which will allow application solution providers to get incentives (meaning cash rewards) if they push IBM's middleware stack as well as their product. The Value Advantage incentives will be announced in May. On the services front, IBM also is introducing new incentives in the United States that will give partners a piece of the action if they get customers buying IBM products to also sign up for IBM services agreements. In Europe, partners will get steeper discounts when they push services with products, starting on July 1. IBM will also deliver unspecified incentives to European partners that push services into new and competitive accounts, and will deliver other services incentives to its other geographic regions.

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