Midrange Shops Shift Priorities This Year

June 29, 2009 Timothy Prickett Morgan

With a sharply declining server market this year and relative stagnation expected for the next four years, at least according to forecasts released by IDC and reported on in last week’s issue of The Four Hundred, you can bet that midrange resellers are trying to get a bead on what things midrange shops want and, more importantly, need to spend money on. Which is the main reason why the Enterprise Computing Solutions division of master IT distributor Arrow Electronics has just done its second annual mid-market end user survey.

Even though IT Jungle is not a midrange business partner and is therefore not entitled to the report that Arrow’s reseller partners are getting, Robert Spee, director of marketing for the Midmarket and IBM groups at Arrow ECS, shared some insights from the most recent survey that the company commissioned Echo Research to do to case the midrange. Spee says that Arrow ECS’ MPower marketing programs for the midrange focus on companies with between 100 and 5,000 employees, and that in the United States there are some 110,000 such firms; depending on who you ask. According to Spee, there are around 6 million businesses in the U.S. and obviously only a few thousand enterprise-class firms. So it is a big, relatively flat pyramid by customer size. (But, I would guess, probably looks like a tall rectangle with three horizontal stripes when you look by aggregate revenues per business size.)

To chase these SMB and enterprise customers, Arrow ECS has over 18,000 partners–including value-added resellers, solution providers, independent software vendors, and system integrators. In April of last year, Arrow ECS launched the MPower program, which does very targeted marketing and sales for partners who agree to make a commitment to training and marketing for high-growth areas for Power Systems and other platforms. The MPower program already had 185 partners, and Arrow ECS obviously wants that number to continue to grow.

While the sweet spot for Arrow’s channel partners might be companies with between 500 and 1,000 employees, Arrow wanted to take the pulse on the upper part of the midrange (where IT infrastructure has a certain sophistication and budgets presumably can’t just be turned off as they can be for small businesses), and so the company asked Echo to talk to 200 IT executives based in the United States with between 1,000 and 5,000 employees and engaged in the financial services, manufacturing, wholesale distribution, healthcare, and retail sectors. While Arrow didn’t explicitly look for shops running Power Systems iron, based on the customer profiles of i and AIX shops, many of these customers are almost certainly using an IBM platform in some capacity with one or both operating systems.

So what did Arrow find out from midrange customers? “We learned that this mid-market continues to be strong,” says Spee. “But there is a little less optimism about IT budget growth.” And, some priorities have understandably changed.

In last year’s mid-market survey, which was done in the spring like this one, 61 percent of the shops surveyed said they expected their IT budgets would be going up, with 30 percent being flat and 8 percent expecting them to go down; 1 percent were unsure what was going on budget-wise in 2008. This year, only 29 percent of the midrange shops polled by Echo on behalf of Arrow ECS said they would go up, 40 percent said they would be flat, and 29 percent said they would go down; 2 percent were unsure. If you average the amount of the increases in IT budgets for 2009 for the midrange shops saying they expect an increase, the math works out to an average of 16 percent. If you do the same math on the declining budgets, it works out to an average 18 percent decline. These seem like pretty big swings to me, but I am used to thinking about the entire market swinging up or down by a few percent–usually nothing close to 10 percent one way or the other.

As you might expect, the number one priority this year was to reduce IT costs (cited by 77 percent of respondents), followed up by improving customer service (meaning how well or poorly IT serves end users and business units). Access to capital has also moved up on the list after being fairly low down last year, and improving security and reducing risk has also moved up in priorities.

The thing to remember about the midrange, particularly the upper end of it where Arrow ECS was doing its polling, is that it simply is not possible to absolutely lock down spending in the data center. Business units have long-term application and infrastructure plans and budgets that match the scale and term. “People can defer buying new PCs,” says Spee. “But they can’t put off mission-critical applications.” And not just back-end ERP systems and CRM and SCM extensions, either. Security, business intelligence, online collaboration, and server and storage virtualization and consolidation are key areas where midrange companies are willing to pony up some cash.

Interestingly, Arrow ESC found that 38 percent of those polled said their company’s managers require some sort of mathematical return-on-investment calculation for IT purchases. (Meaning, something more than “this is really cool technology, we should get it.”) Only 12 percent of the midrange companies polled said they required a one-year payback for an investment, while 31 percent said that they are allowed to justify the acquisition on the basis of total cost of ownership over multiple years. Another 13 percent said they make their IT buying decisions based on the total acquisition cost within one year or less. Presumably the distinction between ROI and TCO is one that plays into the favor of upgrades to Power Systems i iron one steady-state, mission-critical workloads, while ROI calculations come into play on new projects, like setting up a data warehouse or a CRM system.

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