Download Attacking the Untapped Middle Market

Attacking the Untapped Middle Market –
A New Business Model for Profitable Growth
© 2000 Booz•Allen & Hamilton Inc.
Marty Hyman
Ragu Gurumurthy
Debjani Deb-Phalke
Yogesh Pathak
Attacking the Untapped Middle Market – A New Business Model for Profitable Growth
Information technology providers traditionally focused on large businesses to sell their most sophisticated
products and to drive their profitable growth. But with the rise of “middle market” businesses and the
lowering costs of technology, there is abundant opportunity for information service providers to profit
from pursuing this heretofore neglected business segment.
I
n recent years, the speed with which information
competitive with the larger players as well.
technology has revolutionized the way enterprises
Going forward, technology will continue
do business has been nothing less than startling.
to be a great equalizer for some medium-
No less impressive is the agility that information
sized companies in several different industries.
service providers — including applications service
providers (ASPs), telecommunications service
The Middle Market Is Large, Growing Quickly and Hungry
providers and Internet service providers (ISPs) —
for New Services
have demonstrated in delivering state-of-the-art
According to the Small Business Administration,
information services in different ways. In doing so,
small businesses are responsible for 39% of the U.S.
the vast majority of these service providers have
GNP and 44% of all sales. They also provide 57%
concentrated their efforts on the largest enterprises.
of all private sector employment. More importantly,
They reasoned that middle market businesses —
they are growing more quickly than large enter-
those having roughly 100 to 500 employees —
prises; four out of five jobs added to the U.S.
didn’t have the scale or the resources to employ
economy are attributable to smaller businesses.
their most sophisticated and lucrative offerings.
While smaller businesses have not commonly had
However, as information technology has become
access to the most sophisticated offerings of the
vastly more sophisticated and dramatically less
information service providers, they clearly appre-
costly — and profit margins for service providers
ciate information technology and are eager to get
have been increasingly squeezed — new markets
more of it. According to a survey by Sherwood
for growth are needed.
Research, middle market companies already
The middle market provides much opportunity
for those service providers willing to adjust their
business paradigm. The new business paradigm has
account for 47% of the total IT market. And
more than 70% of these companies are connected
to the Internet.
been enabled by revolutionary technology advances.
Recent qualitative research conducted by
This “e-revolution,” in turn, enables information
Booz •Allen & Hamilton shows that medium-sized
service providers to satisfy their customer’s needs
businesses are spending on average $3,000 per
in innovative ways — especially in terms of both
month per employee in cumulative IT support.
offerings and channels. Their expertise can help
Most importantly, our research found that the
their customers reduce cost of operations to stay
majority of these businesses are increasing their
1
technology investments as the “new paradigm”
information services that middle market businesses
takes hold. Most recently, these companies have
are using and upgrading. We further found that
indicated a willingness to invest aggressively in new
these requirements can be grouped into five basic
services such as e-commerce, unified messaging,
segments (see Exhibit 1). Traditionally, service
Internet access, IP VPN and a few hosted applica-
providers have relied primarily on the size of a
tions such as customer relationship management
company or its spending on telecommunications
(CRM) and collaboration. But these customers
services as primary attributes for segmentation.
would need training in how to use the new services,
Our analysis of the information indicated that
along with a clear articulation of the value propo-
middle business requirements are determined largely
sition for them. This remains a core challenge for
by the following three factors:
the service providers.
• Technical sophistication of the company —
The more technological the business of the
company, the higher the demand for sophisticated communications
Needs for Applications and Services Vary by Segment — and
So Does Their Channel Preference
• Growth of the company — The faster the pace
of growth, the more likely a company is willing
to invest in better communications
Where are they committing their money? We found
that there is significant variance in the kinds of
Exhibit 1: Segment Profile
Segment
High Tech
and Harried
Remotely
Local
Movers and
Sellers
Growth
Frequency
of Contact
Technology products or services
High level of post-sales support to customers
Move data quickly: they need speed
Flexibility to accommodate fast growth
Fast turnaround and high reliability
Convenience (bundling)
Many remote sites within local area: quarries,
job sites, fields, boats
Limited customer universe
Mobile communications within a defined local area
Fast voice line provisioning interval
Telecommunications service advice
Products require tracking
Mobility and global reach equals high telecommunications spending
Mobility solutions (for U.S. and international) at competitive prices
Effective handling of high incoming call volume
Messages to mobile staff
Track product
Automate for the
People
Many repeated customer requests on same topics
Large customer universe
Automated solutions for repeated customer requests
Disseminate information to customers
Low Needs, Low
Maintenance
Price-sensitive, but, at the same time, concerned with reliability
Basic voice communication
Want low price and reliability at the same time
extremely important
Source: Booz•Allen & Hamilton analysis
2
Technical
Sophistication
Profile and Needs
very important
somewhat important
low priority
lowest priority
• Audiences of the company — The more complex
and varied the internal and external audiences,
the greater the range and sophistication of
communications desired
The profiles of these five segments are given as follows:
resellers (VARs) who are trained and knowledgeable or through direct call centers. Thus it is clear
that even though a direct salesforce is the most
preferred option, there are other indirect options
with adequate support mechanisms to target the
middle market aggressively.
Exhibit 1: Segment Profiles
Our research revealed that both the communications needs and the level of pre- and post-sales
support required differs significantly by segment.
For example, companies in the “high tech and
harried” and “automate for the people” segments
generally want more sophisticated services such as
IP VPN, e-commerce and several other scalable
Findings That Service Providers Can Use to Target
Middle Market Opportunities
Our research uncovered several common themes
among most middle market businesses we
investigated that savvy service providers can
use to identify potential opportunity.
services, in addition to superior reliability, faster
Middle market businesses require a high degree of
provisioning and 24 X 7 tier 2 customer support.
service dependability yet do not want to manage or
On the other hand, companies in the “movers and
maintain the services themselves — Surprisingly,
sellers” segment typically want more outsourcing
none of the businesses we researched — even the
type functions, which include tier 1 and tier 2
technologically advanced — wanted to establish
customer support, in addition to a different set of
in-house and independent resources to stay current
services such as unified messaging, IP Fax, hosted
with communications needs. They all wanted these
applications like CRM and wireless data/messaging
capabilities to be managed from an outside resource;
integrated with wireline services. A detailed
synthesis of needs from our research is shown in
Exhibit 2, with services such as messaging, hosting
and e-commerce emerging as high-need services
across all the segments.
some indicated they would like a “service bureau”
to understand their needs and provide all the
support required. The differences across different
segments originated primarily in the level of advice
and help that they needed to develop an optimum
solution that could then be externally managed.
Exhibit 2: Application Needs by Segment
According to our findings, the propensity to
purchase from various channels also differs by
segment. For example, the “high tech and harried”
customers were more willing to purchase services
over the Internet, including receiving e-billing and
support. On the other hand, “remotely local”
customers tended to purchase from a direct sales
Middle market customers are looking for simple,
packaged one-stop shopping — They don’t
want to have to juggle services from a variety
of providers. They want cost-effectiveness, topcaliber support, rapid turnaround and a single
point of contact. And, if possible, they want local
vendor relationships.
force and from specialized industry groups/organi-
Middle market businesses want to “look like a
zations — trade associations who better understand
bigger company” — They are increasingly aware
their needs. Other segments such as “movers and
that to capture the most sophisticated customers
sellers” and “automate for the people” were more
they need to implement the most sophisticated
willing to purchase services from value-added
offerings of the larger companies where possible.
3
Exhibit 2: Applications Needs by Channel
Small Business
Medium Business
Comments
Unified Messaging
Internet Access
Web Hosting and Design
High Tech
and Harried
Telecom Consulting
High tech and harried require more
sophisticated applications even within
small companies
Voice Mail
High-Speed Data Lines
E-Commerce
IP Telephony and Fax
VPNs
Network Mgmt and Integration
Voice Mail
Internet Access
Remotely
Local
Networking needs emerge as remotely
local companies grow to become
medium businesses
Integrated Cellular and Two-Way Radio
Telecom Consulting
VPNs
Network Mgmt and Integration
Internet Access
Movers and
Sellers
Telecom Consulting
VPNs
Voice Mail
Network Mgmt and Integration
Unified Messaging
ISS and Call Centers
Needs increase dramatically as
movers and sellers grow to become
medium businesses
E-Commerce
IP Telephony and Fax
Internet Access
Automate for the
People
Telecom Consulting
Interactive Support Systems and Call Centers
Voice Mail
Low Needs, Low
Maintenance
Increased dependence on communications
network for enhancing productivity
Network Mgmt and Integration
Voice Mail
Internet Access
Simple needs mean simple
applications, even as companies grow
Source: Booz•Allen & Hamilton analysis
They are looking for similar products and services
technology planning and management. As a result,
to those employed by large businesses but with
their technology landscape evolves into a mixture of
fewer “bells and whistles” and for lower prices.
legacy and state-of-the-art systems. When making
They are looking for service providers who understand their needs — Middle market customers are
often mistaken for being “tough sells” when they
really are simply price-sensitive. They can’t waste
any new investments, the decision makers are
skeptical about issues like hidden costs and interoperability. They need a technology evolution plan,
a framework for expanding their systems in a cost-
employee time or resources in searching for
effective and evolutionary way over time.
appropriate solutions. They are typically “half
They are looking for simple, cost-effective means for
ready” to commit, meaning that they will not pull
learning about new products and services — A
the trigger until they are convinced they have a
dedicated salesforce and/or call center contact have
well-articulated value proposition.
not been cost effective for either service providers or
They are looking for systems that can evolve cost-
middle market businesses. The businesses need easy,
effectively over time — Middle market businesses
cost-effective access to new products and services.
usually lack the resources and capital required for
The rise of the Internet presents service providers
4
and middle market businesses alike a great oppor-
ability to offer new products and services to middle
tunity to find each other.
market businesses by themselves, especially considering the investment restraints of those businesses.
A New Approach to Gain Profitable Growth From
A way around this hurdle is partnerships.
Middle Market Businesses
Partnerships can effectively defray the costs and
risks involved in getting to a market first. As we
The first step information service providers need
scan the environment, we see that some in the IT
to take to gain profitable growth from the middle
industry — particularly the software and hardware
market is to ask themselves three simple questions.
vendors, as well as the systems integrators — have
First, can they see areas of opportunity in the
already traversed this path and have shown that
middle market that warrant their pursuit? Second,
partnerships work.
do they have existing and planned offerings that
could be tailored to serve the market? And third,
do they think they could understand the needs of
middle market customers and structure service
delivery and channels in a way that would create a
win-win situation for all partners? If the answer to
these questions is “yes,” then service providers are
ready to consider the steps necessary to change
their business paradigm to pursue this sector.
In our view, any new business model used to pursue
the sector requires a foundation of three core themes:
• Rapid Service Deployment to satisfy unique
needs of customers
• Innovative ways to Access the Customers to
communicate the core benefit proposition
of offerings and to understand their
evolving needs
• Providing Superior Support to the customers
while keeping the total cost of service low
Rapid Service Deployment — In almost every
industry, a major factor for success is to be first —
or at least a fast follower — to market with a
significant innovation. The same is true with the
information services industry. Those service
providers who are quick to market with innovative,
well-serviced and well-priced products have the best
chances for success.
For example, partnerships with applications and
content providers would allow service providers to
minimize risk and decrease the time to market. Our
discussions with software and hardware vendors
as well as system integrators indicate that this
partnership opportunity will be mutually beneficial.
Additional reasons for this include:
• Most IT vendors are not interested in being
service providers on their own. They consider
this outside their core competence.
• IT vendors are interested in long-term relationships with service providers. They consider
such services an additional channel for their
software or hardware platform. System
integrators are also interested in relationships
where they can provide application integration
or act as a channel.
• IT vendors realize the potential for the middle
market and are open to partnerships that
focus downstream.
• Most established IT vendors are flexible
about revenue-sharing arrangements, more
so in opportunities concerning emerging
data services.
• Most IT vendors are busy releasing Internetenabled versions of their packages/platforms.
They realize the Internet’s role as a service
delivery medium and are eager to participate
in Internet-based services.
Partnerships with players with varying positioning
and competencies are already evident. Exhibit 3
However, in light of the costs and risks in being
demonstrates this trend in the emerging area of
first to market, few service providers have the
Application Hosting Services.
5
Exhibit 3: Segment Profile
Best-of-breed applications are at the center of application outsourcing services.
IBM has recently made announcements to bring hosted applications to the “neglected middle market” through a series of partnerships.
This includes ERP applications from JD Edwards and industry-leading accounting software from Great Plains.
USInternetworking (USi) is another player in the hosted applications market. It sources data centers and network infrastructure from
US West, which also has an equity stake in USi. USi’s applications partners include Siebel (CRM), Broadvision (e-commerce), PeopleSoft
(HR) and Microsoft (messaging).
Interliant has bet on groupware infrastructure outsourcing. Based on its partnership with Lotus, it provides “rental apps” for the Notes
platform. Applications like Instant Teamroom can be rented in real time by visiting Interliant’s Apps-Online catalog.
Cisco has established the Cisco Resource Network for growing businesses. Toward this end they have partnered with managed
application services providers like Employease, Netmosphere, eCompany, SalesLogix and Great Plains.
Source: Booz•Allen & Hamilton analysis
Exhibit 3: Examples of Partnerships in Applications
Exhibit 4: Channel Models and Their Equivalents in Cyberspace
Hosting Services
Consider some of these relationships at work:
Access the customers — The middle market can
be effectively addressed through a combination
of existing and new channels. Innovative channel
strategies may be necessary for several reasons.
Current channels of a provider may be inadequate
to effectively address the middle market. Needs-
Umbrella of certified VARs supplementing a call
center for lead generation (establish channel from
scratch) — In many cases, the VARs may not be
direct employees of the service provider. While the
VARs own the customer interface, the service
provider still owns the customer relationship. Sears
based segmentation may call for completely new
Home Central and Protection One provide good
channel strategies tailored along customer needs.
examples of this model. The provider typically sets
In addition, most new service models are based
up a network of independent VARs from scratch or
on partnerships rather than vertical integration.
uses an existing network of channel partners. For
Especially in the data arena, it is possible to
example, if an application service provider includes
exploit synergies from a wide variety of channel
Microsoft applications in its portfolio, it may
partners like software VAR networks and partners
consider using Microsoft VARs as a channel. Such
of vendors.
an arrangement enables the provider to offer
Based on our customer research, understanding of
the industry drivers and the economics around
customer access/reach, we believe that three
“full service” — including pre-sales consulting,
provisioning/integration and post-sales support —
to the customers.
channel models are most applicable for the service
Affinity marketing on an already established portal
providers to target the middle market effectively
(cyberspace equivalent) — This structure involves
and efficiently. These are “establish channel from
the use of a portal to establish a relationship with
scratch, “leverage existing channel” and “leverage
a customer and facilitates the selling process.
existing vertical/local relationships.”
Portals draw traffic that allows providers to set
6
up a relationship with customers. Services such
customer base to a whole group of businesses.
as Excite, Netcenter and Yahoo guarantee repeat
Examples of communities of interest include an
visits due to their rich content and features like
agency of multiple listings for real estate, the local
free e-mail, personalized start pages, etc. Service
chamber of commerce or an association of non-
providers have already started using portals as a
profit businesses. Several companies have used this
serious lead generation channel. AT&T is selling
“hub and spoke” approach to market. For example,
long distance services and Internet access on Yahoo.
IBM is targeting accounting firms to comply to its
AOL has set up an online mall for its e-commerce
Great Plains platform, thus reaching the small and
customers. Quicken has set up a small business
medium-sized businesses that use the accounting
portal which vendors like Office Depot leverage for
firm. This enables very creative bundling — and
e-sales. Other vendors who extensively use portals
affinity marketing—in addition to direct access to
as sales channels include Amazon.com, Dell and
customers in a concentrated fashion.
Computer Discount Warehouse (CDW).
Partner with a player having existing relationships
Affinity marketing through vertical interest groups —
in a vertical — This approach enables superior
“Central interest points” or “communities of
targeting of key verticals and has the same
interest” could be used to connect a fragmented
economic benefits of a “hub and spoke” approach.
Exhibit 4: Channel Models and Their Equivalents in Cyberspace
Marketing
Strategy
Channel Partner Relationships
Establish
Channel
Leverage
Existing
Channel
Cyberspace Equivalent
Setup network of certified
VARs
YOURPORTAL.COM
Example:
Sears Home Central
Leverage the VAR network of a
software vendor
Set up your own portal for
business customers
Example:
Intuit Quickensmallbiz.com
THEIRPORTAL.COM
Affinity marketing on a
vertical community portal
Example:
Microsoft of Novell VARs
Existing eyeballs relationship
Examples: • CDW on Yahoo Small Business
• Excite Small Business by Quicken
Leverage
Existing
Vertical/Local
Relationships
Partner with a player having
existing relationships
in a vertical
NICHEPORTAL.COM
Examples: IBM and HBOC
Partner with membership
organization in a
vertical/local community
Affinity marketing on a
vertical community portal
Eyeballs from a vertical
Example: VerticalNet
Examples: ADP and IBM
Service Provider
Channel Partner
VARs
Customers
Source: Booz•Allen & Hamilton analysis
7
A case in point is HBO and Company (HBOC).
success in the middle market sector need a similar
HBOC is a top provider in the $13 billion
one-two punch — underscored by the need for
healthcare information industry. It has formal
cost-effective delivery.
partnership programs with various hardware and
software vendors. It generates revenues through an
extensive software product portfolio, a services
group focused on system integration and a network
solutions group focused on network design and
implementation. HBOC’s partner for network
transport is IBM Global Services, through which it
provides a number of value-added services. These
include online medical database gateways, Internet
access, a portal with web links to journals, clinical
information and drug interaction services and paid
A consistent and integrated strategy of support is
also a crucial concern in determining what kind
of channel selection and revenue sharing model
to select. Regardless of how fine a product is,
customers will not stay pleased over time if their
service concerns are not adequately addressed. If a
provider does select outside channels, it is also very
important to brand the service aggressively so that
the power of the brand can overshadow the on-site
contact between the VAR and the customer.
services like Physicians Online and Medline. In this
In light of the ever-constant demands of cost,
model, IBM has found an effective vertical-focused
service providers also need to devise service
channel in HBOC.
strategies whereby various routine or simple
All these different options, as discussed, have
services can be self-provisioned over time. Such
different capabilities and require a different revenue-
arrangements can be successfully triggered once a
sharing approach — from flat commissions for
customer is confident that a strong relationship
referrals to sharing a percentage of customer revenue
exists and will continue to exist.
on a yearly basis. Formulas depend on the inherent
While it is too early to tell how easily and cost-
value of the channel to convert leads to customers.
effectively state-of-the-art information services
Providing superior support — As mentioned
can be transitioned downstream to middle market
earlier, an important key to success in the infor-
businesses, there is little doubt that continuing
mation services industry is to get a new product or
advances in technology combined with lowering
service to a market first. But this is rarely the key
costs will facilitate the process over time. At this
to lasting success. Excellent and pervasive service is.
point there is no surefire way to identify who the
Over recent years, for example, many companies
winners in this process will be, and the field is
introduced promising digital cellular telephony
wide open. Nonetheless, it is very likely that those
technology with initial success only to experience a
service providers who quickly and objectively
rapid decline. More recently, Sprint PCS introduced
analyze their capabilities, identify logical middle
a digital cellular telephony package that quickly
market opportunities where those capabilities are
gained momentum. Largely accountable for this
potentially attractive — and then go after those
success has been a nationally coordinated service
opportunities with a sense of urgency — will have
program. Information service providers looking for
the best prospects for success.
8
About Our Firm
B
ooz •Allen & Hamilton is a global management
and technology consulting firm committed
steel, telecommunications, textiles, tourism, transportation and utilities.
to helping senior management improve the perfor-
With our in-depth understanding of industry issues
mance of their organizations. In more than 90
and our expertise in strategy, systems, operations,
offices, in hundreds of the world’s leading industrial,
organization and technology, we assist our clients
service and governmental organizations, our team of
in developing the capabilities they need to compete
9,000 professionals has one common goal — to help
and thrive in the global marketplace.
our clients achieve and sustain success.
We judge the quality of our work just as our clients
Our broad experience in the world’s major
do, by the results. Their confidence in our abilities
business and industrial sectors includes aerospace,
is reflected in the fact that more than 85% of the
automotive, banking, chemicals, consumer goods,
work we do is for clients we have served before.
construction, defense, electronics, energy, engineering,
Since our founding in 1914, we have always
food service, health care, heavy industry, insurance,
considered client satisfaction our most important
oil and gas, pharmaceuticals, publishing, railways,
measure of success.
The Writers
Marty Hyman is a Vice President and Partner
Debjani Deb-Phalke is a Senior Associate with
with Booz •Allen & Hamilton’s Communications,
Booz •Allen & Hamilton and is a member of the
Media and Technology practice in New York. His
Communications, Media and Technology practice.
background includes a wide range of product
Much of her work has focused on market entry
development and marketing strategy, business devel-
strategies for telecommunications carriers,
opment, strategic planning and cost restructuring
equipment vendors and e-commerce players.
experience within the telecommunications industry
over a period of twenty years.
Yogesh Pathak is an Associate with Booz •Allen &
Hamilton in the Commercial Communications
Ragu Gurumurthy is a Principal with Booz •Allen
Technology group in McLean, VA. He primarily
& Hamilton in the Communications, Media and
works with communications and technology
Technology practice in New York. He works
companies developing new product/service
primarily with communications service providers
strategies and Internet-related growth initiatives.
and equipment vendors to develop growth and
For more information contact:
market share enhancement strategies, focusing on
New York
new business models, global distribution strategies,
Marty Hyman — Vice President
[email protected]
212·551·6594
Ragu Gurumurthy — Principal
[email protected]
212·551·6708
technology forecasting, new product development
and innovation processes and M&A opportunity
assessment.
Worldwide Offices
Abu Dhabi
Melbourne
Amsterdam
Mexico City
Atlanta
Milan
Auckland
Munich
Bangkok
New York
Bogotá
Paris
Boston
Philadelphia
Buenos Aires
Rio de Janeiro
Caracas
Rome
Chicago
San Diego
Cleveland
San Francisco
Dallas
Santiago
Düsseldorf
Sa~o Paulo
Frankfurt
Seoul
Hong Kong
Singapore
Houston
St. Louis
Jakarta
Stockholm
Lima
Sydney
London
Tokyo
Los Angeles
Vienna
Madrid
Warsaw
McLean
Washington, D.C.
CORP 217 3M: 2/00 PRINTED IN U.S.A.