CDN Special Report: SMB markets are in flux

SMBs who survived the recession are now wondering if we’re headed for another dip into recession territory, or how viable their business will be over the next few years. But the Canadian market is, generally speaking, fairly healthy, with plenty of growth opportunities – both for SMBs to improve their productivity, and for resellers to help them get there.

In Canada, the SMB market overall is healthy, since the economic uncertainty hanging over the world has had a greater direct impact on the U.S. and Europe, said Paul Edwards, director of research for Info-Tech Research Group. “That being said, Canadian SMBs in specific industries – notably the manufacturing and resource sectors – have been negatively impacted by the high Canadian dollar against the U.S. currency.”According to Industry Canada, Canadian business bankruptcies have been on the decline since the fallout from the recession of 2008, which indicates at least a growing stability in the market.

“The continued health of the SMB market in Canada will be determined by how long global economic uncertainty remains,” said Edwards. “The longer it lasts, the more it eats into consumer confidence, thereby negatively impacting the ability of all SMBs to sell their products and services, and by extension impacting their ICT budgets.”

Canadian businesses also lag behind their comparable global counterparts in productivity, which impacts their ability to compete internationally – which is why productivity is still the No. 1 area of improvement for the SMB sector in Canada, said Edwards.

According to IDC Canada, SMBs with fewer than 500 employees will spend approximately $10 billion on IT in 2011, accounting for 27 per cent of total IT spending in Canada (not including telecommunication services spending).

While the health of SMBs depends on the industry they play in and the economic conditions of their market and suppliers, the overall picture for SMBs (and general business for that matter) is tied to indicators such as consumer confidence.

“And we’ve seen it fluctuating over the past year,” said Tony Olvet, group vice-president of research for IDC Canada. “This has implications especially for SMBs selling products and services to consumers. The higher Canadian dollar can punish export-oriented firms, so those SMBs counting on foreign markets need to improve productivity to stay competitive.” So a key message for IT vendors, he said, is to show how IT investments directly improve productivity.

IDC’s Canadian Small and Medium-Sized Business IT 2011-2015 Forecast Summary predicts that for small businesses (from one to 99 employees), IT spending will grow by 1.7 per cent (CAGR) over the next five years. For medium business (from 100 to 499 employees), it will grow by 3.7 per cent.

Just as much as the recession caused small business owners to shut doors, it also caused new ones to open, said Michelle Warren, president of MW Research & Consulting. “The Canadian SMB market is always strong – albeit challenging. Purchasers tend to opt for larger companies, thinking that they will be around a bit longer than the smaller ones, but they are usually surprised by the resilience and creativity of Canadian entrepreneurs,” she said.

IT Opportunities

According to IDC Canada, the top spending categories for SMBs right now include networking hardware (an area of high priority spending across all SMBs); outsourcing and operational services (more likely seen in medium businesses where economies of scale can be achieved); application development and deployment software (pockets of strong growth where “big data” exists); and data warehousing (where analysis and integration are required). Cloud services can overlay or play a role in each of these areas.

“Mobility is of course another important trend in business, not just phones and devices but also mobile device management software and services,” said Olvet.

There are a number of key areas where SMBs will be steering their attention over the next year, said Edwards, including business intelligence, mobile applications, SaaS and IaaS, as well as desktop virtualization.

SMBs are becoming much savvier around understanding the potential of technology in helping their businesses perform better, said Edwards. But the key to making sense of business data is deploying software that allows for standard and on-the-fly analysis, whether it’s provided in reporting tools or simply for quick data access.

Understanding the dirty details of the business is important in decision-making, he said, but there is a wide selection of BI, from the very simple to the most complex, and the SMB market should look to source BI that fits the best price and functionality metrics. This may even include upgraded versions of Excel for some base-level capabilities.

Another big trend is applications for mobile devices. “SMBs are generally good adopters of consumer technology, either by force as younger employees bring in their own devices, or because the highest-level executive wants to have the same mobile functionality at the office as at home,” said Edwards.

Mobile device success is related to the apps that run on them, and since mobile devices will be ubiquitous across many SMBs, there will be a need for applications that meet business requirements, which will differ across industries. “Of course this opens up the need for mobile device management capabilities, but that’s maybe a topic that will gain ground in SMBs next year,” said Edwards.

Just as we’ve become accustomed to tweeting 140 characters, 99-cent commerce is becoming big business, said John Reid, president and CEO of CATAAlliance. And you don’t have to be a big business to design a 99-cent app. “Those are some of the ways [SMBs] have to reorient their thinking.”

One growing trend that CATA sees is in the area of smart vehicles, which is due to the transformation of the industrial economy through the use of technology, “so the area of auto design or design engineering is very much a growing market,” said Reid. That’s part of the green revolution, he said, where we’re pushed not only to reduce carbon emissions, but we’re also affected by the politics of oil, and there’s an overall realization that we must shift. “All of those technologies are moving down in price and representing significant market segments.”

Challenges for SMBs

Improving productivity is always a challenge for SMBs and is the No. 1 driver for technology adoption, he said. The state of the economy will also continue to be a challenge. “But I think most SMBs find it challenging to find a balance in their businesses, regardless of market dynamics, where business goals and imperatives can be supported by technology, and where growth or at least long-term sustainability is a byproduct,” he said.

Access to growth capital is fundamental, said Reid, as is having access to talent that understands some of these new modalities of doing business – that represents a cost and in some cases can be a scarce resource. There’s also a need for leadership in that business owners have to know how to build flexible business models – maybe teaming up with a multinational or understanding how to set up a distribution network. If you take a misstep in legal or privacy, you can find yourself out of business pretty quickly.

The biggest challenge for SMBs moving forward, said Warren, will be staying alive and finding funding. Cash requirements are challenging to manage, and moving forward into new opportunities without daily cash flow can hinder and close a business.

Challenges such as “data management” sound expensive to an SMB owner, she said, so channel partners must be able to communicate the benefits in a cost-effective manner that won’t hurt the SMB’s pocketbook.

Challenges and opportunities for the channel

One of the biggest challenges for the channel will be evolving its offers to align with new delivery models, such as SaaS and IaaS, said Olvet, as well as continuing to move upstream in delivering value while remaining cost-competitive as larger-scale volume channel partners encroach.

In terms of a cloud-based channel, however, it’s still early days and it’s taking on different shapes. “I expect there to be new relationships formed between large service providers and VARs. But not all traditional resellers will survive in the new cloud world. Storefront dealers and retailers may also have new life if they can cost-effectively serve the ‘prosumer’ inside businesses to deal with the support issues related to BYOD,” said Olvet.

He advises the channel to watch for opportunities in machine-to-machine (M2M) technology and services in specific industries such as utilities, transportation and healthcare.

The channel comprises, by and large, SMBs, so they face many of the same types of challenges as their customers. However, the channel is also a unique group of SMBs that is experiencing other market challenges to business models and future success, he said.

And the biggest challenge is the cloud. “It’s a foregone conclusion that the delivery of IT or business functionality via the Web is here to stay, and that it’s both a driver and inhibitor for the channel,” said Edwards. On the one hand it offers the opportunity to benefit from recurring revenue, but has the challenge of being significantly different than on-premise, revenue and profit, so integrating it into a legacy partner business creates barriers – not to mention the fact that it has the potential of reducing SMB on-premise infrastructure and software spend, thereby reducing the channel’s core business.

“There are already channel players in the U.S. that are basing their businesses solely on cloud-based solutions, so I would expect the same to happen in Canada,” said Edwards. “But for the most part I see many channel partners creating separate groups that support the sale of cloud.” As customers begin to adopt cloud-based solutions they won’t be jettisoning their entire on-premise solutions, which provides opportunity for these partners to ensure the smooth integration of both.

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Jim Love, Chief Content Officer, IT World Canada

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Vawn Himmelsbach
Vawn Himmelsbach
Is a Toronto-based journalist and regular contributor to IT World Canada's publications.

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