IBM Expects Big Growth From Small Businesses

The company hopes to tap into a global SMB market worth about $487 billion annually and growing at 6.5% per year with new servers, software, and services.
How key is the small- and mid-sized business market to IBM's future growth prospects? In the long run, it's perhaps more important than customers like American Express, Citigroup or JPMorgan Chase.

Speaking Tuesday in St. Louis at the company's annual gathering of third party software developers and resellers, IBM CEO Sam Palmisano said the so-called SMB market is poised to become IBM's biggest source of revenue -- surpassing the lucrative financial services industry as the company's premier customer segment. SMB's represent "the biggest IT growth opportunity in the world today," said Palmisano, during his keynote speech at IBM PartnerWorld.

In its most recent first quarter, IBM reported SMB sales of $4.1 billion, compared to $6 billion for financial services, which is still the company's largest vertical.

That could change as IBM seeks more growth from business customers with 200 to 2,000 employees. And growth is what IBM desperately needs. Its sales increased a mere 4% year-over-year in 2006 after falling 5% in 2005.

IBM believes it can significantly better those numbers if it can gain a bigger presence with smaller companies. Palmisano said the global SMB market is worth about $487 billion and growing at 6.5% per year. What IBM needs to do to capture more of that, Palmisano said, is develop additional programs and services that will allow independent software vendors and value added resellers -- the company's main conduit to SMBs -- to sell its products more effectively. Already, ISVs and VARs account for 47% of IBM's SMB revenue.

IBM this week at PartnerWorld introduced a number of new products and services aimed at small- and midsized businesses around the world -- and those who sell to them. Among other things, it announced availability in 23 countries of several products it currently sells to SMBs in North America under its Express Advantage program.

The offerings include the System i 515 and System i 525 Express servers, the TS2340 Tape Drive Express storage system, and the Lotus Complete Messaging Express Starter Pack. Palmisano said the offerings will allow SMBs to "access capabilities that were previously reserved for large enterprises."

Beyond hardware and software, IBM also believes that SMBs represents a largely untapped market for its business services offerings. In a PartnerWorld interview, Steve Solazzo, general manager for IBM's SMB group, said many small- and mid-sized companies are looking to outsource routine functions in order to reduce the size of their back office.

"In some cases they're even bypassing software-as-a-service," said Solazzo, noting that such hosted application offerings still require businesses to maintain some level of in-house IT expertise -- a resource many SMBs can't afford on don't want to deal with. IBM is ramping up the number of business process outsourcing services it offers to both large and smaller companies. For instance, it recently acquired Equitant -- a provider of outsourced order-to-cash services.

IBM is also focusing hard on targeting SMBs in emerging markets in Asia and Latin America in the belief that growth in those regions will outpace domestic growth. Last week, the company unveiled localized versions of its PartnerWorld Express Advantage Web portal for resellers around the world. "The subtext of the emerging markets story is once again SMB," Palmisano said during his keynote.

So what's IBM's biggest barrier to finding big growth in the small business sector?

Because the company lacks a retail presence at popular SMB supply outlets, it's still primarily thought of as a vendor to the Fortune 500s of the world when compared to rivals Hewlett-Packard and Microsoft. "Does that mean you're going to see our products on the shelf at Office Depot next week? Probably not, but it's an area we need to address," said Solazzo.

The extent to which IBM solves that problem could have a big impact on its growth prospects for the next several years.