The Real Deal: Jyoti Banerjee on Focus on the M in SME

This continues a series of guest columns from practitioners and bloggers I respect. The category - The Real Deal describes them well.

I have met Jyoti Banerjee just once years ago - and was fascinated how influential he has been in the UK application software market with his publishing, advisory and even his charitable activities. Here he writes about  one of his passions - the mid-market. As SaaS heats up particularly in the SME market, my readers should find Jyoti's views incisive. While he writes about the UK, the concepts apply equally in most global markets (just replace the "s" with "z"!)

"In Europe, we call them SMEs, short for small and medium enterprises. Really, we mean anything that is not big business. We attribute almost mythical powers to SMEs – they drive innovation, employment, and, most of all, growth.  We shower them with every possible financial and regulatory break we can think of.  And they consistently fail to meet our (massively hyped) expectations.

In the SME segment, where business births and deaths happen at about the same rate, the net economic contribution is pretty close to zero.  A year ago, a small group of us decided to study the segment in the UK, and found that the real economic heroes are mid-market enterprises. They power the UK economy. 

That’s where we need to apply our focus: on the M in SME.

Although only three-quarters of one percent of UK companies are in the £10-£250 million revenue bracket, these businesses employ 15% of the British work force, and generate 20% of all corporate profits. Their annualised growth rate is at 8%, which is well above the national growth rate.

By the way, their IT stinks – a Harvard study found that British mid-market companies fail to get the revenue boost that US, German and Brazilian companies get from smart investments in IT.

Despite their sterling business performance, mid-size enterprises (I call them M companies) are nearly invisible. They have no profile in the market, government does not pay them any attention, and they are usually lumped together with small and micro enterprises via the SME label, although they are significantly different from those companies in almost all respects. And, it must be said, that few IT vendors seem to know how to sell to them.  For an example of poor mid-market selling, check out this Siebel story from earlier in the year.

Leaders of Ms often struggle when it comes to knowing where to turn for help and advice. They are rarely plugged into peer networks where they discuss their challenges and learn new ideas relevant to their scale of organisation. B-school methodologies, they feel, are aimed at those who work for Exxon or BP. The massive literature on starting up a new business is completely irrelevant. They want, expect, to grow at 20-25% per annum but don’t always have access to the finance to do it, people with the right skills, or the internal systems.  If they struggle with direction, it is not surprising that those who target them, such as sellers of technology, find it difficult to keep them in focus.

The motivations of an M organisation and its behaviour patterns are critical for understanding how these businesses would respond to particular products and services that are offered to them. Yet, few suppliers to the marketplace for mid-sized businesses understand their unique characteristics, and end up confusing mid and small enterprises in their product development, positioning and messaging.

Next time you meet a leader of an M, consider their deepest current challenges:

1)    Growth – if an M is not growing, it is probably sliding downhill. Fast.
2)    People – finding people, particularly top people with great skills, is difficult; developing existing people is tough because there is little spare time to grow them
3)    Growth – did I mention that already?
4)    Finance – money to build things is often easy to find but money to grow an M usually has a high sticker price
5)    Processes – finding smart processes and technologies that aid growth and are not expensive in terms of money or people
6)    Globalisation – is somebody from across the world blitzing them out of their best markets?
7)    Growth – sorry: been there, done that…

Get my drift? Products or services that fail to ring these particular bells are irrelevant.  But get the resonances going, and the fruits are sweet.  Value is a key requirement, and growth the result that works for customer and supplier alike.

Want to find out more about mid-market organisations? Check out a new UK initiative aimed squarely at the leaders of mid-market businesses at www.m-institute.org. "

Jyoti can be emailed at jbanerjee@kiteblue.net

Comments

[Jeff Osborne]

Hi Vinnie, thanks for posting this. The list of common challenges was confirming to read, and my experience is that those same motivations are consistent with US firms in the $15m - $300m range.

The statement about SME's "net economic contribution being pretty close to zero" is hard to accept. I'd love to know more about how Jyoti arrived at that conclusion.

[Jyoti Banerjee]

Hi Jeff. Well spotted. The net economic contribution of the S sector is nearly zero in growth terms in the UK - the SME sector as a whole does rather better than that because of the strong positive contribution of the M component. It will be interesting to see if this position continues over the next few years. As long as the net births remain close to zero I suspect there will be no change.

Really interesting to read your comments about a possible match with M companies in the US. I have not done any testing of the ideas with US companies but anecdotal evidence suggests that many of the issues faced by UK Ms carry quite nicely across the pond.

[Mahesh Ramamani]

Vinnie, Thanks for the column.
Jyoti, I cant agree more with you. In my days with SAP, I was working very closely with the SMB initiative in Asia. I am sorry to confess that I felt the initiative to be at best conflicting and confusing. Much along the lines of Siebel (Also Jyoti's comment), SAP too was conflicting between "making a REAL product for the SME" and "selling what they have to the SMEs". Here are a couple of thoughts from my side:

1. Vendors like SAP, Siebel that sell "BIG" software are used to making an issue out of dealing with software and the systems around it. They feel that's the way they are NOT selling "IT Commodities". Large Organizations (their main clientele) could take it. But SMEs can't. In order to sell to SMEs, you need a commodity mindset. An "All for just $49.99" attitude which is very diffcult for these big guys to develop. I am not surprised that Oracle is better at this. SFDC and the likes, who flaunt this mindset are a welcome break in the industry.

2. I also found that the big vendors were used to thinking in terms of industry verticals. Such a classification has benefited them to appreciate differences between the industries and their key processes in dealing with large organizations with a lot of vertical integration. But SMEs DO NOT come with such an integration. Hence, my gut feel is industry really does not matter much in dealing with SMEs. You could have an SME chemical supplier whose processes are modelled more like that of an auto - dealer. SAP tried to achieve this by over engineering and introducing what it called as microverticals (Look at businessone soln from SAP).

[Philip Woogate]

Great post and thanks for the link to M Institute.

Most SME’s are actually sole traders (approx 70%). The differences between these and medium sized companies is clearly huge, but both will still benefit by good management techniques and systems.

My experience in the UK M sector is that they are currently relying on mid range software providers such as Access Dimensions and Iris Exchequer. These systems are equipped to give significant improvements to M sector businesses, but often there is a reluctance to invest. I’ve seen too many core systems being used by accountants, but with none of the additional modules that could really open up the system to the whole organisation. Seminars provided by a mid range software providers often demonstrate some extremely useful tools and modules. These would significantly help the business, but the take up from customers is often low.

The four main reasons for the lack of progress with business systems I see are:

> cost – the comparison is always with small business software (which cost peanuts)

> cultural – a resistance to do something new

> technological – lack of internal IT expertise

> implementation worries – they know of a similar business that has had a horrendous implementation

I would be interested to know if you agree with my list or have any additional reasons.

[Jyoti Banerjee]

HI Philip, Your list is very interesting, and one that I buy. I would add two things to your list:

1) Space: by this I mean some freedom for the management team to get involved in the nitty gritty of IT decisions and implementation. Often, I find that management teams don't have the space in their lives to give due attention to the strategic decisions (and detail decisions as well) that need to be made. This is an M problem, as large enterprises usually hire external resources to get a job done, if they find they cannot do it on their own. M enterprises struggle with the space needed. Small businesses rarely need that level of external input.

2) Professionalism - most M businesses cannot afford more than a few top pros. This is particularly true when it comes to IT. The finance director usually runs the IT show in a British company. I have met a number of finance directors who do an excellent job of running IT but most do not. Also, the IT people they hire tend not to be strategic in their thinking but operational.

These issues are highly inter-related with your list.