Small and Midsize Business IT Outsourcing Vendor Market Trends, 2003 (Executive Summary) Executive Summary

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1 Small and Midsize Business IT Outsourcing Vendor Market Trends, 2003 (Executive Summary) Executive Summary Publication Date: 15 January 2004

2 Author Robert H. Brown This document has been published to the following Marketplace codes: ITSV-WW-EX-0411 For More Information... In North America and Latin America: In Europe, the Middle East and Africa: In Asia/Pacific: In Japan: Worldwide via gartner.com: Entire contents 2004 Gartner, Inc. and/or its Affiliates. All Rights Reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice

3 Small and Midsize Business IT Outsourcing Vendor Market Trends, 2003 (Executive Summary) Introduction A significant increase in attention by outsourcing vendors to small and midsize businesses (SMBs) occurred in More SMBs are using outsourcing services than ever before, but this option is still not a mainstream pursuit for most. Most vendors seek opportunities among midsize (not small) businesses, and they do so as a parallel activity to business development efforts with large businesses. Gartner Dataquest estimates that the IT management market size and forecast for small businesses (1 to 99 employees) in 2003 is $1.84 billion and will grow to reach $2.58 billion by The midsize business (100 to 999 employees) IT management market in 2003 is estimated at $12.65 billion in 2003 and will grow to reach $15.67 billion by Many vendors will fail because of a lack of segmentation, an inability to respond to the unique requirements of the SMB market and a failure to commit to SMBs over the long run. Although SMBs prefer to maintain control and independence, they need help deploying and managing IT initiatives. With limited skills, SMB project managers struggle to determine the right mix between internal and external IT resources. Vendors will find that midsize businesses in particular will outsource more as their relationship with them grows and as these businesses develop a greater comfort level with outsourcing. As larger outsourcers cultivate more business with SMBs, many will rush to attract alliance partners that can help them drill down-market into SMB sectors they perceive as "underserved." These alliances will also help pave the way for large-market vendor access to an SMB sector in which many do not presently have relationships. Meanwhile, smaller, regional outsourcers will move upmarket at times, successfully cherry-picking high-margin contracts among large enterprises. The objectives of this market trends study were to identify and analyze major trends affecting how IT outsourcing vendors target SMBs in North America. The major areas of focus are broken down into the following categories: Customer focus and revenue mix SMB drivers and attitudes toward outsourcing Target markets Sales and marketing Contracts and engagements Methodology Key Findings From July through September 2003, Gartner Dataquest conducted a multipart survey of 65 IT professional services companies. These companies included consulting and systems integrators, IT management services companies, application service providers (ASPs), and business process outsourcers of varying revenue sizes. The data for this report was drawn from one of these surveys, which focused specifically on IT outsourcing trends. These companies were asked general questions about their work with SMBs. Data collected from a total of 35 IT outsourcing providers was analyzed. The following are some of the key findings of the Gartner Dataquest 2003 SMB IT outsourcing market trends study: 2004 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 1

4 2 Small and Midsize Business IT Outsourcing Vendor Market Trends, 2003 (Executive Summary) Recommendations The high growth of the overall outsourcing market is the top driver for vendors to pursue SMBs Fifty-four percent of vendor respondents cited "high growth of the overall outsourcing opportunity" as very important or extremely important in their pursuit of outsourcing business among SMBs. Unfortunately for SMB customers, this response indicates that to most respondents, the SMB market is not a specific strategy, but rather an afterthought in their pursuit of a robust market opportunity in outsourcing overall. Midsize is the SMB IT outsourcing market Midsize businesses account for approximately 20 percent of the total U.S. IT outsourcing market. Small businesses (those with fewer than 100 employees and $50 million revenue) account for only 3 percent of this market. SomeoutsourcershaveturnedattentiontoSMBsbecauseofthedowntrend in large-market IT spending One-fifth of vendor respondents cited "downtrend in large enterprise spending on IT and IT-enabled services" as very important or extremely important in their pursuit of outsourcing business among SMBs. Bolstering channel alliances and partners is critical for SMB outsourcing vendors Of the respondents, 62 percent rated this factor as a very important or an extremely important initiative for 2003 relative to SMBs and outsourcing. Smaller, regional outsourcers are interested in large-market prospects Of the respondents, many of which were Tier 3 and Tier 4 local providers, 33 percent rated "moving upmarket to provide services for large enterprises" as very important or extremely important initiatives for SMBs want contractually guaranteed cost savings When rating their agreement with statements about outsourcing and SMBs, vendor respondents strongly agree that cost is the primary requirement for many SMBs. "Contractually guaranteed cost savings and return on investment (ROI) are important for the SMB sector" rated highest, with an average rating of 5.44 on a scale of 1 to 7, with 7 being the highest. What SMBs want and what outsourcers can "afford" to give them do not match Thestatement"IToutsourcingvendorsofferthesamelevelsof service and support to SMBs as large enterprises" averaged a very low rating 2.9 on a scale of 1 to 7. Many SMBs want outsourcers to give them high-touch services. High-touch services are expensive, especially for larger vendors that traditionally work with like-size large enterprises. Outsourcers think SMBs want costs and flexibility to grow together over time When working with SMB prospects, outsourcing vendors are told that the top four selection criteria include their capability to provide a total solution, lower prices, flexible pricing and lower cost of implementation. Gartner Dataquest makes the following recommendations to SMB IT outsourcers: Be specific about your plans for the SMB market. Focus your efforts on midsize businesses. Beware of using SMBs as a large-market "escape hatch." Bolster alliances and channel partnerships. Beware of diluting midmarket traction to win large-market clients. Contractually guarantee cost savings and ROI Gartner, Inc. and/or its Affiliates. All Rights Reserved. 15 January 2004

5 Small and Midsize Business IT Outsourcing Vendor Market Trends, 2003 (Executive Summary) 3 Related Documents Assess your capability to "afford" to deliver what SMBs want from outsourcing. Offer an integrated portfolio of services. For additional information, see the following Gartner Dataquest research: "SMBs Seek 'High Touch' From Infrastructure Outsourcing Vendors," ITOU-WW-UW-0114 "SMB IT Services Buying Trends and Preferences, 2003," ITSM-NA-UW-0111 "SMBs Show Appetite for IT Outsourcing: How Will Outsourcers Respond? (Executive Summary)," ITSV-WW-EX-0273 "Evaluating the IT Infrastructure Outsourcing Landscape," ITSV-WW-DP "SMB Services and Software Market U.S. Forecasts, 2003," ITSM-NA-MS "Selecting an Outsourcer: Relationships Are Key to SMBs," COM "SMB IT Utility Wants and Needs, 2002," ITSM-NA-UW-0108 "Seven More Big Vendor Mistakes Inhibiting SMB IT Sales," COM "XSP Competitive Landscape," ITOU-WW-FR-0110 "SMBs Come in More Sizes Than Just Small and Medium," M "SMB Market Provides Relief for Savvy IT Professional Services Vendor," ITES-WW-MT-0107 "What Do SMBs Seek From Professional Service Providers?" M "Seven Big Mistakes Vendors Make When Targeting SMBs," M "Selling IT Services to the Small and Midsize Client," ITSV-WW-DP-0169 "Channel Strategies for SMB-Focused Vendors," ITSV-WW-PR-0225 For the full report, see "Small and Midsize Business IT Outsourcing Vendor Market Trends, 2003," ITSM-NA-MT Gartner, Inc. and/or its Affiliates. All Rights Reserved. 15 January 2004