Microsoft Sees Increasing Momentum in the Midmarket Segment

REDMOND, Wash., Feb. 21, 2005 — Who is the midmarket customer? That question is being asked with increased frequency across the global IT industry It has become common knowledge among market watchers that the midmarket business sector will help drive global IT industry spending in the near future with an annual growth rate of 12percent (AMI-Partners 2004). Overall, global software sales also have grown at 11 percent year over year as midmarket businesses increasingly adopt more sophisticated technology solutions. And amid this market groundswell, Microsoft is experiencing increasing momentum for its software solutions among midmarket organizations.

Yet serving this customer group in a consistent way has largely been an industry mystery due to the fact there is no singular way in which these customers define themselves. The midmarket customer, viewed at Microsoft as a business with 50 to 1,000 employees, profiles their needs most often by the vertical industry in which they operate. Their business processes are often more diverse and complex than small business, nearing sophistication levels of the enterprise, yet IT staff and budgets remain relatively small. To drive further misunderstanding, the midmarket segment often is lumped alongside small business in the industry as “SMB.”

Microsoft seeks to engage this customer base on a deeper level and help the industry to redefine this segment more on customer terms. To learn more about the midmarket customer and Microsoft’s strategy for helping these businesses embrace technology to retain a competitive edge, PressPass spoke with:

  • John Lauer , vice president of the Worldwide Small and Midmarket Solutions and Partners (SMS & P) Group at Microsoft

  • Roux Carroll, an IT director for R.L. Hudson & Company, a mid-sized distributor of custom rubber parts, based in Tulsa, Oklahoma

  • Scott Bess , IT director with Goodwill Industries of Central Indiana, which serves 50,000 people per year and operates 27 retail stores and other manufacturing and packaging operations

John Lauer, Vice President, Worldwide Small and Midmarket Solutions and Partners (SMS & P) Group, Microsoft Corporation

PressPass: John, let’s start with you. Your new role at Microsoft is focused on midmarket strategy. What have you found to be the biggest differences between the small business and midmarket?

Lauer: I’ve seen several differences in my time at Microsoft. Before taking this role, I actually worked for several years in the field in Asia where I had quite a bit of hands-on experience helping this customer segment adopt technology, and I know them to be a very diverse, complex group. Strictly in terms of size, Microsoft defines midmarket businesses as those with between 25 and 500 PCs or 50 to 1,000 employees. We define small businesses as those with 25 or fewer PCs and less than 50 employees. However, we find it’s more effective to define customers by business need and IT profile. Much like Microsoft has done in the small business segment, we’ve done extensive research across multiple geographies to determine how midmarket organizations view themselves. We know that core business needs are very similar to small business in that they want to better manage cash flow, connect with new customers and increase sales to existing customers. When you factor in that midmarket customers often work in disparate offices and have infrastructures that need to be connected, it becomes much more complex. And they are facing these sophisticated challenges with limited resources and cash flow. For example, a midmarket business must decide whether to use existing budget to invest in a new truck, hire sales staff or invest in technology. It’s that contact with real customers facing real challenges that inform our strategy of offering midmarket customers the tools and services that can help them fulfill their business growth plans.

PressPass: Microsoft is experiencing considerable momentum in the midmarket segment. What do you believe are the contributing factors?

Lauer: I believe we can attribute our success to date to two things. The first is a robust software solutions stack that we deliver in conjunction with our partners, to address what midmarket customers need across a spectrum of vertical industries. Our customers tell us that Microsoft’s technology is highly adaptable to their specific needs and a good value for their investment. The second contributing factor is a world-class network of highly skilled industry partners who add tremendous value to our software. We have approximately 30,000 gold and certified partners around the world, and they work closely with businesses to help them be more productive and more competitive. While our company focus remains on delivering broad-based technology that provides a high level of business value, our business partners extend those solutions and help ensure that our mutual customers are making the best possible investment for their business needs. The strong momentum Microsoft is experiencing in the midmarket is evidence of that. While we’ve seen outstanding growth in the midmarket segment we believe it’s only the beginning. There is much more we can do to better serve the 1.2 million customers around the world that can be considered midmarket businesses. This is a market that has been traditionally underserved by technology vendors, and we want to do what we can to change that.

PressPass: How is Microsoft re-defining its midmarket strategy?

Lauer: Well, before we even sat down to refine our current strategy, the first thing my team did was to place a direct focus on researching the complexities of midmarket customers to make sure we understood everything we could about how they define themselves. It’s then we confirmed they align by industry, have complex IT infrastructure needs but often limited cash and IT resources. From there, we divided our focus into three pillars. One is continuing to deliver the most flexible, robust technology to meet specific customer needs; the second is enabling a partner community to specialize their skill sets. But the third pillar, and probably the biggest change we’re making, is refining our customer engagement model. To this end, we’ve developed a midmarket customer relationship program that will provide consistent and relevant information to customers based on their technology business lifecycle.

Press Pass: What is the goal of the midmarket customer relationship program?

Lauer : My goal is to take the work we’ve done in understanding the complexities of the midmarket customer and develop better relationships with our customers in tandem with our partner community. We believe that if we can understand how an organization is growing, we can be more proactive in how we help that organization develop the IT infrastructure to accommodate that growth. We are beginning to gather detailed information on several key verticals. We’ll use this data from customer and partner feedback to continue refining our technology to meet the challenges faced by organizations in the midmarket segment. We will also continue to work closely developing solutions with our vast network of independent software developers (ISVs) to ensure software solves real business problems. But technology is only the first step. We are working on changing the language in which we talk to our customers, based on how they want to be reached and how they buy. For instance, we are investigating different assets, such as financing, adapted to midmarket budget and business needs. Total Solutions Financing programs are available for Microsoft Business Solutions through Microsoft Capital in seven countries, including the U.S., Canada and five in Europe, and we are working to expand TSF programs to include more Microsoft solutions in certain geographies.

PressPass: Considering the momentum Microsoft is experiencing in the midmarket, why make changes to a strategy that appears to be succeeding?

Lauer: Microsoft’s philosophy — and it’s one I share on a personal level — is that you can always be better, particularly when it comes to improving a customer’s experience. If you look at IT growth in this segment at an industry level, PC shipments are growing 10 percent per year and servers are growing at 15 percent, so there is clearly a growing customer interest in understanding more about what technology can do for their businesses and to help them remain competitive. With that in mind, we’re refining our strategy to help customers more easily identify the solutions that are right for their business. We have great technology today, but we’re committed to improving how we go about providing customers with consistent and highly-relevant information to help them understand how to take advantage of what they have and take their business to the next level of growth.

PressPass: You mentioned partners as critical and called out the role of ISVs. What is your strategy for engaging ISVs?

Lauer: By delivering a valuable platform to the midmarket, Microsoft’s ultimate vision is to work with its ISV community to help more customers adopt customized technology solutions as a strategic business advantage. So using our technology as a way to help generate demand for our partners is top of mind. To further increase awareness of Microsoft technology for our partners, we’re currently working on a globally consistent, Web-based method of providing education to midmarket customers about the benefits of IT. We’ll have more to say around this in coming months. In the meantime, ISVs who are building on our platform can be thinking about developing a wide range of solutions through the Microsoft Partner Program and the ISV Competency. Or ISVs can determine a specific vertical industry in which to specialize. A specialized skill set is a key factor for those who want to position themselves for growth with Microsoft’s platform. There is a great deal of opportunity around services in this segment.

PressPass: Which Microsoft products are best suited for midmarket businesses?

Lauer: We’re seeing the whole technology stack become more widely adopted among customers in this group. From a numbers standpoint, Microsoft Windows Server System products are growing most rapidly, and Microsoft Office System and Windows desktop also continue to perform very well. In addition, Microsoft Business Solutions offers products that have been developed and refined for midmarket businesses: Microsoft Business Solutions CRM, Microsoft Business Solutions–Axapta, Microsoft Business Solutions–Great Plains, Microsoft Business Solutions–Navision, and Microsoft Business Solutions–Solomon. All of these products are experiencing growth. But I think this is a great time to hear from our customers directly on which products they find most valuable for their midmarket business.

PressPass: Great, so from a customer’s perspective, how do the products offered by Microsoft serve businesses in the midmarket?

Roux Carroll: At R.L. Hudson, we migrated to Microsoft Business Solutions–Navision about a year ago. We distribute rubber parts to manufacturers in diverse geographies, so we pretty much have to modify any solution we choose to purchase to fit the individual needs of our customers. We selected Microsoft Navision because of its core functionality in the areas of accounting, inventory management, sales, purchasing, engineering and quality control. Microsoft Navision really rises to the challenge in terms of quality control, which is something our customers have come to expect of us. But what really sets us apart in our use of Microsoft Navision is that the product is far more affordable to modify and upgrade. With our previous technology, by the time we’d made the modifications we needed we were at roughly three times the quoted cost. And then, when it came time to upgrade, we would have had to pay to make those modifications all over again. With Microsoft Navision, when you upgrade you don’t have to start all over again with the modifications. Most of the customizations stay in place when you upgrade. In addition there are tools available that let us make modifications on our own, which saves money. The bottom line is that we’ve paid less for a superior product. The annual cost of ownership is much lower.

Scott Bess: Goodwill Industries of Central Indiana serves 50,000 people a year. We have 27 retail stores, as well as manufacturing and packaging operations. While we’re not the same size as Fortune 500 companies and certainly don’t have a Fortune 500 budget, we’re large enough that we have a number of the same business needs. Through Microsoft we have access to that type of technology but at a price point that is palatable to us. We’ve been running Microsoft Business Solutions–Great Plains for seven years now. We use it for financials, inventory and human resources. In addition, we use other Microsoft technologies, including Microsoft Windows XP, which we have on approximately 600 desktops, Microsoft Windows Server 2003, and Microsoft Exchange 2003. We’re essentially a Microsoft shop. We use handheld devices both in the central warehouse and in the stores to track inventory, all of which feeds directly into Microsoft Great Plains. It’s also beneficial for us the way the different systems work together. Microsoft Excel, for example, allows our department heads to work in a familiar environment, and the integration between Microsoft Excel, Windows Server and Microsoft Great Plains means that the budgets can be uploaded directly in Microsoft Great Plains, which means our financial people don’t have to do data entry. Applications built using .NET ease the process of moving data quickly and efficiently among different locations and systems.

PressPass: What are some of the main challenges midmarket businesses faces today?

Carroll: What’s really tough on midmarket businesses is that they often have business problems that are complex enough to warrant using technology that is usually distributed to larger companies. While we may have big-business problems and challenges, we don’t have big-business budgets. I’m the IT director at R.L. Hudson. I manage 75 work stations and about 30 servers in three locations. We have approximately 80 employees in three locations — in Oklahoma, Arkansas and South Carolina. We’re basically a solution center for rubber distribution, which includes design procurement, supply chain management and a 10- to-12-person engineering team. We’ve developed a niche market for procuring goods from overseas. We work with major players in the manufacturing industry, and in order to keep up with the game, we’ve taught ourselves to go overseas. The problem here is that we’re not a huge corporation. We’re fairly lean, but we still need the technology infrastructure with the muscle you’d normally associate with a larger operation. The biggest challenge we faced is to feel like we are truly valued by a gigantic software vendor.

Bess: Businesses in the midmarket are always tight on resources and funding. One of the advantages to the approach Microsoft takes is that expert resources are almost always available. There are a lot of programmers, consultants and partners available to our organization. For an organization like mine that doesn’t have endless resources, having a Microsoft environment is advantageous because we can bring people in and they’re immediately familiar with the environment since Microsoft products and tools are widely available and widely used. And with Microsoft’s pricing models — particularly in the nonprofit sector, for which Microsoft has set pricing — you’d be hard pressed to make a solid business case to go any other way.

PressPass: How does Microsoft accommodate that challenge?

Carroll: Microsoft accommodates that by having highly skilled and knowledgeable industry partners. The partner we work with — Integrated Systems Technology (IST), based in Dallas — is an excellent group with impeccable product knowledge. I deal directly with someone at IST who in turn deals with someone at Microsoft, which clearly values the expertise of IST. IST has a help desk that I can contact if I run into problems, and I have access to their best programmers. That’s been very helpful, being able to contact the partner who made modifications to our system. They know the modifications, and they know how to troubleshoot if problems arise.

Bess: Microsoft’s partner community is extremely strong. Obviously the company has made a commitment and significant investment in the partner system. Where Microsoft is taking things from a technology standpoint in all their products is also very beneficial to the midmarket segment. Microsoft’s dedication to interoperability and out-of-the-box functionality is very beneficial, especially if you don’t have a lot of resources to develop extra applications.

PressPass: Obviously, industry partners are the strongest connection to customers, so how does Microsoft plan to keep a pulse on the midmarket customer long term?

Lauer: I think the answer is in line with how the company has changed over the years. In the beginning, Microsoft was a small company with great technology and a lot of young and brilliant employees. Now we’ve matured into an industry driver, and we’re very conscious of our obligation to provide responsible leadership. As a large company, we’re now able to allocate the resources necessary to stay focused on and really understand our customers growing technology needs. For instance, we didn’t use to formally measure customer and partner satisfaction, but now it’s one of the key factors on which our executive compensation is based. Now, if we find there are areas where we’re not making progress, we can immediately address those areas with additional resources and improvement plans.

PressPass: Why should a business in the midmarket, or an industry partner specializing in that segment, invest in Microsoft technology and services?

Lauer: At the end of the day, Microsoft is fundamentally committed to understanding our customers by segment and enabling partners to reach those customers. We invest in research to deliver the right products, resources and support to our customers, and we’re committed to evolving in accordance with the needs of our customers and our industry partners. In addition to evolving the Microsoft Partner Program to help businesses specialize their skillset, we’re very focused on demand generation, including opportunity-mapping at the field level to help partners identify where the greatest opportunities are, and we offer a platform that continues to grow and provide value.

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