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THE JOURNAL REPORT: TECHNOLOGY
Little Firms, Big Hurdles
Tech companies are turning their attention to small companies.
It isn't an easy sale.
By ROBERT A. GUTH
Staff Reporter of THE WALL STREET JOURNAL
April 26, 2004; Page R10
Alan Kahn is on the front lines of one of today's toughest
business frontiers: reselling software to America's eight
million small and midsize companies.
As co-chief executive of New York-based InterDyn AKA, Mr.
Kahn fights for business in an arena that for years had
been neglected by large technology makers -- those with
less than 1,000 employees.
Not anymore. The biggest technology makers, including Microsoft
Corp. and International Business Machines Corp., have started
to tout the huge potential they see in selling to the small
guys. They say that by tapping the smaller companies they
can help offset the broad slowdown in sales of computers,
software and networking gear to big companies. Microsoft
Senior Vice President Orlando Ayala is confident enough
that he predicts Microsoft's sales to smaller companies
will reach $10 billion within 10 years.
But a look at AKA shows that while many small and midsize
businesses constitute a ripe market, selling to these companies
can be a difficult game that demands just as much sweat
as big-company sales, but with a far smaller payoff. Steadily
falling prices of software, stiff competition among resellers,
and highly cost-conscious buyers make the business tough.
And it's resellers like AKA, which act as middlemen of sorts,
that are doing the sweating.
"I don't know if they will fulfill the destiny they have
mapped out," says Mr. Kahn of Microsoft's $10 billion revenue
prediction. "But if they do, we will be as busy as can be
for the next five years."
 In
2003, the 8.1 million U.S. small and midsize businesses
spent $75 billion on information technology, a 4.1% increase
from the previous year, while overall IT spending in the
U.S. grew just 0.7% over the same period, according to IDC,
a market-research firm based in Framingham, Mass. IDC predicts
that in 2004 investment from small and midsize businesses
will rise 6.2%, outpacing the 4% expected increase overall.
Long, Hard Road
AKA is one of the entrepreneurial worker bees of the industry
that handles the details of selling, installing and maintaining
software for the big technology companies. The resellers,
often geographically focused, are the only way many big
tech companies can reach the mass of smaller companies without
employing armies of sales and support staff.
For its part, AKA, formed in 1998, handles software made
by the former Great Plains Software that smaller businesses
use to manage finance, customer relations and other business
functions. In 2001, Great Plains was snapped up by Microsoft
for $1.1 billion in stock, raising the profile of the software
and the whole small and midsize market. Meanwhile, AKA has
rebounded from the collapse in technology spending that
dragged the company deep into the red in 2001. The following
year it moved into the black, and in 2003 its profit grew,
as sales reached $6.5 million. (The company doesn't reveal
profit figures, but Mr. Kahn says that last year's net income
was between 15% and 20% of sales.)
Still, there are some challenges for resellers. Many of
those stem from the ever-falling price of software. Microsoft
and other software makers use lower pricing to attract smaller
businesses to their technology. But resellers feel the brunt
of that strategy, since even as prices fall, their costs
don't, making it increasingly difficult to earn a profit.
The pressure becomes particularly acute as customers, with
their own financial concerns, often take far more time than
in the past to mull what software to buy. To make the sale,
resellers have to stick with those customers -- preparing
demonstrations and answering questions -- which raises their
costs.
Last year, for instance, AKA won a bid to supply software
to a cooperative of universities. The bidding stretched
on for more than a year, requiring so many product demonstrations
and man-hours of work that when the deal was done -- the
cooperative bought about $60,000 of software -- AKA barely
broke even. Only later, when the customer spent $15,000
on incremental software and consulting services, did AKA
make a profit.
"It's more challenging to make our business model work
as the length of the sales process extends and the price
of the software goes down," Mr. Kahn says.
While hindsight shows that that kind of job isn't very
profitable, Mr. Kahn says it's impossible to know that up
front. "There was no one time where it made sense to just
say 'OK, we are cutting this off now and we are not spending
any more time on this,'" he says. "The customer would have
said 'If you can't help us through the rest of this process,
then we are going to find somebody else who can.'"
The selling process can be even more prolonged at the smallest
companies, many of which are operated by owners who know
they need new technology but are particularly sensitive
to its cost. "As they're writing the check they clutch onto
the checkbook thinking, in effect, 'It's coming out of my
own pocket,'" says Ray Boggs, an analyst who covers small
and midsize businesses at IDC.
Then there's the middleman. Smaller businesses often don't
have technology expertise in-house or standard processes
for choosing a technology vendor. That places extra demands
on the reseller to educate and hand-hold -- often at no
charge and with little promise of any return. Other times,
the businesses hire consultants to guide them through the
process. For resellers like AKA, adding another layer can
limit direct contact with the client.
Starving for Feedback
A bid by AKA to land a big deal illustrates the frustration
of trying to work through a consultant to make a sale.
In late 2002, AKA was invited by a consulting firm to bid
on a project to set up an accounting system for Young Broadcasting
Inc., a 1,000-person New York-based company that runs 11
local television stations around the U.S. Young didn't have
the human resources or expertise to manage the day-to-day
details of the bidding, so it hired the consultant -- a
specialist in helping companies rework their financial systems
-- to handle all the details, says Stephen Baker, Young's
vice president.
At the start, AKA and the other bidders weren't told that
the potential client was Young. Instead, they communicated
only with the consultant, who directed them to answer a
detailed 70-page "request for proposal" for a company described
simply as a television broadcaster. AKA made it to the next
round a month later, demonstrating the Great Plains software
to Young's management in Chicago. A few weeks later, it
was called to do another demonstration in New York. The
process stretched out nearly four months.
Still, during that whole time AKA got so little feedback
from the consultant that Mr. Kahn says he wasn't sure it
was worthwhile to continue. Young also deliberately limited
direct contact between itself and bidders, another tactic
to guard it from being overburdened with requests and questions
from bidders. Young knew it kept AKA starving for feedback,
but it was part of the game plan. "When you're playing poker,"
says Mr. Baker, "I believe in the poker face."
When Mr. Baker finally announced to Mr. Kahn that the company
had chosen AKA, "I could feel through the phone the sweat
beads on Alan's head," he says.
AKA is now putting the finishing touches on the new system,
which cost about $1.3 million.
Mr. Kahn says that AKA continues to benefit from strong
investment by small and midsize businesses. But he says
he expects that Microsoft will continue to drive down the
cost of its software for the market, making his job even
tougher. Meanwhile, it's unclear if the recent uptick in
technology spending by businesses will continue.
Nonetheless, Mr. Kahn says he is bullish about his company's
performance this year. And while casting his lot with Microsoft
has its challenges -- namely the pricing pressure -- he
says he's optimistic that small and midsize companies will
continue to buy.
"This is our business," he says. "The more of these smaller
deals we do, the more successful we are going to be."
Mr. Guth is a staff reporter with The Wall Street Journal's
San Francisco Bureau.
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