Small Business Taking the Biggest Economic Hit

This may come as no surprise, but the small-business segment is feeling the biggest pinch in the current economic downturn.

According to the Channel Insider 2009 Market Pulse survey, the small-business sector makes up 49.7 percent of respondents’ sales, and that same market is showing the greatest signs of a slowdown in IT spending, at 28.3 percent.

“We are seeing a reassessment of IT spending by our clients,” said Sindi Major-Martinez, president and CEO of Sindel Technologies. “They are prolonging the life of their existing networks through increasing maintenance. If they do have to upgrade their networks, they are looking for business-friendly financing options.”

The Market Pulse queried 180 solution providers on myriad business challenges including revenues and profits, pricing and vendor and customer relationships. The results indicate an overall slowdown in technology spending, with small businesses clamping down the hardest.

“Customers are redeploying old equipment and re-looking at their shelved equipment, so if a company is adding a new facility or if something broke, more are looking into repairing rather than replacing,” said Aaron Kane, president and CEO of CallTele.

Survey respondents note that their small-business customers are demanding more for their money as the economy continues to decline.

“Companies are looking for a detailed analysis of the return on investment for every piece of equipment,” Kane said. “That is huge because they want to know exactly how it’s going to impact the bottom line in terms of usage, staffing–what it can do for the company. They’re saying, ‘I want it in a summary form and I want it all spelled out. I must present it to the executive team before any decision can be made.’ So as a consequence, the sales cycle is getting longer.”

Major-Martinez agreed. “There absolutely must be a business case that delivers an ROI,” she said.

The Market Pulse survey yielded a number of troubling results, including the indication that customers are cancelling IT contracts. Almost one-quarter of survey respondents – 24.4 percent – report that cancellation of contracts is the largest tendency among their clients.

However, Kane said his company’s customers are delaying contracts and new projects rather than cancelling.

“Legal is one vertical we are very strong in, and they’re telling us their billing rate is down 40 [percent] to 60 percent and so they need to delay their projects. They are just delaying, but that could be a delay of a quarter or 12 months. It’s not defined yet,” Kane said. “Customers are feeling the pinch themselves.”

Mark Lubbock, president of Louisiana Data Systems, is also seeing delays rather than slowdowns with his customers.

“Most customers recognise and accept the ROI for pending projects. In fact, it is the ROI that serves as the deciding factor for projects and purchases,” he said. “If there are hard dollar returns the project tends to move forward. The only time the soft dollar prevails is if it is tied to doing more with fewer people.”

Solution providers noted that services-based projects are on the increase – a scenario also indicated in the survey. Almost 23 percent of survey respondents note that customers are increasing their demand for professional services.

For Kane, managed telecom services and leasing are becoming important elements of customer conversations. “The outlay for capital cash is less, so customers are talking about recurring cost more than capital expenditures,” he said.

“Many of the SMB clients are spending money on outsourcing their IT departments so they can reduce their payrolls,” Major-Martinez said.

That’s not to say, however, that hardware is not being purchased in the SMB space; rather, small-business customers are buying as their needs require.

“Aging infrastructure is behind much of the spending we see today,” Lubbock said. “The tail-end of the Y2K hardware/software upgrades are expiring and require replacement.