u.s - the smb market landscape & it opportunity

SMB Landscape of The United States of America

This report is solely for the use of Zinnov Client and Zinnov Personnel. No Part of it may be quoted, circulated or reproduced for distribution outside the client organization without prior written approval from Zinnov

2

U.S. SMBs: Key Business Trends

U.S. SMBs: Key IT Trends

1

2

Agenda

3

Summary: Key Business Trends

Massive Contribution to the U.S. Economy 42% contribution to GDP; $2.1 trillion revenue generated by SMBs 1

SMBs Dominate Services Sector in Terms of Revenue and Employment

Retail, HealthCare, Prof. Svcs.1, Food & Construction constitute ~60% SMB revenue & employment 2

Southern U.S. States Emerge as the Hub of SMB Concentration

South U.S. states – led by Florida, Texas, Georgia – constitute more than 1/3rd of U.S. SMB activity 3

Significant Export Potential with Emerging Markets

Increasing the SMB exports by value by 1.8X would generate additional ~$350B

4

Health of the U.S. SMBs Affected by Cash Flow Issues

•~26% U.S. SMBs shut down in 2011

•Only about Half of the SMBs survive for 5 years 5

SMBs Instrumental in Driving the Economic Recovery

SMBs to grow $575B additional revenue and employ ~23M additional people by 2020 6

*Prof. svcs. include scientific research, architecture, engineering, law, accountancy, advertising, MR, and consulting

4

SMBs Make a Sizeable Contribution to the U.S. Economy

1

Revenue from SMBs $2.1T

Contribution to total Employment

Of all U.S. Enterprises 99.7%

Total SMB Base 28M

Contribution to U.S. GDP1 42%

~50%

Source: U.S. Small Business Administration (SBA) data; U.S. Census Bureau

Medium (20-199)

Small (5-19)

Micro (0-4)

~0.6M

2%

~1.6M

6%

~25.6M

92%

Medium (20-499)

Small (5-19)

Micro (1-4)

Medium sized firms – constituting only 2% of SMBs

(~0.6M) – generates a massive 2/3rd of SMB revenue (~1.4T)

Contribution to GDP

Very High Very High Medium Low

Contribution to Employment

Medium Very High Very High Medium

*Relative ratings

US China India Australia

Note: 1Contribution to GDP represents Non-agricultural GDP

No. of SMBs Revenue

$1.4T

66%

$0.5T

24%

$0.2T

11%

5

U.S. SMB Market is Fragmented Across Verticals

Retail & Wholesale

Professional

Services1

Construction

Health Care

Food & Accommo

dation Services

Manufacturing

Others2

% No. of SMBs 17% 13% 12% 11% 8% 4% 35%

% SMB Employment

16% 8% 8% 15% 12% 9% 32%

% SMB Revenue 15% 14% 10% 15% 5% 10% 31%

Contribution of SMBs in Total

Sector Revenue 47% 53% 79% 42% 55% 39% -

2

Retail, Professional Services, Construction & HealthCare

forms more than 50% of SMBs

Retail & HealthCare make up

~30% of SMB revenue & employment

SMBs dominate enterprises in Construction, Food &

Accommodation & Professional Services in revenue terms

% SMB Revenue 89% 10% 1%

% SMB Employment 90% 9% 1%

U.S. SMBs dominate Services sector both in terms of revenue and employment

1Professional services include scientific research, architecture, engineering, law, accountancy, advertising, MR, and consulting; 2Others include Agriculture, Mining, Utilities, Transport, Information, Finance, Real Estate, Education, Arts, and Entertainment

Services Manu-

facturing

Agriculture, Mining

Source: U.S. Small Business Administration (SBA) data; U.S. Census Bureau

6

Southern U.S. States Constitute over One-Third of Overall SMB Activity

3

24% 23% 23%

22% 23% 22%

20% 20% 23%

35% 34% 32%

No. of SMBs Employment Revenue

*all figures expressed as % of total

Total 7M SMBs

Total 6M SMBs

Total 6M SMBs

Total 10M SMBs

Northeast U.S. (NE)

Midwest U.S. (MW)

West U.S. (W)

South U.S. (S)

W MW

NE

S

16% total no. of SMBs

15% total employment

17% total revenue

Top 3 West U.S. States

California, Washington, Colorado



11% total revenue

Top 3 Midwest U.S. States

Illinois, Ohio, Michigan



16% total revenue

Top 3 NE U.S. States

New York, Pennsylvania, New jersey



15% total revenue

Top 3 South U.S. States

Florida, Texas, Georgia

New York (in NE U.S.) and California (in West U.S.) alone constitute ~20% of total

SMBs, employment and revenue

Source: U.S. Small Business Administration (SBA) data; U.S. Census Bureau Note: Above classification done according to U.S. Census Bureau

West U.S. States: WA-Washington; OR-Oregon; CA-California; ID-Idaho; NV-Nevada; UT-Utah; AZ-Arizona; MT-Montana; WY-Wyoming; CO-Colorado; NM-New Mexico

Mid-West U.S. States: ND-North Dakota; SD-South Dakota; NE-Nebraska; KS-Kansas; MN-Minnesota; IA-Iowa; MO-Missouri; WI-Wisconsin; IL-Illinois; Mi-Michigan; IN-Indiana; OH-Ohio

Northeast U.S. States: ME- Maines; VT- Vermont; NY- New York; PA- Pennsylvania; NH- New Hampshire; MA- Massachusetts; RI- Rhode Island; CT- Connecticut; NJ- New Jersey

South U.S. States: OK- Oklahoma; TX- Texas; AR- Arkansas; LA- Louisiana; KY- Kentucky; TN- Tennessee; MS- Mississippi; AL- Alabama; GA- Georgia; WV- West Virginia; VA- Virginia; NC- North Carolina; SC- South Carolina; FL- Florida; DE- Delaware; MD- Maryland; DC- District of Columbia

7

Significant SMB Export Potential Can be Realized by Increasing Focus on Emerging Markets

SMB Contribution to Exports

U.S. EU

% Businesses Exporting* 98% 99.8%

% Revenue from Exports 33% 58%

Ratio 3:1 1.7:1

4

Challenges with U.S. SMB Exports

SMB’s Export Value can increase 1.8X

to reach EU levels…

…Potential revenue upside of $350 Bn

*SMBs exporting as a % of all enterprises

Source: U.S. International Trade Administration report; SBA Fact Sheet 2012 Germany (EU); USITC SME reports

SMBs exporting to BRIC 25% 40%

Limited Global Reach & Visibility 1

~60% SMB exporters posted sales to only one foreign market (mostly to Canada, Mexico, UK)

Only 5% SMBs export to India and 5% to Brazil, compared to ~40% to Canada

Lack of Export Initiatives by Govt. 2

85% SMB exports are dependent on U.S. Govt. to circumvent trade barriers and open foreign markets

Majority SMBs feel the govt. should negotiate additional trade agreements and help with market access (esp. for India & China)

U.S. SMBs had little success exporting to the lucrative BRIC nations

Lack of Trade Agreements in place

Lack of Knowledge of potential export markets due to limited SMB resources

Language and Cultural Barriers to export esp. in case of India and China

8

Cash Flow Issues Trigger a High SMB Mortality Due to Non-Supportive Banks and Government Policies…

5

26% U.S. SMBs shut down in 20111

SMB

Gro

wth

C

hal

len

ges

Cash Flow Issues due to Strict

Credit Norms post down time

61% SMBs feel U.S. economy affected their business negatively in 2011

32% cite budget constraints as major hurdle in their growth plans

3% decline in the total value of SMB loans in 2012

More than 70% SMBs feel Banks are averse to lending to SMBs

Non-supportive Government Policies drain out SMB funds

73% SMBs feel federal government is a hindrance to their business

40% feel no organization setup for SMBs (like SBA etc) are helpful

Fiscal cliff policy2 (tax hikes and budget cuts), and compulsory Health Care insurance3 for employees will further dry up SMB funds

Employment Issues and

Shortage of Skilled Labor

42% SMBs feel U.S. economy impacted 2012 hiring plans negatively

65% SMBs don’t plan to hire more in 2012

~30% SMBs who intend to hire feel availability of skilled labor as a major barrier (for instance, hi-skill labor is required in manufacturing)

1

2

3

Note: 1includes SMB closings plus bankruptcies; 2implemented since Jan 1, 2013; 3 to be implemented starting Jan 1, 2014

Source: Yodle Small Business Sentiment survey; NBC News; U.S. SBA data; Zoomerang SMB perspectives

Only about Half U.S. SMBs are able to survive for 5 years

9

…But SMBs are Set to Act as Job & Revenue Generators and Drive the U.S. Recovery Post-downtime

6 Em

plo

yme

nt

Note: 2015 and 2020 figures are based on Zinnov Projections using historic growth figures and future estimates

Source: Bureau of Labor Statistics (BLS) Occupational Handbook; U.S. SBA data; U.S. Census Bureau; Zinnov Analysis

SMBs are set to grow ~$575B in Revenue and Add

~23M employees by 2020

2010 2020

55M 78M

Rev

en

ue

G

en

era

tio

n

2010 2020

$2.1T $2.7T

2015

$2.4T

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U.S. SMBs: Key Business Trends

U.S. SMBs: Key IT Trends

1

2

Agenda

11

Summary: Key IT Trends

SMBs have a Remarkable Level of Technology Infrastructure

~90% SMBs have internet with broadband 1

Massive Addressable IT Opportunity for U.S. SMBs

~$260 billion (~90% incremental growth) is the total Addressable IT Opportunity for SMBs

2

Software & Services Show Impressive Growth at the Expense of Hardware

Investments in Mobility, SaaS, and Security is driving Software & Services 3

Cloud Set to be the Core Focus Area for SMB IT Investments

Instant Collaboration, Hosted Infrastructure, Security & Storage poised to grow 4

IT Vendors are Resorting to Unique Business Models to Attract SMB Customers

Vendors are offering bundled services and forging strategic alliances to enhance value 5

12

U.S. SMBs show a Remarkable Level of Infrastructure Readiness

1

U.S. SMBs Overall U.S.

Internet Penetration

79% Flat, no growth over 2011

90% 25M

Broadband Penetration1 38% ~100M 90% 23M

PC Ownership

93% ~10% plunge 85% 24M

Smartphone Ownership

55% ~170M 90% 25M

Tablet Ownership

22% YoY 46% rise in tablet shipments

65% 18M

Tech

no

logy

Infr

astr

uct

ure

Internet infrastructure is strong for U.S.

SMBs

Smartphones & Tablets cannibalizing

PC sales

Source: AT&T’s SMB Report; NPD Connected Intelligence; Gartner estimates; Forrester estimates; SBA figures

1Broadband penetration as a % of internet users

13

Huge Addressable Opportunity for IT Adoption by U.S. SMBs

2

Overall ICT Spend

IT Spend 53%

$140B

Telecom Spend

47%

$125B

$265B

Includes Internet spend

Future Growth

6-8%

3-6%

U.S. SMBs

SMB’s spending in IT would further increase

in future

Telecom spend is already tapering off & shifting towards IT

Cloud & Mobility are driving IT investments

Average SMB IT Spend (2013)

~$9,400 28M SMBs $263B

SMB Total Addressable IT Opportunity

Addressable SMB Opportunity

~88% Incremental

Growth over $140B

U.S. SMBs already spend more on IT

compared to Telecom

Source: IDC estimates; TechAisle Research; Gartner estimates; Zinnov analysis

14

Software & Services Related Market Set to Grow at the Expense of Hardware Spend

3

Mobile Apps important for SMBs on the go

~45% SMBs want more access to documents remotely

80% SMBs feel mobile solutions helped improve their efficiency and saved time

1

Shift from CAPEX to OPEX would drive SaaS

60% YoY growth in SMB use of SaaS (2013 over 2012)

2

Hardware Growth Inhibitors Software & Services Growth Drivers

Shift from PCs to Mobiles and Tablets

90% SMB Smartphone penetration

65% SMB Tablet penetration

1

Shift from On-Premise to cost effective Cloud

40% SMBs intend to shift from on-premise to IaaS servers

by 2016

2

Software & Services

Hardware

Current Spend Future Growth

65%

35%

~10%

< 0%

SMB IT Spend Areas

Source: IDC Estimates; AT&T’s SMB Report; Parallels U.S. Cloud Report, 2013; IDC Security Report

Mobility/Cloud would drive spend on Security

~50% SMBs intend to spend on security solutions

3

$5.6B is the intended SMB spend on security in 2015

Mature SMB’s increased spending on Mobile Apps, SaaS and Server Virtualization is

cannibalizing Hardware Spend

15

Cloud Emerging as Core Focus Area for SMB IT Investments

4

Source: Parallels U.S. SMBs Cloud Report, 2013; Cisco U.S. SMB Cloud Watch; Zinnov Analysis

$19B 2013 U.S. SMB Cloud market

13% U.S. SMB Cloud spend as a % of Total SMB IT Spend

SMB’s Cloud Purchase Preference Cloud Service Provider Selection Criteria

SMBs prefer to buy Cloud Services as a part of “discounted” ICT Bundle

When buying a Bundle, SMBs see internet as the lead service to anchor the bundle

68%

SMBs prefer the current Internet access providers for Cloud Services

Though 60% would switch to another provider if cloud services are not properly supported

75%

SMBs quote Reliability of Service (Eg- no downtime) as the most important criteria

44%

SMBs see Quality of Service (Eg- speed of service transactions) as a criteria

41%

SMBs consider Security – Network, Data, and Information important 31%

Reduce CAPEX and enhance affordability

Increase IT Reliability

Provide accessibility in mobile environment

Key Reasons

19%

70% Expected Growth in Cloud market by 2016 ($32B)

Expected increase in SMB’s Cloud adoption by 2016

16

Instant Collaboration, Hosted Infrastructure, Security & Storage are Expected to Drive Cloud Growth

4

Instant Collaboration for SMBs on the go

~40% U.S. SMBs use instant collaboration software currently

21% SMBs expected to adopt by 2014

1

IaaS Growth Drivers SaaS Growth Drivers

Hosted Servers to shift from CAPEX to OPEX

30% new Hosted Servers to be added by SMBs by 2016

40% SMBs to shift from in-house to hosted servers by 2016

1

Storage driven by Optimization of utilization

25% SMBs use storage and backup as add-ons for IaaS

3

More than 50% SMBs plan to add Backup for their IaaS

Source: Parallels U.S. SMBs Cloud Report, 2013; Cisco U.S. SMB Cloud Watch; Zinnov Analysis

Security increasingly gaining Prominence

45% SMBs plan to add Security for hosted infrastructure

2

50% SMBs cite security as a major concern in move to cloud

Mobile SMBs to increasingly adopt File Sharing

37% U.S. SMBs currently use SaaS file sharing on the go

2

18% additional SMBs to adopt file sharing by 2014

Cloud based Accounting to optimize cash flows

31% U.S. SMBs currently use SaaS Accounting

3

21% additional SMBs will adopt Accounting by 2014

U.S. SMB SaaS Market (2013) $6.8B

YoY growth over 2012 60%

Growth in SaaS market by 2016 2X

U.S. SMB IaaS Market (2013) $6.5B

YoY growth over 2012 10%

CAGR till 2016 14%

17

IT Vendors are Exploring Unique Strategies to Tap the Market Potential

5

Target U.S. SMB Market

Forge Strategic Acquisitions & Partnerships

Building Extensive

Partner Network

Innovative Partner

Programs & Incentives

Easy IT Financing & Leasing Options

Providing Bundled

ICT Services

A B

C D

E

18

Vendors are Attracting SMBs by Bundling ICT Services to Provide End-to-End Solutions & Enhance Efficiency

5

Vendors offer Unique Bundles for SMBs

A

Cisco offers Networking Bundles (Flex & Cross-Technology) to SMBs

~40% U.S. SMBs prefer to buy services as a

part of an ICT Bundle rather than from multiple vendors

ICT Bundled Services

Internet access

Landline Voice

Security services

IaaS / SaaS CRM

services

Analytics / Storage

Accounting services

Common software framework ensures Superior Network Performance & Enhanced Efficiency

Ease of Installation, Use, and Management Key

Reasons Lower Total Cost of Ownership

Cisco Partners can offer a higher value proposition to SMBs vis-à-vis competitors

Cisco Rewards Program provides incentives to Partners selling Bundles

Cisco partnered with Plantronics to provide a UC bundle1

Note: 1UC: Unified Communication;

Source: Cisco U.S. SMB Cloud Survey; ZDNet articles; ChannelInsider articles; CRN News; Zinnov Analysis

Vendors partner other Players for Bundles

Dell has integrated Salesforce.com’s

CRM with Microsoft Dynamics and

Intuit Quickbooks for SMB Cloud HP Total Care Portfolio provided SMB Bundles for Security, Storage, and Networking solutions (in 2009)

HP SMB IT in a Box bundles HP’s SMB

PCs and Printers with Google Apps

Microsoft & Verizon (Voice & Internet) launched a UC bundle1

19

Vendors are Undergoing Acquisitions & Forging Partnerships to Provide Solutions in the SMB Space

5

B

Source:

Vendors have been very active in undergoing acquisitions and partnerships for SMB solutions

Intuit website; Google website (GYBO); TechCrunch article; InfornationWeek; Zinnov Analysis

Intuit’s Small Business Group acquired

Demandforce, a SaaS Marketing firm for $425M in 2012 The acquisition allowed Intuit to add marketing and communication tools to its existing Cloud offerings aimed at SMBs

Intuit had also acquired Homestead , a Website hosting firm for SMBs, for $170M few years back

Intuit recently partnered mobile

payment firm Square in an API deal

Intuit integrated its Quickbooks accounting software with Square’s point-of-sale products to allow SMBs to feed mobile payment data automatically into their financial books

IBM’s Cast Iron partnered with ADP’s TAXServices in 2010 for SaaS-based Tax Filings for SMBs

IBM had earlier acquired Cast Iron Systems to bolster its cloud-based data integration capabilities

Google partnered with Intuit & Local Governments for the U.S. Get Your Businesses Online (GYBO)

GYBO provides SMBs free hosting for 1 year, free domain name, and access to Intuit’s website builder

The initiative got ~300,000 SMBs online since 2011, and increased customer base of Google & Intuit

20

Vendors are Offering Easy IT Financing and Leasing Options to Ease Cash Flow Burden of SMBs

5

Shift from Purchasing to Vendor Financing

and Leasing

SMBs want to Reduce CAPEX and Enhance ROI

Banks & Brokers provide tougher credit terms to SMBs

C

Source: HP website; Cisco website; CRN News; Ciol articles; ChannelNomics; IBM Newsroom; Zinnov Analysis

HP Financial Services offers 0%, 12-month lease with $1 purchase Or 0%, 36-month lease on HP equipment up to $250,000

IBM’s similar financing of $1B in 2011 bought

6,800 SMBs on-board

Recently, HP launched Extended Finance Program for partners with 0%, 60-day repayment period

In 2010, Cisco Capital in alliance with GE Capital allowed SMBs to lease hardware, software, bundled services & maintenance for 0%, 36 months and own it after that

IBM Global Finance is pumping $4B for SMBs aimed at Cloud & Analytics offerings for 1-yr, no down payment and 0% interest

In 2011, IBM launched custom Cloud, Analytics & Security offerings for SMBs

financed by payments as low as $5 /user /month for 100 users (over 36 months)

Available for both IBM and non-IBM products

Vendors have Stepped up 0% Financing Incentives

Vendors push SMBs towards product adoption

Leasing helps SMBs update their obsolete IT infrastructure

21

Vendors are Building Extensive Partner Networks to Target SMB Market Potential

5

Self-help does not work for SMBs who need hand holding

D

Source: SAP website; CRN News; ChannelNomics; IBM Newsroom; Zinnov Analysis

SAP’s Rapid Deployment Solutions (RDS) to grow and enable its partner network to serve SMBs more effectively (2012)

Partners generate majority of SAP’s 197,000 SMB base and ~35% SMB sales

SAP is on-boarding partners to build micro-

vertical solutions on Business One. Eg- Orchestra builds specialized SMB solutions on Business One in beer & food industry

SAP Business One’s revenue grew 20% YoY

SAP is building its Channel aggressively to capture a bigger share of SMB Wallet

Lenovo has been engaging and enabling its Channel partners aggressively rather than direct selling

Lenovo saw a 30% increase in partners in North America

Lenovo overtook Dell to attain No.2 spot in U.S. PC sales

Verizon has consolidated its partner initiatives with Verizon Partner Program to enable resellers to deliver to SMBs with more flexibility and short sales cycle (2013)

Indirect Channels facilitate more than 50% SMB Purchases

Vendors with deficient reseller channels lose market share

Local resellers help vendors increase their Reach of SMBs

Vendors like Lenovo have successfully exploited channels to gain SMB market

22

Vendors are Resorting to Innovative Partner Programs and Incentives to On-Board Partners and Push SMB Sales

5

Huge Commissions & Bonus to push sales

Provide Trainings & Free-Trials to partners

Higher Reward Points per deal closure

E

Source: Lenovo website; CRN News; ChannelNomics; Zinnov Analysis

Vendors have a host of Partner Programs & Incentives targeted at SMB Cloud

Lenovo offered partners & sales reps big cash incentives of ~$10,000 /quarter & SPIFFs based on deal closures for SMBs

HP has invested ~$20M in 4 years; added 40 new training centers

HP LIFE (Learning Initiative for Entrepreneurs) trainings for SMBs around HP solutions (such as HP servers, switches)

MS integrated Cloud Essentials and Cloud Accelerate with MPN, making renewal for MSPs faster and easier; Rewarded high performing MSPs with sales incentives

Led to 15k partners joining in 1 week; ~100k within 1 year in 2012

MS Cloud Easy’s up to 38% commission on referrals to Office 365 helped regain lost customers

Innovative Partner Programs & Incentives

Vendors are evangelizing Partners through Trainings and Free-Trials

Generated ~1,000 partner cloud wins in 6

months; 25% jump in MSPs in 1 month

MS SMB Cloud Champions Club offers SIs trainings on Azure, ISVs 30 days free Azure accounts, and also allows partners access to MS events

23

Conclusion: How to Win in U.S. SMB Market ?

*Top contributing South U.S. include Florida, Texas, and Georgia

Targeted Focus on the Mature SMBs in the Southern U.S. States* 1

Evangelize Cloud, Mobility and Security Solutions for SMBs 2

Provide Bundled ICT Offerings to Enhance Value for SMBs 3

Build Partner Capacity through Innovative Programs & Incentives 5

Address Cost Concerns of SMBs by Offering Lucrative Schemes & Engagement Models 6

Forge Strategic Alliances with Other Players to Provide Solutions for SMBs 4

Thank You

[email protected] www.zinnov.com

@zinnov

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