MMR: During the past few months, the midmarket has become the focus for many technology vendors who were never interested before. What’s generated this change?

Laracuenta: Well, there’s certainly a lot of “me too” activity in the vendor community right now. Some of it has been because vendors have gone through the whole lifecycle with their large accounts, and it’s simply time to expand into new markets. But, it’s probably as likely that a number of vendor companies are making this decision because of the extended downturn in IT spending.

During the Internet boom when start-ups and very large companies were spending inordinate amounts of money on technology, few vendors were paying close attention to the midmarket. Then, the bubble bursts. Dot-coms went out of business. Big companies scaled back IT spending and in some cases have excess computing capacity to work off. So the midsize company space looks appealing because of these two dynamics – one customer is virtually gone and one customer has significantly reduced buying and here’s the midsize customer. Midsize businesses (MSBs) stand out more now because they are a consistent buyer and a more reliable spending pool.

MMR: So, has there been a less drastic drop in IT spending at the midsize vs. larger enterprise?

Laracuenta: Midsize businesses cut back as well but not as severely as larger firms in many cases. It’s not as drastic as larger firms because midsize businesses never had the IT budget windfall to begin with - it’s been a steadier pattern of prudent spending. That said, all IS departments are getting pressured to reduce costs because it’s an easy and obvious place to cut expenses. But midsize businesses are typically understaffed and as such they can’t really cut human capital expenses as their larger peers can.

MMR: Do you think CIOs are getting any more sophisticated in how they approach the IT buying process?

Laracuenta: To a degree, it’s more than just the improved decision-making of the CIO. The CEO and CFO often are challenged in terms of seeing the true impact of IT – ‘what does technology even do for this company and/or its customers?’. It’s invisible to many of them because they don’t see how it impacts the bottom line. They don’t worry about it and they almost look at IT in the same way as electricity or the telephone. They don’t know it’s not working until something breaks, data is lost, or opportunities are missed. They take it for granted or they don’t understand how it’s affecting the business.

On the other side, the IT professional is tired of hearing about IT and business alignment. ‘Why do I have to be the one to convince management that technology’s important? How could they not know it? Everyday we take orders, check e-mail, do inventory. How do they think this is being done? It’s all technology.’ I’ve had CIOs tell me that business line managers are willing to just wait for stuff to blow up before doing anything about it. They think that rationale is off, and it is.

If CIOs really want to take advantage of the opportunities right now – more product, more vendor attention than they’ve ever had, then they have to be able to work within a business context to take advantage of that. CIOs need to get away from the speeds, feeds and uptime, and educate the business unit professionals on the value that technology can play for the company and its customers. That implies that IT needs to get a better understanding of customer needs and the strategic planning process.

MMR: Do you think the current market activity will be beneficial for midsize companies in the long-run?

Laracuenta: I think by and large, they will be better off. A lot of sharp CIOs are taking action now and will have a much more sophisticated technology portfolio than they would have been able to had we not gone through this period of high focus. So I do think most companies will be better off.

I’d say there will be three groups - one that will be better off because they took advantage of the current situation. One group that will be in trouble because they picked a vendor who had no long-term interest in the market, and a third group that does nothing. The companies who make the wrong bet and go with a vendor that was not committed to the MSB space may get stuck with an architecture that isn’t getting upgraded, and if they want to stay with that vendor will probably have to move to their more expensive enterprise product. It’s hard to say how many companies will fall into that category.

By and large midsize companies will be better off if they’re successful in adding business context to what they’re doing. If they reach out to the business professionals and develop a strategy, not just an IT strategy, but one that has business context and business language, they’re going to be able to make a case to bring in the right technology at the best price, and the best configuration. There’s no question that there’s more flexibility now in how deals are being built, and if a CIO/CEO knows what the company needs, they will be able to take advantage of what the marketplace is providing.

MMR: So, you don’t believe that the attention that midsize businesses are enjoying now will sustain when the economy turns?

Laracuenta: No, I think it will. That said, I’d say that more than 30% of the vendor community today may fail to succeed in the midmarket and move on. Additionally as these vendors see stabilization in their main line business, and provided they haven’t struck a chord in the midmarket, they may exit.

The change is likely to result in smaller technology companies sticking with the midmarket that have a real difficult time servicing the large organizations. Midmarket will be their bread and butter. But also the very large technology companies like IBM, HP, Microsoft, PeopleSoft and SAP, who can afford to do both. As the economy turns around, they don’t have to walk away from the midmarket because they can in fact do both.

MMR: So are you recommending that the best bet for midsize companies is to simply work with the large technology vendors?

Laracuenta: I’m not saying that midsize businesses should only work with the biggest of the big. It’s as likely as not that they’ll get as fine a service and capability from a smaller vendor. Quite frankly, a midsize CIO has to balance the benefits of working with a vendor that may have better viability as a corporation, maybe a richer product set or a larger channel program, than with someone who is totally focused on their segment. The decision will be unique to each company.

For example, take a software company that only cares about midsize enterprises between $50 and $300 million in revenue in three specific industries. Every nickel that they invest is to make sure that that particular constituency is successful and happy. That is very comforting and it’s a good business decision to have someone like that on your short list. The question is, are there enough people out there that feel the same way to ensure that this vendor is going to be around in 2-3 years?

MMR: What one recommendation would you make to IT Executives amidst this market flurry?

Laracuenta: Going into 2004, the main thing for midsize companies is going to be separating the committed vendors from those who are just being opportunistic. They need to determine who is in it for the long haul vs. who is not. And it goes beyond just vendor viability, which is a typical way to determine ‘do I want to work with this vendor’? What’s their midmarket revenue growth? How much are they investing in MSB product R&D? What type of sales do they have in the industry you’re in? What partnerships do they have with other vendors?

Do you have a question for Ray Laracuenta? E-mail him at midmarket@gartner.com now, or speak with him one-on-one at the next Midsize Enterprise Summit. Click here to qualify to attend now.