Short-term planning drives IT purchases for SMEs

Small businesses are constrained by cash flow considerations and the need to purchase IT equipment on an ad hoc basis to meet volatile conditions, says Danny Bradbury.

Small and mid-sized enterprises (SMEs) have their own particular ways of buying IT - which are quite different from the large enterprises that dedicate entire departments to procurement.

According to a survey of 567 small businesses conducted recently by silicon.com and the Bathwick Group, roughly half of all small businesses buy their technology from a reseller, with another 31 per cent buying directly online from the vendor.

One such reseller is WStore, which sells servers, networking equipment and software to its client base. Stewart Hayward, commercial director for the company, says: "They always want the product quickly. A lot of them don't believe in forward planning, so an SME might buy new PCs but then forget about the networking and probably the cables too."

As small businesses struggle to manage rapid growth and cash flow, long-term IT planning is often not an option. Consequently, resellers such as WStore have to work around them. When buying equipment that is seen as complex (such as networking, which is still seen as something of a black art even today), Hayward finds that small businesses tend to be very loyal and purchase what they know and trust.

"We won't sell Hewlett-Packard into an installed base of Cisco," he explains. On the other hand small businesses are less loyal about their PCs. For such commodity items which are well understood they will often buy on price and convenience, rather than brand name.

This resonates with the results of the survey, which suggest that roughly half of small businesses consider the suitability of a system for a particular purpose to be the most important buying criteria, with 27 per cent believing that cost is the most important factor in such decisions.

It is not surprising that price ranks so highly in small business purchase criteria. Smaller companies often find cash flow to be a particular issue. Responsewave, a small marketing company operating internationally, is a case in point. Managing director Henrik Mandal says: "Cash flow can be a big problem. One machine with its software on it can be several thousand pounds. If you need 50 machines that's a lot of money you have to put up."

Consequently Mandal has learned to innovate in his IT procurement. He makes use of leasing agreements when buying his equipment directly from Dell. This allows him to make monthly payments and amortise his investment in IT over a number of years. Because he has no dedicated IT person, this also makes it easier to him to manage technology, which represents only a small portion of his responsibility in the company.

In keeping with this approach, he also uses hosted services for tasks like customer relationship management (CRM), instead of software applications loaded on his own servers. This helps him to keep his IT payments regulated and his management headaches down. The same goes for the server hardware, which he gets on a leased basis from his ISP. It makes it easy to plan his IT budget ahead, he says.

When small businesses do purchase PCs outright, they tend to work them into the ground, getting every last bit of value out of them before replacing the equipment, says WStore's Hayward. They will upgrade PC components repeatedly rather than throw them out and buy new ones every three years, as some larger companies do.

This is certainly the case with Chris Harman, director of IT and operations at magazine publisher Newhall Publications. Harman uses Citrix to centralise his applications, which means he can use older PCs as dumb clients. He is still using desktop PCs from 1997 and is only now upgrading them with flat screens. For both servers and new PCs, he buys any new thin client or flat screen equipment directly online.

Harman uses XDA mobile phones from O2 to hook his salespeople into a hosted third-party web-based application that manages subscription details. He purchased all of the XDAs directly from O2, something which doesn't surprise the mobile operator's head of business acquisition Peter Rampling. For basic voice telephony products, 70 per cent of businesses with fewer than 200 users purchase from small, independent retailers, he points out. "The interesting thing is that it's a different story when you look at more complex products providing data services," he adds. "When it comes to Blackberrys and XDAs, the majority of businesses buy from us as a network."

Companies seem to draw a line between low-value, commodity equipment and high-value items such as latest-generation data phones and value-added services. When dealing with software suppliers who are adding value, Harman has noticed the suppliers tend to avoid selling commodity products such as servers because they make no margin on it and it is simply an inconvenience for them. "Two or three people that we've had quotes from tell us to source the PC and they'll come in and configure it and install their solution," he says.

As for where SMEs buy IT, a lack of planning, a focus on cost and the need to adapt quickly to volatile conditions push many small-business purchases through commodity outlets such as the internet or through commodity resellers or retail outlets.

Higher-end value-added resellers that provide support and service contracts will step in when small businesses need independent expertise to help them set up their systems and networks.

Meanwhile subscription-based software-as-a-service models and leasing agreements are a good way for SMEs to regulate cash flow, while third-party hosted software, although still suffering from the damage to its image inflicted by the dot-com crash, is nevertheless proving more attractive to small businesses that want to outsource the management headaches of IT, while planning their IT budget more effectively.