The Middle Market Ain't Easy

Posted At : September 28, 2007 3:12 AM
Related Categories: Spend Management, Middle Market

During Ariba's remarks on their call with Wall Street analysts announcing the Procuri deal last week, I counted the word "middle-market" in their presentation and Q/A at least half a dozen times. Clearly, Ariba is putting quite a bit of stock in pursuing this market opportunity. Personally, having had significant experience working with and talking to middle market procurement organizations in the past few years, I can tell you first hand that Ariba -- and everyone else for that matter -- is going to have a tough hurdle to overcome if they want to achieve their goals. Why is the middle market challenging? They're the classic software reasons: long sales cycles with smaller rewards, limited budgets, and customers who demand just as much from their solutions providers as larger organizations. But they're also unique reasons to procurement that make the middle market especially difficult to pursue.

Namely, middle market procurement organizations often are looked upon as highly tactical functions. In fact, in many middle market companies, procurement reports up through two or three layers before getting to the true executive ranks. This means budgets are typically small -- unless you can go in above the heads of the typical practitioner -- and it's easy to get a run around in the sales process (just try selling "Helga" or "Marge", a self-proclaimed "expert negotiator" but "buyer" in title, anything that is not budgeted). And if you add on top of this that middle market deals are built largely on relationships -- rather than sales calls -- then it becomes even clearer that penetrating this segment can be rough regardless of how good your value proposition is.

Will Ariba succeed in realizing its middle market ambitions with Procuri? Only time will tell, but personally, I think there are easier ways to make higher margin dollars in the Spend Management solution world. I do hope, however, that they -- along with other vendors with similar middle market ambitions -- prove me wrong. As a side-note, there was some irony to the timing of this announcement, given that it coincided with SAP's launch of their new middle market solution (more news on that next week).

- Jason Busch

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You're right on point here Jason. That being said, I believe Procuri's cost structure in this area is highly advantageous, should Ariba retain it. A few pilots enalble practioners in this agreement to sell the benefits upstream, though the "tactical" perception and reporting levels down is indeed a challenge for this company class and smaller.

# Posted By RB | 9/28/07 8:09 AM

The dilemma for the middle-market procurement manager is often this: "Do I spend money on this software, or do I hire more people?" Even when adding more people is clearly the wrong decision -- and even when the manager fully realizes this him/herself -- it is often difficult to make the decision in favor of software, and even harder to sell that decision internally. An extra FTE can make a big difference to some organizations.

One way out of the dilemma is to outsource to a third party (this could be a software vendor, a consulting firm, or a BPO provider) who already licenses the software and is trained to use it. You are (effectively) adding resources, typically more than if you had tried to staff up. Quick results can be achieved without a long ramp-up and without a long commitment. You can always buy the software yourself once its value has been established.

Some outsourcers haven't historically been interested in small deals, but this is changing. Outsourcers are increasingly willing to entertain modest, targeted engagements, and some are even "renting" individual offshore analysts on a short-term basis.

# Posted By Eric Strovink | 9/28/07 8:24 AM

Spoken like someone who has never carried a bag. I find your characterization of the middle market inaccurate and almost offensive.

Every big company was once a smaller business. Many large companies are made up of several mid-market companies. They all want the same advantages of getting the best value from the COGS investment they make. Jump down out of your ivory tower Jason. I think the smog in China is getting to you!

# Posted By Ronnie | 9/28/07 11:56 AM

My experience working with middle market companies (revenues of $150m - $2.5b) is that software is indeed a much more difficult "sell". I think the degree of "tactical" vs. "strategic" is directly related to the size of the company. The larger, often times, the more strategic. And it makes sense as to why...when you are smaller and your volumes are less significant, you hire a buyer to manage the purchasing process. As volumes grow (and the supply chain becomes more complicated), company needs change and a strategic sourcing function is often required. But that doesn't change the fact that software is indeed a very tough pill for middle market companies to swallow, no matter the level of talent. It's an ROI question...middle market companies have less COGS or SGA than their large brethren and the solutions that they purchase need to create fast painless returns. Software as services, on-demand, outsourcing etc may be both easier to sell and easier for procurement organizations to buy. I think Jason's analysis is correct and Eric's suggestions are good ones...

# Posted By Lisa Reisman | 9/29/07 3:37 PM

"Ronnie",

I don't know what your personal beef is with me, but to suggest that I've not "carried a bag" or that I'm in the ivory tower is absurd. I've run a growing, successful, firm -- selling to both providers and practitioners in this market -- for the past four years. And I’ve been responsible for every penny of revenue. You're entitled to your opinion, but I find your rhetoric and style of attack showing of your clear lack of knowledge and experience in the middle market, and some greater issue with me. If you have any insights to share, I welcome them. But don't reduce the conversation level on this blog and hide your personal attacks behind a pseudonym. If you think I'm full of it, tell it to my face, and let's have a debate on the issue. Perhaps we'll both find the information exchange worthwhile. I'm back in the states this week and can be reached at 773 525 7406.

# Posted By Jason Busch | 9/29/07 3:43 PM

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