SaaS CASE STUDIES

CRM FOR THE MID-MARKET

Market Differentiation For Medium- Sized Firms Requires a Different Approach - By Geoffrey James

Conventional wisdom says there are two market segments for CRM software: "large enterprise" (generally shortened to "enterprise") and small-medium businesses (often abbreviated as "SMB"). That market segmentation, however, gives short shrift to mid-sized businesses, which face challenges that are profoundly different from either large enterprises or small businesses. Part One of this white paper explains why traditional CRM, as implemented for large enterprises or small businesses are entirely inadequate for mid-market firms. Part Two of this white paper provides a detailed case study of how a CRM product targeted at the mid-market was able to satisfy a particularly demanding set of requirements inside a mid-market firm.

PART ONE: THE CRM SEGMENTATION FALLACY

The classic segmentation of CRM into enterprise and SMB is not based upon actual market conditions, but rather upon the historical evolution of the software industry. It's often been observed that software tends to go through a simplification process. When new applications are introduced into the market, the problems they attempt to solve are usually not well understood, and therefore the solutions intended to address them tend to be complex, requiring significant customization and systems integration. As the problems that the software is supposed to solve become better understood, the solutions become more mature, better targeted, and easier to install and support.

This basic market dynamic causes software vendors to introduce new applications by selling early versions into large enterprises, because those are the only firms that have the financial clout to spend tens of millions of dollars on experimental IT projects. As these applications mature over time, they trickle down to ever-smaller firms, eventually becoming available to the very smallest companies, even sole proprietorships. For example, one of the early applications for the IBM mainframe was payroll, which in the mid-1960s was a big-ticket item. Today, however, anyone with a PC can purchase and operate a perfectly usable payroll package for a few hundred dollars. And that package is likely to have features that far outstrip the capabilities of the original payroll systems.

This process of "commoditization" determines the business model for most software vendors. Some firms (e.g. Oracle, SAP, IBM) primarily sell new, complex applications to large enterprises. Other firms (e.g. Microsoft, Intuit, Salesforce.com) primarily sell simplified, commodity-like products to a broad base, including everyone from large enterprises to sole proprietorships. As each application type becomes simplified, the only way that the enterprise vendors can compete against the broad-based vendors is by upping the ante and making the scope of application larger and hence more complicated. For example, word processing originally involved expensive, proprietary equipment, limiting its usage to a relatively small number of large firms. However, when word processing migrated to the PC, the vendors who had been selling those high-priced systems (like Xerox and Wang) immediately began repositioning their offerings as something more elaborate: document management and publishing respectively.

That's exactly what's happened in the realm of CRM. Back when it was called Sales Force Automation (SFA), CRM was basically an experimental application. Installing an SFA system entailed significant risk. More than half of CRM projects failed (according to Gartner), either because the technology was inadequate or it was trying to solve the wrong problems. Since then, however, CRM software vendors and the sales teams that use CRM, have made great progress in understanding what CRM needs to do, so CRM software has become correspondingly more streamlined. As one might expect, now that simplified CRM capabilities are available from broad-based vendors like Salesforce.com and Microsoft, the enterprise CRM vendors have upped the ante. SAP and Oracle, for example, are now repositioning CRM as one element of a grander Enterprise Resource Planning (ERP) strategy.

Because of the inner dynamics of the software business, enterprise CRM vendors and broad-based CRM software vendors alike tend to view the mid-market as a continuum that edges into their original target markets. The enterprise vendors want mid-market firms to embrace the ERP concept and retool their entire computing infrastructure. Similarly, the broad-based CRM vendors want mid-market firms to add customizations and "partner applications" to those vendors' vanilla-level implementations. Unfortunately for mid-market firms, neither approach is very effective. On the one hand, mid-market firms can't afford to install and support a massive (and risky) centralized ERP system. On the other hand, mid market firms generally have needs that are too complex to satisfy with the Tinker-toy approach that the broad-based vendors have to offer.

The root of the problem is this concept of the mid-market as being inside a continuum with the very largest firms at one end and the very smallest firms at the other. This concept is deeply flawed because mid-market firms are, in most ways, extremely different from both large enterprises and small businesses.

Consider: large enterprises, regardless of industry, tend to be similar in terms of corporate structure (hierarchical) and fiduciary structure (public ownership). Furthermore, within specific industries, large enterprises almost always have nearly identical marketing and sales models. For example, there is very little difference, in terms of general activities, between Toyota and General Motors and Volkswagen. In these environments, the value of automation is found in creating ever-deeper layers of integration in order to create an incremental advantage over the competition. That's why these behemoth firms are willing to invest in the ERP concept.

Small businesses are also similar in terms of corporate structure (little to none) and fiduciary structure (generally private and often family-owned). Within individual industries, small businesses are often quite different (because they sell very different things), but because they're small, their marketing and sales processes are, by definition, simplistic. In these environments, the value of automation is the ability to bring up some kind of a basic application that can add at least some level of automation - and then extend it piecemeal. That's why small businesses are willing to buy into the concept of simple customization via mix-and-match applications.

By contrast, mid-market firms enjoy a wide variety of corporate structures (networked, collaborative, consensus-driven, loose affiliations, etc.) and a wide variety of fiduciary responsibilities (venture capital, wholly owned subsidiary, private but planning to go public, public but planning to go private, etc.). Furthermore, mid-market firms always have sales and marketing processes that are both unique and complex. The reason is simple. If what a mid-market firm provides isn't both unique and complex, it is inevitable that a large enterprise will enter that market and use the power of its deep pockets to force those mid-market firms out of business.

For example, two decades ago, thousands of small chain stores erupted around the country that provided high speed copying services to small businesses. One of these chains, Kinkos, eventually achieved critical mass and used economies of scale to undercut the other local franchises, eventually driving them out of business. This was possible because providing reproduction services to small businesses is insufficiently complex and unique to justify the presence of a mid-sized firm. Because the service is all a matter of who can buy the equipment and paper cheapest, there's no reason for a mid-sized firm to exist, except temporarily (as when Kinkos was originally growing.)

By contrast, there are many regional banks throughout the country that offer financial services to small businesses. These regional banks continue to survive and thrive, even though they can't possibly compete head to head, in terms of financial resources or services, with giant international banking concerns like Wachovia or Bank of America. However, in servicing small businesses, regional banks do something that's complex and unique - assessing the value of a customer based upon personal relationships and local knowledge.

For example, to write productive loans to small businesses, a regional bank must make decisions based upon the sales rep's assessment of the reliability of the individual asking for the loan, and the validity of that individual's business within the local economy. International banks are simply not set up for this type of decision-making, because their centralized nature inevitably pushes decision-making up the hierarchy.

Obviously, the simplistic approach of the broad-based CRM vendors is wildly inappropriate for mid-market firms where the complexity and uniqueness of sales and marketing processes are the very reason that the firm survives. While the price for such systems does not create a financial burden, the "out-of-the-box" functionality is simply too inflexible and feature-poor to support the complex uniqueness of mid-market sales and marketing processes.

Similarly, the ERP approach taken by the large enterprise CRM vendors is equally inappropriate, not because the functionality isn't there to support uniquely complex sales models, but because mid-market firms typically can't afford to risk their entire business on ERP, which assumes a complicated redesign of the entire corporate computing infrastructure.

What the mid-market needs for CRM is neither a scaled-down ERP system nor a cobbled-together kludge of vanilla applications. Mid-market firms need CRM applications that are feature-rich and flexible without requiring the company to rewrite and rework its entire computing infrastructure. Fortunately, such applications are beginning to emerge now that a handful of CRM vendors are focusing on servicing these uniquely complex mid-market environments.

ABOUT THE AUTHOR:

Geoffrey James is the author of the award-winning management book Business Wisdom of the Electronic Elite (Random House) and has had 25 years experience in software sales and marketing. In addition to writing feature articles for publications ranging from Wired to Men's Health, James has written extensively on the subject of CRM for SellingPower magazine.