Where are the service providers when you need them? For small- and medium-size businesses (SMBs) in need of a total communications solution, that’s the pressing question. Lacking the glamour of either the enterprise or consumer segments, SMBs have been a remarkably neglected market — even though their high communications spending makes them very lucrative customers. In the current environment they face a lack of appropriately scaled, affordable products. Either too large to be satisfied with a simple T1 line or too small to afford or to manage a DS3 connection, many SMBs simply aren’t being presented with the products and services that meet their needs at prices that are competitive. Add the additional expense and management of voice applications and equipment, and you have a disgruntled sector.

 

Recently, Deloitte Consulting conducted a unique survey of SMBs across a number of U.S. industries to better understand their communications spending and identify the lines of differentiation in spending and needs. What are ILECs offering these companies compared with non-ILECs? What are the opportunities for SMBs to find a communications provider with the right solution at the right price?

 

The survey confirmed that SMBs are at a distinct disadvantage when it comes to having their communications needs met. The specific challenges are finding competitive pricing, service, and tailored solutions. Because SMBs don’t generate the same volume as large enterprises, it’s difficult for SMBs to negotiate better rates. They are generally interested in tailored solutions that package voice, data, and managed services — something they are not getting from existing providers. And, because they’re often growing, SMBs need services that can be scaled to their needs.

 

What is critical to understand about SMB communications needs is what determines them and the role spending plays. Initially, it’s tempting to look at different industries as the differentiator. Technology, media, and telecommunications companies, along with consumer businesses, spend the most per employee on communications, while life sciences and healthcare businesses spend the least.

 

However, it turns out that the better determinant is the number of business locations a company has. Deloitte Consulting looked at wireline spending by company size and found that, on average, monthly spending per employee increases 40 percent for companies with two or more locations. Specifically, a company with a single site that spends $100 on voice spends an additional $27 on data. However, when the number of sites increases to between two and five, a company that spends $100 on voice spends $114 on data. The data spending jumps to $140 for those with more than five locations.

 

As the number of sites increases, SMB companies turn from traditional landlines to VoIP. Only 18 percent of single-site companies use VoIP, while more than 70 percent of multi-site companies use the technology. And, approximately 30 percent of multi-site companies use both VoIP and MPLS or other VPN technologies, reflecting the SMB market’s sophistication with IP-based services.

 

This isn’t surprising. After all, single-site companies don’t have other sites they need to communicate with and their communications needs tend to be simpler. They’re probably not running a robust network. But once businesses have two or more locations, internal communications between sites is the driver, they very likely have an established network, and data is more important, becoming a bigger portion of spending. Turn voice into data with VoIP, and the spending increases further.

 

For example, SMBs using VoIP spend $61 per employee monthly on voice and $45 on data, while those with traditional landlines spend $64 on voice and $23 on data per employee per month. VoIP users are 60 percent more likely to use non-ILEC services.

 

The message is that SMBs with higher communications spending per employee tend to adopt an IP-centric view and are more interested in competitive data service offerings from a choice of providers.

 

But who is providing this service to SMBs? Single-site SMBs are the perfect ILEC customer since they have minimal data demands and can combine traditional voice and data services satisfactorily. But, that’s not the case for multi-site SMBs. They’re about 20 percent more likely to choose a non-ILEC for voice and about 50 percent more likely for data service. According to additional Deloitte Consulting research, at that level of data-centricity, more complex communications needs drive a desire for an increased choice in suppliers and products, more tailored services, and lower prices. Under the circumstances, ILEC pricing is less attractive and their services are less likely to fit the needs of a multi-site SMB.

 

What has made the situation even more challenging for IP-centric SMBs is industry consolidation, which has made the market less competitive. So, many SMBs are looking at ILEC alternatives like cable companies and VARs. These businesses have made huge inroads capturing multi-site SMBs. What has helped them is the fact that small- and medium-size businesses are less concerned with brand and act more on recommendations by trusted sources. Pricing is obviously more important to a smaller organization, but also key to the decision making are bundled offers and a complete service set. SMBs also are very interested in product reliability and good customer service, and this has provided an opportunity for non-ILEC competitors to fill the void with reasonably priced, quality data service.

 

In this scenario, as the demand for IP services increases, SMB customers will shift their telecom spending to IP, with VARs bundling telecom and IP services into business communication services. This, in turn, could spark new competitive cable offerings as demand for alternative access and IP services increases and begins to provide a viable revenue stream. As yet, cable hasn’t made much penetration into the SMB communications market.

 

This slower transition to VoIP and IP services creates a significant window of opportunity for whoever is able to seize it. But there are challenges. The issue for ILECs is that they have limited IP product offerings, especially between 1.5 Mbit/s and 45 Mbit/s; they are also concerned about T1 loss and cannibalization. Cable companies, in turn, have been slow to move due to the competition for resources from other high-growth areas and limited existing physical access to many SMB locations.

 

But, whoever makes the move to launch appropriately priced services, invest in IT-centric networks, build distribution capability, and enhance their service set in the next few years will get the big advantage for the multi-site SMB market.