Small Business IT Spending Trends

Despite a weak U.S. economy, small businesses have hired new employees, opened new facilities and increased spending on IT products and services over the past 12 months.
A study from AMI-Partners reveals that U.S. small businesses added 382,000 new employees and spent $86 billion on IT products and services over the past 12 months. Overall, U.S. small businesses expanded their workforce by more than five percent. Spending on IT products and services grew by 11 percent. Hotspots of IT spending activities include Internet Infrastructure, Web services, wireless networking, data storage, and security.

Fifty percent — nearly 3.5 million small businesses — reported moderate to strong revenue growth over the past 12 months. Yet a weak economy has taken its toll on small businesses with 25 percent — approximately 1.9 million small businesses — experiencing declining revenues over the same time frame.

Despite the weak U.S. economy, American small businesses surged ahead, hiring new employees, opening new facilities and increasing spending on advanced IT products and services. Arjun Mehra, AMI-Partners analyst, said taken as a whole, the economy's impact on the small-business market during the last 12 months has been mixed.

"Approximately half of all U.S. small businesses experienced an increase in their annual revenues during the last twelve months, with one in five reflecting an annualized revenue growth rate exceeding 10 percent," Mehra said. "Much of the past 12 months' growth, be it in IT spending or hiring employees, has largely been driven by small businesses that weathered the economic storm."

If the economic turnaround takes hold, the impact could spread to a broader segment of the small business market resulting in substantial growth. But Mehra cautioned that this could merely be the result of wishful thinking on the part of U.S small businesses.

"Seventy-four percent of small businesses indicated they expect an increase in revenues over the next 12 months," Mehra said. "AMI's survey indicates that small-business expectations for 2004 are exuberant — perhaps too optimistic."

What is certain is that U.S. small businesses recognize the competitive benefits of deploying advanced technologies, particularly when it comes to network security. A growing number of small businesses have adopted a wide of a range of security solutions including anti-virus and firewall protection schemes, as well as intrusion detection and managed security systems.

According to the AMI study, small businesses favor software-based firewalls running on personal computers or local area network (LAN) [define] servers. They also tend to favor deploying firewalls that are embedded in networking hardware such as routers and switches. Furthermore, small businesses like to have remote access systems in place for keeping an eye on their LANs. Roughly 228,000 small businesses currently have remote access capabilities built into their networks for security monitoring. AMI expects that this number will double over the next 12 months.

Focus on developing business continuity plans played a large role toward influencing small business IT spending. Nearly 60 percent of small businesses with LANs currently use on-site data backup and recovery solutions. Twenty percent of the same have deployed redundant backup power systems as part of their disaster recovery plans.

When it comes to storage systems, small businesses tend to lean toward the least expensive solutions. AMI's research reveals that the number of businesses deploying storage area network (SAN) [define] and network-attached storage (NAS) [define] systems increased by 36 percent. The data indicates that price cuts in SAN/NAS systems, coupled with enhancements to make the technologies more IP-friendly, were welcomed by the data-intense segment of the small-business market. AMI estimates that small businesses spent roughly $480 million on network storage solutions over the past 12 months — a 27 percent increase from 2002 spending.

Spending on networking soared as small businesses sought cost-effective ways to improve and secure internal communications — inside and outside of the office. Burgeoning interest in wireless LANs and the increasing need for connecting via virtual private networks (VPNs) [define] forced small businesses to refocus their investments in networking-related spending, which reached $15.06 billion in 2003. Of this, small businesses spent roughly $530 million on wireless LAN solutions — a 50 percent increase over 2002 spending. Consequently, the number of businesses using VPNs nearly doubled over the last 12 months.

Interestingly, AMI-Partners' survey results indicate that small businesses are deploying enterprise software applications in order gain new efficiencies in business processes. The study reports there has been a surge in the deployment of business process automation applications, including customer relationship management (CRM) [define], sales force automation (SFA) [define], enterprise resource planning (ERP) [define], and supply chain management (SCM) systems.

AMI findings indicate there has been a 26 percent increase in the number of small businesses using CRM and SFA applications over the past 12 months. The need to establish electronic linkages with larger companies translated into a 16 percent increase in the deployment of ERP and SCM solutions during the same time frame.

The research firm attributes this growth to companies like salesforce.com and Microsoft, for releasing affordable software applications catering specifically to the small-business market. The shift towards automating existing transactions with suppliers and customers indicates that enterprise software applications will continue to be a hotspot of small business IT spending in 2004.

New York-based AMI Partners is a leading consulting firm specializing in IT market intelligence with a strong focus on global small- and medium-sized businesses. For the purposes of this study, small businesses were defined as those with 1- to 99-employees, factoring out home-based businesses, home offices, non-profit organizations, and government organizations. AMI conducts the IT industry's most comprehensive annual tracking surveys of SMBs in several countries including the U.S., France, Germany, U.K., Australia, China, India, Japan, South Korea, Brazil and Mexico.






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