From the December 2003 issue of Entrepreneur

Yes, growing businesses do squeeze every dollar until the eagle grins, especially during uncertain times like these. But they're leading the way in boosting their purchases of computer products and services. U.S. companies with 20 to 99 employees have the highest expectations for improved IT budgets in 2004, with an average increase of 10 percent, says research firm Gartner Inc. That contrasts with projected spending growth of less than 1 percent among the largest corporations.

Smaller firms are responding more quickly to this year's increased cash flows and profits, says Lewis Clark, a principal analyst with Gartner in Lowell, Massachusetts. They're also exploiting a short-term tax break for first-year depreciation. (Covering up to $100,000 in equipment purchases, this break is scheduled to run out in September 2004.) "We're seeing a large amount of growth in the small- and midsize-business market," agrees Meredith Child, an associate analyst with research firm Forrester Research Inc. in Cambridge, Massachusetts. A recent Forrester study found 44 percent of firms with sales less than $100 million boosting their IT budgets during 2003. On average, these companies will increase their IT spending by a whopping 17 percent.

Raymond Boggs, vice president of small-business and home office research with IT and telecom research firm IDC in Framingham, Massachusetts, sees small-business IT buys climbing by a far less dramatic-but still respectable-4.2 percent next year. He points out that, unlike the giants, smaller firms generally didn't load up on equipment during the years of dotcom frenzy and Y2K fears. "They don't have a huge tech investment backlog to work off," he says. "Small businesses don't have backlogs at all. They do have new people, and they do have to upgrade the old stuff that's beat to death."

So where's the money going? Companies are briskly buying PCs and the other hardware products that just keep getting more cost-effective, analysts note. Top hardware priorities include PCs, servers, storage, security devices and handhelds, says Clark. Other hot areas include CRM packages, security software, application development and hardware maintenance and support. Also, Child points out, small and midsize businesses "are testing the waters with small-scale outsourcing projects, such as PC support and contracts to manage individual applications."

Run With the Big Dogs
Outsourcing is part of a major trend: Smaller firms are buying into more sophisticated products and services formerly reserved for large enterprises. That's occurring partly because major IT suppliers are eager to make it happen-marketing more to smaller organizations while enterprise spending is stalled, Clark says.

This trend is also part of living in a tightly connected business world, where companies across the board "are increasing their spending on technology that enables their suppliers, partners and customers to access their internal systems," says Mike Dominy, a senior analyst with The Yankee Group, a communications and network research and consulting firm in Boston. Overall, investment in this category will jump 75 percent this year, he predicts.

Fortunately, smaller firms, like their bigger cousins, increasingly will be able to buy computer services in a subscription model, paying only for what they use as they use it, Dominy says. While applications get more sophisticated, he says, "You don't have to spend a million dollars to buy the hardware and software to run them." Instead, service providers such as IBM and application makers such as SAP and their partners will deliver what you need over the Internet. Over time, this could diminish a small firm's need to buy the latest PCs, since "all you need is a browser and an Internet connection," Dominy continues.

Clark also applauds the early move toward this "on-demand computing," pointing to the potential advantages of buying critical but standard applications from a service provider with many clients. This approach can give a small company added flexibility, ease its connections with its business partners, and offload headaches about security and the ability to expand capacity. It could also level the playing field, says Clark: "Smaller firms can probably get the same deals as larger companies."

Tackling Tech Twists
"Smaller firms are more aggressive than larger firms in deploying wireless networks and Linux," Child says. "That shows their ability to be flexible. It's easier for smaller firms to deploy technology, to communicate to everyone and to keep tabs on everything."

However, experts caution to investigate new tech offerings, such as wireless networks, with care. "Sorting though the wireless technologies can be a challenge," says Boggs. "The more you explore them, the more befuddled you become. At some point, you have to jump. But make sure you talk to the right people first. In the end, it all gets back to the old Reagan line: Trust but verify."


Eric Bender is a former executive editor of PC World magazine.