Web Services Upend Old Ideas About the Little Guy's Role

By STEVE LOHR (Published February 21, 2006; nytimes.com)

 

 

The old story of technology in business was a trickle-down affair. From telephones to computers, big companies came first. They could afford the latest innovations, and they reaped the benefits of greater efficiency, increased sales and expansion into distant markets. As a technology spread and costs fell, small businesses joined the parade, though from the rear.

 

Now that pattern is being challenged by a bottom-up revolution, one fueled by a second wave of Internet technologies like the search services from Google, Yahoo and Microsoft and software delivered as a utilitylike service over the Web.

 

The second-generation Internet technologies combined with earlier tools like the Web itself and e-mail are drastically reducing the cost of communicating, finding things and distributing and receiving services online. That means a cost leveling that puts small companies on equal footing with big ones, making it easier for upstarts to innovate, disrupt industries and even get big fast.

 

The phenomenon is a big step in the democratization of information technology. Its imprint is evident well beyond business, in the social and cultural impact of everything from blogs to online role-playing games. Still, it seems that small businesses, and the marketplace they represent, will be affected the most in the overall economy. Long-held assumptions are suddenly under assault.

 

Fortune Below 500

 

One truism has been that while small businesses represent a huge market companies with fewer than 500 employees, the government reports, account for half the nation's economic output and 60 to 80 percent of all new jobs it is highly fragmented and hard to reach.

 

So big companies typically shunned the small-business market, and Silicon Valley start-ups tended to sidestep it, instead devising business plans focused on either the consumer or the large-corporate market. But Salesforce.com, which supplies customer tracking and management software online, has shown how to create a thriving business by selling first to small businesses.

 

"Our company was based on building momentum from the bottom up, and using the Web as we do drastically reduces the cost of sales and service," said Phill Robinson, senior vice president for marketing.

 

Today, the company has more than 18,000 customers and sales of more than $300 million a year. Its only problem seems to be growing pains, as the company's network went down a couple of times in the last two months. Many start-ups are trying to follow in the footsteps of Salesforce by offering software as an online service to reach smaller companies.

 

I.B.M. makes its living catering to the costly needs of its Fortune 500 clientele. But last year, it began offering small businesses Web-based software services like filtering for e-mail spam and viruses, starting at less than $2 per employee a month.

 

"I.B.M. could not afford to touch this market years ago," said James M. Corgel, general manager of services for small and medium-size businesses. "But as we automate more, we can afford to sell to the small-business market."

 

Creating More Gazelles

 

Students of small business have often noted that the most economically significant companies are the "gazelles," small businesses that become dynamic fast-growing companies. The new Web-based technologies could foster a proliferation of gazelles, stimulating job creation and wealth across the economy.

 

"In principle, this should lower barriers to the entry and growth of innovative small enterprises," said Frederic M. Scherer, an economist and professor emeritus at the John F. Kennedy School of Government at Harvard University.

 

That principle is being widely practiced these days. Take the example of Bella Pictures, a three-year-old business in San Francisco. Its goal is to transform the enterprise of wedding pictures from a local craft of mixed quality into a national business of consistently high quality and personalized service. It has grown rapidly, and last wedding season, May through October, Bella shot photographs at 1,300 weddings.

 

Bella's 150 freelance photographers and 50 consultants in a dozen cities are linked in a virtual network. Every job, assignment, bride and mother-of-the-bride preference is entered into a Web-based customer relationship management program. Bella markets itself by buying keywords, like "wedding photography," on search engines like Google and Yahoo to bring customers to its Web site, bellapictures.com.

 

Bella solicits photographers on Craigslist, the online bulletin board, and photographers submit portfolios through the Web, too. All photographs are taken with digital cameras.

 

The technology behind Bella, said Tom Kramer, the president and a founder, has become available and affordable only in the last few years. Sophisticated customer- and job-tracking software, he said, used to be available only as million-dollar software applications, with hefty annual maintenance fees. Today, its Web-based equivalent is a pay-for-use service from Salesforce, which costs Bella a couple of thousand dollars a month. Web searching, online listings and the spread of digital photography, he added, are all crucial tools for Bella.

 

"Our business wouldn't have been possible five years ago," he said.

 

More Growth on Tap

 

The new technology is also giving small businesses the freedom to pursue new strategies. Brooklyn Brewery, founded in 1988, took a new path less than three years ago. The company wanted to build its beer into a larger regional brand. So it sold the trucks and storage facilities that it had used mainly in the New York area, and hired independent distributors to deliver its beer up and down the East Coast.

 

To become a regional business, the company wanted most of its employees to work outside Brooklyn, promoting its beer in new markets. It invested about $20,000 in a computer network so that its 15-person sales force, spread from Massachusetts to Georgia, could tap in from notebook computers for information on everything from sales leads to poster art for tavern promotions.

 

The strategy has paid off. Sales at the 27-person company have grown nearly 30 percent over the last couple of years to about $10 million in 2005, said Eric Ottaway, the general manager, who expects sales to rise about 15 percent this year. The growth has come without adding to his four-person administrative staff, Mr. Ottaway said.

 

Brooklyn Brewery farms out the maintenance of its computer network to a services company, Quality Technology Solutions of Morris Plains, N.J., which typically works for larger businesses. But it can make money on a smaller account like the beer maker because of the Internet and features that Microsoft has added to its Small Business Server software, which enables remote updating, troubleshooting and bug fixes, said Neil Rosenberg, president of Quality Technology Solutions. Mr. Rosenberg's experts can now monitor and tweak the brewery's computers from New Jersey.

 

"So I don't have to schlep a technician to Brooklyn for 80 to 90 percent of the problems," he said.

 

I.B.M., the giant of the technology services business, is not sending consultants to Cole Harford in Overland Park, Kan., either. Last year, Cole Harford, a distributor of restaurant supplies like napkins and plastic cups, started using a couple of I.B.M. Web-based software programs that monitor Cole Harford's e-mail for spam and viruses, blocking malicious code from reaching its 75 desktop and notebook personal computers. The service has been remarkably effective, said Laurel Johnson, the information technology director at Cole Harford, and it costs less than $5 a month per user.

 

Previously, Ms. Johnson said, she and an assistant used to spend two days a week wrestling with virus and spam troubles. Today, those problems take only four hours a month of her time, so she is planning to finally tackle a long-delayed project to automate the company's four warehouses.

 

Providing a Second Wind

 

The new Web technologies have also given a second life to languishing small businesses. Until a few years ago, the Newark Nut Company, a retail and wholesale vendor of nuts, candy and other snacks, was struggling in a declining urban neighborhood. But in 2003, Jeffrey Braverman decided to leave behind his six-figure salary at a private investment company in Manhattan and help revive his family's business.

 

Mr. Braverman pushed the business online, studied Web marketing and bought keywords on search engines. Since then, the company's employment has tripled to 12 people, Mr. Braverman said, and sales have tripled into millions of dollars a year. The business, now called Nutsonline.com, recently relocated to Linden, N.J.

 

Search technology, he said, can really open the door to wider markets for small companies. Far-flung customers can find a company's products, while keyword advertising makes marketing more specific and affordable. "It's just been phenomenal what Google has done for our business," said Mr. Braverman, who is 25.

 

Smaller businesses have now taken the lead in spending on information technology. Small and medium-size businesses those with fewer than 1,000 employees account for half of all spending on hardware, software and services in the United States, and their spending grew 35 percent faster last year than the overall market, according to IDC, a research firm. That trend, said Ray Boggs, an IDC analyst, is expected to continue for the next few years as small businesses become more eager and adept at using new Web technology.

 

JotSpot is a Silicon Valley start-up betting on the small-business market. It offers collaborative work spaces online where people can share and edit Web-based documents and databases for project management, help desks, recruiting, product development and other tasks.

 

JotSpot calls them "do-it-yourself applications." Anyone can create up to 20 Web pages shared by five people, at no cost. For more pages and larger groups, the monthly fees start at $9.

 

"The sweet spot for us is small businesses up to 200 people," said Joe Kraus, a co-founder and the chief executive of JotSpot. "The rise of software as a Web service, combined with search marketing, has totally changed the economics of supplying and selling technology to small businesses."