Sizing up Small-to-Medium Business (SMB)

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As we enter 2010, and we here at SMB Research begin to focus on the technology advisory needs of the small and small-to-medium business, it is worth taking a fresh look at “small business”, and “SMB” (or “SME”) – and, indeed, what these terms even mean.

The confusion around these terms have been addressed before elsewhere before, most notably by Anita Campbell Editor in Chief of the terrific Small Business Trends website, but by others as well. (You will find below references to several other discussions about the challenge of defining SMB and small business.)

There are a lot of different terms used by small business owners, companies selling to small businesses, the media, the analyst community, and government entities, among others, to characterize the size of companies:

• Start-up
• SOHO / VOHO (Small Office/Home Office / Virtual Office / Home Office)
• Micro business
• Small Business
• Lower mid-size Business
• Medium-sized Business
• Mid-Sized Business
• Upper mid-size Business
• Small-to-Medium Business / Small-to-Medium Enterprise (SMB / SME)
• Lower Mid-Market
• Mid-Market
• Upper Mid-Market
• Medium-Large Business
• (Large) Enterprises

The challenge is that there is quite obviously very little standardization around the common use of these terms.

If you ask my good friend, Stephen Konetchy, who runs his own home repair business, Home Specialists, Inc., about his small business, he will tell you “I don’t know what a micro business is…I consider my business a Small Business…My office is my job-site….We were a startup until reaching 3-years old when we started getting solid repeat business, referrals,…”

Everyone seems to have their own idea of what a “small business” is, or what a small-to-medium business (SMB), and these two terms, in particular, seem to be used interchangeably.  Companies selling into these markets, however, know just how different “small business” and “small-medium” businesses can be.

Part of the problem is simply that as businesses have grown, the nature of what “large”, “medium”, and “small” mean have had to adjust. Consider:

  • The #1 company on the Fortune 500 list reported revenues of $121B in 1989, reported more than $258B in 2004 – and this year the #1 company on the Fortune 500 list shows revenues of nearly $443B.
  • The #500 company on the Fortune 500 list reported revenues of $501M in 1989, reported more than $3.2B in 2004 – and this year the #500 company on the Fortune 500 list shows revenues of nearly $4.6B.
  • The #1,000 company on the Fortune 1000 list reported revenues of $1.1B in 2004 (the first year for which I find the Fortune 1000), and this year the 1,000th company reports revenues of $1.7B.
  • This year (2009), the last company reporting positive revenues on the Forbes Global 2000 (#1,995) is listed with revenues of $10M.

While “small” will always be small, and an enterprise with no more than a couple of employees will surely always think of themselves as “small” (and it is worth remembering that nearly 75% of the firms that exist employ no workers at all), the upper revenue end of what we consider “small”, “Medium” or “large” probably flexes.

The European Union’s European Commission and the U.S. Small Business Administration have each issued, respectively, guidance around how they define sizes of companies:

Enterprise Size SBA revenues SBA headcount EU headcount EU turnover EU Balance sheet
medium-sized < 250 ≤ €50 million ≤ €43 million
small < 50 ≤ €10 million ≤ €10 million
small services, retail trade, construction, and other industries ≤ $7 million
small manufacturing, mining and other industries with employee based size standards ≤ 500
small wholesale trade industries ≤ 100
micro < 10 ≤ €2 million ≤ €2 million

The Small Business Administration (SBA) in fact goes much further, above and beyond these “anchor sizes”, to provide small business size standards for nearly 600 different NAISC (North American Industry Classification System) codes. Although it would be easiest to be able to say that any company with less than 500 employees qualifies as a small business, in fact there are another quarter of the NAISC codes in the SBA table that deviate from this, requiring a 40+ page user guide to explain it all.

The U.S. Census Bureau reports on U.S. firms within these employment bands (the U.S. Census bureau does not define businesses as “large” or “small”):

Firms with no employees
Firms with 1 to 4 employees
Firms with 5 to 9 employees
Firms with 10 to 19 employees
Firms with 20 to 99 employees
Firms with 100 to 499 employees
Firms with 500 to 749 employees
Firms with 750 to 999 employees
Firms with 1,000 to 1,499 employees
Firms with 1,500 to 2,499 employees
Firms with 2,500 to 4,999 employees
Firms with 5,000 to 9,999 employees
Firms with 10,000 employees or more

The question then becomes: Is it possible to align the U.S. Census Bureau’s size bands with the available descriptors of small-medium-large business to clarify and add meaning to our everyday conversation and discussion?

Oracle has been seen to define “mid-size” companies as those companies with revenues of $500M or less. Sage Software has classified customers as small business, midsized businesses, and small enterprise. HP reported to me that they divide the ‘small business world into Micro business (1-9 employees), Small business (10 – 99 employees); Medium sized business (100 – 999) – and Mid-sized business, which is considered to be businesses with between 500 and 999 employees, – and Enterprise business (> 1,000 employees). Each of the technology analyst firms to have their way of defining small business, and small-medium business, and this has been seen to vary from research report to research report.

If there is any consensus at all, there seem to be multiple references – by technology advisory firms and vendors – to a small-medium business (SMB) being a company with less than 1000 employees. While the Small Business Administration’s anchor size for a small business is 500 employees or less, more references outside of the SBA refer to a “small business” being a company which has less than 1000 employees.

One way, therefore, to align the stars and to further our discussion on “small” and medium sized business might be as follows:

Business size class number of employees U.S. Census band(s) U.S. Census count of U.S. firms U.S. Census count of U.S. firms Percentage of total U.S. firms
Non-employer firms No employees Non-employer firms 19,523,741
small business less than 100 employees 5,782,199 98.2%
  • Start-ups
  • SOHO / VOHO (Small Office/Home Office / Virtual Office / Home Office)
  • small business
firms with no employees 802,034 13.6%
firms with 1 to 4 employees 2,777,680 47.2%
firms with 5 to 9 employees 1,043,448 17.7%
firms with 10 to 19 employees 632,682 10.7%
firms with 20 to 99 employees 526,355 8.9%
Small-Medium business (SMB) 100 -999 employees 94,942 1.6%
firms with 100 to 499 employees 86,538 1.5%
firms with 500 to 749 employees 5,695 .10%
firms with 750 to 999 employees 2,709 .05%
Medium-sized businesses 1,000 -9,999 employees 7,753 .13%
firms with 1,000 to 1,499 employees 2,828 .05%
firms with 1,500 to 2,499 employees 2,281 .04%
firms with 2,500 to 4,999 employees 1,739 .03%
firms with 5,000 to 9,999 employees 905 .02%
(Large) Enterprises 10,000 employees or more 890 .02%
firms with 10,000 employees or more 890 .02%
5,885,784 5,885,784

Why is this important?

SMB Research has a combined 25 years working with end-users from many different vertical industries, as well as with vendors and service providers. This experience has included both large “Fortune 100″ companies as well as end-users who might have struggled to be on the Fortune 1000 list.

Working with an SMB is much different than working with a “Fortune 100″ company from a technology advisory standpoint. The SMBs we have worked with were much less likely to have gone through a large system selection or implementation; were much less likely to be conversant in or familiar with readiness assessments – or to be in a position to know whether they were ready for a large technology project; they were less likely to be conversant in change management methodologies, or centers of excellence, or Best Practices. Organizational structures of SMBs can sometimes be less well defined, and/or less integrated, meaning that a system selection or implementation may involve more complexity, and greater integration and implementation challenges.

These firms, then, need new and innovative types of technologies, such as Software-as-a-Service (Saas), virtualization, and cloud computing; these firms also need (and deserve) a better kind of technology advisory delivery model to provide them with research, analysis and insight.

Lastly, it is impossible to talk about small business, and the growing needs of small and medium-sized business, without talking about the many calls for “small business” to be a panacea for our current economic woes.

If all of the recent reports and wishful thinking are true, small business will be the engine that reignites job growth in this country, and the numbers of start-ups, small business, and SMBs will increase. The SBA will tell you that small business has “generated 64 percent of net new jobs over the past 15 years.”

As far back as several years ago, however, there have been repeated voices from the proverbial forest repeatedly countering that while this is true the nature of many of the jobs in small business is different. Scott Shane reports that companies with 50-499 employees, and 500 employees or more,  accounted for more than twice the job creation as companies with 10 employees or less from 1992 to 2008. The latest (2008) Babson College-affiliated Global Entrepreneurship Monitor (GEM) report – one of the finest sources of entrepreneur research – offers that “From 2007 to 2008, the number of jobs entrepreneurs expected to create from their startups decreased in all categories – no jobs, 1-5 jobs, 6-19 jobs – except in the category of 20+ jobs.” There are claims that small business not only does not create most of the jobs, but that small business also sheds more quickly the jobs that are created and that the nature and longevity of many of these jobs is different from opportunities at larger firms.  The article in this morning’s Wall Street Journal (“Small firms Cast Large Cloud Over a European Comeback“) is just the latest in a series of articles detailing the challenges facing small business.

SMB Research is taking great interest in this ongoing debate, and as we work to fulfill the research and analysis, and technology advisory, needs of small business, we will also  continue to try to shine light on the technology and business issues that small business and SMBs face.

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Comments

  1. Ramon Ray says:

    I advocate that we take the “SMB” out of the term “SMB” – and stop lumping “medium” sized businesses into small businesses as they more fit into the larger business category. Those with less than 100 employees and/or less than X amount of revenue – $10million? $50million? or in a different class than those with $100 million and $500 million.

    Thanks for the great work in compiling this!

    Ramon Ray, Editor & Technology Evangelist, Smallbiztechnology.com

  2. Tony Gordon says:

    Nice post.and your blog is very informative

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