Even SMBs have inertia.

I have been waiting for a solid uptick in cloud services adoption by Small and Mid-Sized Businesses (SMBs).  Yet a recent report from Microsoft indicates that SMBs are not yet adopting SaaS and cloud services at a blistering pace.  Then again, given Microsoft’s rapidly plunging market value, maybe their survey sample included only Microsoft loyalists … both of them.

According to 3,258 respondents representing companies with less than 250 employees, fewer than 40% plan on paying for cloud services in the next few years, though this is a full 10 points higher than in Microsoft’s previous poll. They also report that those SMBs with their heads in the clouds are doubling the number of services which they rent.  The analysis suggests that cloud adoption will be gradual and, given SMB investments into non-cloud infrastructure, a hybrid model will persist.

In the absence of established infrastructure, small businesses have little need for in-house server-side software.  Nearly every business function that once required start-ups to have their own server racks are now outsourcable.  Need tons of servers and bandwidth for your web sites?  Turn to Amazon, Rackspace and others.  Need cross-platform office applications? Google and Microsoft are ready to deliver.  Need an ERP system?  NetSuite is as close as your browser.  Anyone starting a business does not need an IT department, server room or the dull headaches induced by overhearing IT geeks reciting Monty Python scripts to one another.

SMB cloud adoption will happen, and as the Microsoft survey shows, it will occur over time.  Established SMBs need to engineer services into their mix, and since SMBs typically do not have large and experienced IT staffs, conversions will be slow and painful (those words — slow and painful — are signals to entrepreneurs looking for a new market).  New SMBs can adopt SaaS and cloud services today, but given their start-up status, time is required for them to grow and contribute meaningfully to the cloud’s critical mass.

For SaaS and cloud services vendors, the future is bright.  SMBs have always been the toughest market to crack given the cost to sell, ROI on sales, low customer skill levels, etc.  SaaS was custom made for getting SMBs productive in a hurry while dropping the expense of recruiting them.  This model will continue as cloud vendors streamline common application installation and consultants change business models to bridge any remaining gaps.

The channels will not do as well.  Anyone in the business of helping SMBs adopt technology, and making a buck on hardware and software reselling, will suffer in style.  The economics of SaaS and clouds for SMBs is unbeatable, and continuing refinement of end-user interfaces for even infrastructure services reduce, perhaps even eliminate the value provided by the channel.  Where there is less value, providers either compete on price, change their offerings or starve.

Markets change, sometimes overnight and sometimes over time.  But they always change. In this case the once seemingly uncrackable nut of the SMB space is breaking.  It was broken by addressing an SMB pain point (lack of IT sophistication) and cutting out middlemen.  The only losers are the latter.