End-User Analysis Midsize Business Voice Service Spending Steady for 23 Abstract: Telecom service providers need to know the voice telecom spending plans of the margin-rich midsize business segment in North America. Gartner Dataquest surveyed the current and planned expenditures of this segment. By Margaret Schoener and Ann Buenzli Strategic Demand Statements Larger midsize businesses spend about three times as much on voice telecom expenditures than their smaller counterparts. The voice telecommunications spending outlook for 23 is stronger among midsize businesses in the United States than in Canada 2.5 percent growth in the United States and a.4 percent reduction in Canada. Smaller midsize businesses (1 to 499 employees) will grow their voice telecom expenditures faster during the next year than their larger midsize counterparts (5 to 999 employees). Publication Date:8 July 23
2 Midsize Business Voice Service Spending Steady for 23 Midsize Business Telecom service provider marketing strategies must be developed with a clear understanding of future voice expenditure trends for their key business segments, particularly considering the current economic environment that has left little margin for error. Gartner Dataquest's October 22 survey of the midsize business market in North America (United States and Canada) was designed to aid the carrier's product planning efforts. It provides an understanding of midsize businesses' current telecom expenditures and their plans for expansion or contraction of their voice telecom expenditures during the next year. The survey results reflect midsize businesses' responses on the basis of company size and industry segment. The results answer the question, "Where are North American midsize businesses putting their voice telecom budget during the next year?" The industry segmentation results from this survey should be considered directional in nature. Midsize Businesses An Attractive Telecom Market Segment The following characteristics make the North American midsize business market attractive for voice telecom companies to sell their service offerings: Large market segment 88,5 businesses in the United States and 22,6 in Canada Largeemployeebase Averagenumberofdomesticemployeesper company: 257 in United States and 242 in Canada Geographically dispersed Average number of domestic business locations: 1 in the United States and 7 in Canada Industry diversity High concentration in the manufacturing and education sectors in both the United States and Canada, with all other sectors represented Ample revenue Midsize businesses in the United States have average annual domestic revenue of US$98 million, and in Canada CDN$97 million. Remote workforce 2.8 percent of the U.S. midsize company workforce telecommutes, as does 3.4 percent of the Canadian midsize company workforce. Mobile workforce 9 percent of U.S. midsize company employees are considered "on the road," as are 11 percent of Canadian midsize company employees. The midsize market has two segments the smaller 1-to-499-employee segment and the larger 5-to-999-employee segment, whose differing demographic characteristics dictate different telecom requirements (see Table 1). 23 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 8 July 23
3 Table 1 Midsize Business: Demographic Profile by Company Size 1-499 Employees United States 5-999 Employees 1-499 Employees Canada 5-999 Employees Number of Companies 81,3 8,3 21, 1,5 Domestic Employees per Company 218 637 211 645 Domestic Business Locations 9.5 15.9 6.3 2.5 Annual Domestic Revenue (Millions) US$92.7 US$141.5 CDN$95.9 CDN$116. Telecommuter Workforce (Percent) 2.9 1.5 3.5 2.6 Mobile Workforce (Percent) 9.2 6.1 11.1 5.6 Primary Line of Business (Percent of Total) Manufacturing 23 15 36 25 Education 19 29 16 15 Healthcare 9 9 4 8 Retail Trade and Wholesale Trade 9 2 11 11 Real Estate and Professional Services 6 13 6 4 Government 8 9 3 13 Banking, Finance and Insurance 4 6 4 6 Others 22 17 2 18 Total 1 1 1 1 Midsize Businesses in the United States Continue to Spend More on Voice Communications Than Those in Canada According to Gartner Dataquest research, midsize businesses across North America, on average, spent about the same amount for their total telecom requirements in 22 US$238, per business in the United States and US$235, (CDN$367,) in Canada. However, the research results also indicate that U.S. midsize businesses spent proportionally more of their telecom expenditures on voice-related services than their Canadian midsize counterparts 55 percent voice/45 percent data expenditures in the United States and 48 percent voice/52 percent data in Canada. Additionally, the research results indicate that on average, midsize businesses in the United States spent about 15 percent more on their voicerelated telecom services than their Canadian counterparts about US$13, annually in the United States and about US$113, (CDN$176,) annually in Canada (see Figure 1). In both countries the larger midsize businesses (5 to 999 employees), on average, spent about three times more on voice telecom services than their smaller counterparts (1 to 499 employees). 23 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 8 July 23
4 Midsize Business Voice Service Spending Steady for 23 Figure 1 North American Midsize Businesses: Telecom Voice-Related Expenditures, 22 Thousands of U.S. Dollars 4 35 United States Canada 2.95 Times 3.6 Times 3 25 2 15 1 5 1 to 499 Employees 5 to 999 Employees Total 1 to 499 Employees 5 to 999 Employees Total 115923--1 Gartner Dataquest survey results indicate that voice-related telecom spending in the United States is likely to increase in the range of 2.5 percent in 23. Smaller midsize businesses (1 to 499 employees) will be the segment that underpins this voice spending increase: these companies indicate a 2.7 percent increase in 23, while the larger midsize businesses indicate a 1 percent voice-related spending increase. In Canada, the outlook for voice-related spending among midsize businesses for 23 is not as positive as in the United States. Canadian midsize businesses are indicating a slight.4 percent reduction in spending on voice-related services in 23. However, as in the United States, the smaller midsize Canadian companies are more positive than their larger counterparts. Larger Canadian businesses indicate a 1.9 percent voice spending reduction in 23, compared with smaller businesses indicating a basically flat voice spending level: a.4 percent reduction. Business Size and Industry Segment Matters United States U. S. Midsize Businesses 1 to 499 Employees U.S. midsize businesses with 1 to 499 employees on average spent $9,15 per month, $11, annually, for voice-related local, long-distance and wireless telecom services in 22, of which 43 percent was spent for longdistance service. According to Gartner Dataquest survey results, nearly 23 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 8 July 23
nine out of 1 of these companies indicate that they will either increase or hold steady their amount of voice-related telecom expenditures during the next year (see Figure 2). The overall effect is a 2.7 percent increase above 22 spending levels for this size segment. Nearly one third of midsize companies indicated they would increase their expenditures for wireless and, surprisingly, for long distance. When taking into account those companies that also indicated that they would cut back on their expenditures during 23, the stability of the local market is highlighted: Only 8 percent of companies are planning to decrease local expenditures in 23 vs. 18 percent for long distance and 12 percent for wireless. Figure 2 U.S. Midsize Businesses With 1 to 499 Employees: 23 Voice Spending Outlook 5 Percentage of Companies 8 7 6 5 4 3 2 1-1 -2 Overall 23 Change: 2.7% Net 15% Net 13% Net 22% Local Long-Distance Wireless Remain Increase Decrease 115923--2 Given the considerable level of changes in the local telecom marketplace, Gartner Dataquest surveyed the outlook for line growth from two perspectives companies anticipating changes (expansion/contraction) in their existing base of lines and companies adopting new types of lines for the first time in 23. The survey results indicate that the likely areas of line growth among the smaller midsize business group in 23 are private branch exchange (PBX) trunks, both traditional and Internet Protocol (IP)- based, and private lines (see Figure 3). Increased migration of voice usage from the public switched network to the IP-based Internet modalities is also indicated as more 1-to-499-employee midsize companies adopt the use of PCs for voice communication and those already using the PC for voice expand its use in 23. While some companies that have not had Centrex services in the past indicated they would likely deploy Centrex during 23, this category of access lines is the only one that shows a net 23 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 8 July 23
6 Midsize Business Voice Service Spending Steady for 23 decrease in expenditures among companies that currently have the service (25 percent of all companies that have Centrex indicate they will decrease their Centrex lines while 16 percent indicate they will increase their lines anetnegative9percent). Figure 3 U.S. Midsize Businesses With 1 to 499 Employees: Voice Line Market and Growth Outlook Percentage of Companies 9 8 7 6 5 4 3 2 1 22% 4% Net Percentage of 22 Companies Planning to Increase Lines in 23-9% 16% 5% 14% PBX Trunks Private Lines Centrex ISDN for Voice IP PBX PC for Voice 23 Penetration Outlook 22 Penetration 115923--3 U. S. Midsize Businesses 5 to 999 Employees U.S. midsize businesses with 5 to 999 employees on average spend $27, per month ($324, annually) on local, long-distance and wireless voice-related telecom services almost three times that of their smaller company counterparts. About 38 percent of these expenditures among larger midsize businesses are for long-distance service. Gartner Dataquest survey results indicate that 85 percent of the larger midsize businesses will either increase or hold steady their voice telecom-related expenditures in 23 (see Figure 4). The average change in voice telecom spending anticipated by this business segment in 23 is 1 percent, a lower level of expenditure increase anticipated than their smaller counterparts. As with their smaller counterparts, larger midsize businesses anticipated that their 1 percent increase in 23 voice telecom expenditure will likely be reflected across all voice categories local, long distance and wireless with the largest increase likely to be for wireless service. Survey results indicate that a significantly greater proportion of larger midsize businesses will increase their wireless spending in 23 than local or long-distance spending. The growing mobility need across all business sizes continues to spur the wireless marketplace. A greater proportion of 5-to-999-23 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 8 July 23
employee businesses anticipates a reduction in local service expenditures than their smaller counterparts, evidencing the effects of competition and product substitution in the local marketplace. Proportionally fewer midsize businesses anticipate reduction in long-distance expenditures, likely reflecting the price stabilization and even increases in this market. Figure 4 U.S. Midsize Businesses With 5 to 999 Employees: 23 Voice Spending Outlook 7 Percentage of Companies 7 6 5 4 Average 23 Expenditure Change: 1% Net 29% Remain Increase Decrease 3 2 Net 9% Net 8% 1-1 -2 Local Long Distance Wireless 115923--4 The survey results on local line growth for the larger midsize business segment indicate that the likely areas of growth are the same as those for the smaller segment PBX trunks, both traditional and IP-based, and private lines (see Figure 5). Significant migration of voice usage from the public switched network to the IP-based Internet is also indicated for larger midsize companies as they increase their adoption of PCs for voice communication and the percentage of companies adopting IP PBX exceeds 5 percent. Following the trend indicated by the 1-to-499-employee companies, some 5-to-999-employee companies that do not use Centrex service in 22 indicate that they will deploy Centrex during 23. However, Centrex is the only category of access lines in which larger midsize businesses currently using Centrex service anticipate a line curtailment in 23. 23 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 8 July 23
8 Midsize Business Voice Service Spending Steady for 23 Figure 5 U.S. Midsize Businesses With 5 to 999 Employees: Voice Line Market Penetration Outlook Percentage of Companies 1 8 6 Net Percentage of 22 Companies Planning to Increase Lines in 23 23 Penetration Outlook 22 Penetration 4 29% 21% 2-5% 42% 54% 76% PBX Trunks Private Lines Centrex ISDN for Voice IP PBX PC for Voice 115923--5 U.S. Midsize Businesses Industry Segmentation A significant dispersion exists in the level of voice-related telecom spending by midsize businesses among the vertical market segments in the United States (see Figure 6). Two vertical markets banking/finance/insurance and real estate/professional services had the highest monthly average spending on voice-related telecom in 22: about $28,5 each, nearly double the average of the next highest vertical, transportation. The good news for telecom providers in these vertical markets is that Gartner Dataquest survey results indicate voice expenditure increases for 23 are anticipated in both of these highspending vertical markets 4 percent in the banking/finance/insurance industry and.7 percent in the real estate professional services industry. While the annual rate of spending for voice telecom services is lower among other industry segments, the spending outlook indicated by the midsize businesses in some of these segments also is good news for U.S. service providers. The largest percentage increase in voice-related spending among all vertical markets, 9 percent, is anticipated for the healthcare sector, with the transportation, government and agricultural sectors also indicating spending increases in 23. 23 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 8 July 23
9 Figure 6 U.S. Midsize Businesses: Vertical Segment Voice Expenditures Real Estate/Prof. Svcs. Banking/Finance/Insurance.7% 4.4% Transportation 5.6% Healthcare Manufacturing Agriculture Trade Government Education 8.7% 1.8% 5.8% -1.8% 3.6% 1.9% Anticipated Growth Rates 22 23 Outlook -5, 5, 1, 15, 2, 25, 3, 35, Average Monthly Spending (U.S. Dollars) 115923--6 Canada Canada Midsize Businesses 1 to 499 Employees Canadian businesses with 1 to 499 employees spent on average CDN$13, (US$8,3) per month for local, long-distance, and wireless voice-related telecom services in 22, of which 44 percent was spent on long-distance service. According to Gartner Dataquest survey results, eight out of 1 of these companies indicate that they will either increase or hold steady their voice-related telecom expenditures during the next year (see Figure 7). While Canadian smaller midsize companies indicate a stable to positive outlook for voice spending in 23, the overall anticipated change in voice-related expenditures indicated by these companies is actually a decrease of.4 percent during the next year. Among the categories of voice-related telecom services, a greater proportion (76 percent) of smaller midsize Canadian companies indicate that expenditures for local voice services will remain steady into 23 than either long-distance (48 percent) or wireless (34 percent) voice services. Among those companies indicating a change in their expenditure level during the next year, a larger proportion of companies indicate a net increase in wireless voice services than in local or long-distance expenditures. From an overall perspective, expenditures for long-distance voice-related services are the most likely to experience a sluggish 23. The local services market in Canada remains quite stable. 23 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 8 July 23
1 Midsize Business Voice Service Spending Steady for 23 Figure 7 Canadian Midsize Businesses With 1 to 499 Employees: 23 Voice Spending Outlook Percentage of Companies 8 7 6 5 Overall 23 Change: -.4% Net 34% Remain Increase Decrease 4 3 Net 14% 2 Net 1% 1-1 -2 Local Long-Distance Wireless 115923--7 Gartner Dataquest surveyed the outlook for line growth from two perspectives companies anticipating changes in their existing base of lines and companies adopting new types of lines for the first time in 23. The survey results indicate that the likely areas of line growth among the smaller midsize business group in 23 are PBX trunks, both traditional and IP-based, and the use of Integrated Services Digital Network (ISDN) for voice communications (see Figure 8). Increased migration of voice usage from the public switched network to the IP-based Internet is also indicated as more smaller midsize companies adopt the use of PCs for voice communication and those already using the PC for voice expand its use in 23. While there is a greater penetration of Centrex usage among smaller midsize businesses in Canada than the United States, virtually no further Centrex penetration is indicated by these survey results. Additionally, those businesses currently deploying Centrex lines are indicating a reduction in the number of Centrex lines being used in 23. 23 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 8 July 23
11 Figure 8 Canadian Midsize Businesses With 1 to 499 Employees: Voice Line Market and Growth Outlook Percentage of Companies 1 8 6 Net Percentage of 22 Companies Planning to Increase Lines in 23 23 Penetration Outlook 22 Penetration 4 2 17% 5% -5% % PBX Trunks Centrex Private Lines 14% ISDN for Voice 35% IP PBX PC for Voice 115923--8 Canada Midsize Businesses 5 to 999 Employees Canadian midsize businesses with 5 to 999 employees on average spend CDN$4, per month (US$25,5) on local, long-distance and wireless voice-related telecom services over three times that of their smaller company counterparts. About 38 percent of these expenditures are for long-distance service. Gartner Dataquest survey results indicate that 71 percent of the larger midsize businesses will either increase (29 percent) or hold steady (42 percent) their voice telecom-related expenditures in 23, leaving nearly 3 percent of larger midsize businesses contracting their voice telecom spending levels (see Figure 9). The average change in voice telecom spending anticipated by this larger midsize business segment in 23 is negative 1.9 percent, an even greater decrease than their smaller counterparts. This 1.9 percent decrease would likely be concentrated in the long-distance service category. Survey results indicate that a significantly smaller proportion of larger midsize businesses will hold their long-distance spending at 22 levels in 23 than local spending and a significantly smaller proportion will increase their long-distance spending in 23 than their wireless spending. 23 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 8 July 23
12 Midsize Business Voice Service Spending Steady for 23 Figure 9 Canadian Midsize Businesses With 5 to 999 Employees: 23 Voice Spending Outlook Percentage of Companies 8 6 Average 23 Expenditure Change: -1.9% Remain Increase 4 Net 21% Decrease 2 Net 11% Net 1% -2-4 Local Long-Distance Wireless 115923--9 In the larger midsize business segment, the likely areas of local-line growth are the same as those for the smaller segment PBX trunks, both traditional and IP-based, and ISDN lines used for voice (see Figure 1). Significant migration of voice usage from the public switched network to the IP-based Internet is also indicated for larger midsize companies as they increase their adoption of PCs for voice communication. Like their smaller counterparts, while some 5-to-999-employee companies will start using Centrex service in 23, larger midsize businesses currently using Centrex anticipate a curtailment in their number of Centrex lines in 23. Larger midsize companies currently using private line services for voice communication also indicate a decrease in this category of voice lines in 23. 23 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 8 July 23
Figure 1 Canadian Midsize Businesses With 5 to 999 Employees: Voice Line Market Penetration Outlook 13 Percentage of Companies 1 8 6 Net Percentage of 22 Companies Planning to Increase Lines in 23 23 Penetration Outlook 22 Penetration 4 13% 2-21% -27% PBX Trunks Centrex Private Lines 11% 59% ISDN for Voice IP PBX 38% PC for Voice 115923--1 Canada Midsize Businesses Industry Segmentation From a line-of-business perspective in Canada, the government sector had the highest monthly average spending on voice-related telecom in 22, CDN$38, per month (see Figure 11). The healthcare and banking/finance/insurance sectors were the next two highest-spending vertical markets, averaging about CDN$28, and CDN$25, per month, respectively. A basically flat outlook for voice-related telecom spending in 23.4 percent growth was reported in the government sector, compared with a 1.8 percent increase in the healthcare sector and a slight decline in the banking/finance/insurance industry. Contributing to the dampened Canadian voice telecom outlook are the spending reductions indicated by the next highest-spending sectors the transportation and trade verticals, which foresee an 8.5 percent decrease and a 4.7 percent decrease, respectively. No midsize business vertical segments in Canada report significant voice telecom spending growth for the next year. 23 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 8 July 23
14 Midsize Business Voice Service Spending Steady for 23 Figure 11 Canadian Midsize Businesses: Vertical Segment Voice Expenditures Government.4% Healthcare 1.8% Banking/Finance/Insurance -.6% Transportation Trade Manufacturing.8% -4.7% -8.5% Anticipated Growth Rates Education Agriculture Real Estate/Prof. Svcs. -.3% 2.7% 1.9% 22 23 Outlook -5, 5, 1, 15, 2, 25, 3, 35, 4, 45, Average Monthly Spending (Canadian Dollars) 115923--11 Gartner Dataquest Perspective Voice-Related Services With another difficult economic year anticipated in 23, North American telecom local, long-distance and wireless voice service providers must be very focused in designing their marketing plans and sales efforts in this lucrative business segment. Based on the responses to the October 22 survey, Gartner Dataquest recommends that telecom providers capitalize on the following market indications: North America All voice service providers, not only wireless providers, should recognize the positive spending indications for wireless services and use their service bundling offers to capture this additional revenue stream. Local service providers should heed the strong indications for traditional and IP PBX trunk growth and the expansion of the use of private lines for voice communications. Centrex service providers must react to the anticipated contraction in their access line market share by approaching their current customer base with an improved value proposition and with alternative networkbased solutions that capitalize on hosted PBX and IP softswitch features and capabilities. What Centrex providers need to do is to rival these PBX/IP PBX features; otherwise this Centrex decline will likely continue. 23 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 8 July 23
United States U.S. midsize businesses seem to be more optimistic than their Canadian counterparts. The opportunities for additional revenue are greater in the smaller 1- to-499-employee business segment than the larger 5-to-999-employee segment: 2.7 percent vs. 1 percent, respectively. Smaller businesses seem to have weathered the economy better than their larger counterparts, and smaller businesses traditionally are the first to rebound in a reviving economy. Service providers should focus their scant market budget on the key business segments, which spend the most on voice-related services and are indicating spending increases in 23: Banking/finance/insurance sectors in both the smaller and larger midsize business segments Healthcare and transportation sectors in the smaller 1-to-499- employee segment Real estate/professional services sector in the larger 5-to-999- employee segment Canada Given the voice expenditure stagnation, indicated by the October 22 survey results among Canadian midsize companies, Canadian service providers must be even more focused in identifying their most likely revenue opportunities: Expenditure reductions will likely be higher in the larger, higherspending, 5-to-999-employee companies. Service providers should initiate a special outreach to their key customers, focusing on the banking/finance/insurance and education sectors. Special attention should also be focused on the significant retrenchment indicated in transportation and trade, the top two sectors in the smaller 1-to-499-employee market segment. To capitalize on anticipated voice expenditure growth in the larger midsize companies in the healthcare and agricultural sectors, providers should offer value propositions focused on these sectors, including a positive wireless component. Key Issue How will the fixed public network services market develop and which forces/trends will drive market growth and future opportunities domestically and internationally? 15 23 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 8 July 23
16 Midsize Business Voice Service Spending Steady for 23 This document has been published to the following Marketplace codes: TELC-WW-DP-556 For More Information... In North America and Latin America: +1-23-316-1111 In Europe, the Middle East and Africa: +44-1784-268819 In Asia/Pacific: +61-7-345-2582 In Japan: +81-3-3481-367 Worldwide via gartner.com: www.gartner.com Entire contents 23 Gartner, Inc. and/or its Affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice. 115923