Eye on the states: Small businesses can thrive in this market

Thomas Davies

Most large technology firms focus like a laser on the biggest buyers in the state and local market. But for small companies, a similar marketing focus could result in missed selling opportunities.

This doesn't mean that state and local government is not a friend of small business. One of the least appreciated aspects of this market is just how attractive it is to small businesses.

For starters, most state and local governments are quite small. There are more than 50,000 units of state and local government, including states, cities, counties, townships, schools and special districts such as water authorities. Most of these buyers are small businesses.

For example, of the 3,036 counties in the United States, 62 percent, or 1,888, are considered small employers with less than 250 employees. The same is true for the 21,275 cities and towns, of which 94 percent are small employers.

Small governments like to buy from small businesses, trusting them more than they do larger companies. The smaller the government is, the more personal relationships count. Consequently, small governments aren't as afraid of betting on a reputable, local, small company as large government often is.

Small local governments are often a niche market unto themselves that can be served more easily by small business.

It's not unusual in a state or region to find a group of highly networked, small local governments that have all decided to do business with the same small technology supplier.

Once a small technology company builds a presence in the state and local government market, it's almost impossible to unseat it. Small government buyers are very loyal to their suppliers.

Small technology companies also have advantages over large ones in selling to small local governments. Larger technology companies have expensive, geographically remote sales forces that make it cost-prohibitive for them to reach small local governments. Their sales goals are so large that it would take hundreds of transactions from small local governments to satisfy them. They are big dogs with big appetites.

You're probably asking yourself about technology purchases by small local governments. The old 80/20 rule, with some exceptions, pretty much applies to this market: 20 percent of the largest state and local governments account for about 80 percent of the technology buying. (Once again, you can see why the largest companies target the biggest buyers.)

That leaves 20 percent of the buying to small local governments. Because overall state and local annual technology spending is about $45 billion, that translates roughly into $9 billion from small governments -- not too shabby.

Small government buyers often have money to spend because of the way federal grants work. Many grants, such as homeland security and education e-rate, are distributed using demographic and economic factors, such as population, as the basis for determining who gets what. This ensures that even the smallest state and local buyers will get some of the monies.

Another reason small doesn't necessarily mean poor: the tax base. Some small governments have discretionary monies to spend because they are rich in property taxes. Many have become adept at leveraging this growing base to their advantage, and in good fiscal times they can benefit from revenue sharing with their states.

Savvy small businesses have learned how to make the inherent qualities of the state and local government market -- numerous small buyers that are highly fragmented and hard to reach -- work to their advantage. They have created a market that likes to do business with small business -- and probably always will.

Thomas Davies is senior vice president at Current Analysis Inc. in Sterling, Va. His e-mail address is tdavies@currentanalysis.com.

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