Rich Tehrani’s Executive Suite is a monthly feature in which leading executives in the VoIP and IP Communications industry discuss their company’s latest developments with TMC (News - Alert) president Rich Tehrani, as well as providing analysis on industry news and trends.

Rich recently spoke with Natural Convergence's (News - Alert) CEO David Cork about the small business opportunity and how Natural Convergence is taking advantage of that opportunity and differentiating itself in that space.

David Cork

Natural Convergence's CEO David Cork

Service providers and hardware vendors have traditionally focused heavily on the enterprise and consumer spaces, believing those to present the greatest opportunity. Recently, however, there has been a clear trend where those with service providers and vendors have investing heavily an underserved SMB market, seeing that as a greener pasture, especially for managed services offerings. One of those companies is Ottawa-based Natural Convergence, which offers a hosted VoIP key system for the small business market.

RT: Can you give an overview of your position at Natural Convergence and the company’s market focus.

DC: I am the original founder and CEO for Natural Convergence. Our company was started with the idea that service providers would be looking for broadband applications without having to sink a lot of money into the broadband infrastructure. In particular, we went looking for underserved markets, which has been our consistent theme from day one.

The small business marketplace is generally the last one to be serviced and yet, it’s a huge market. We know there are 32 million key system lines out there, and a lot of them are aged — as old as 12 to 14 years. So, we saw a huge opportunity, as those systems were being replaced, for service providers to bring out a service bundle to replace them.

We created a product called Silhouette, which allows a service provider to deliver a hosted key system service that can be delivered over any broadband connection. That concept has been well established in the marketplace in the consumer side, and it’s now coming into the small business marketplace and getting the attention, just at the time when we are hitting our stride as well.

RT: Tell me a little bit about Silhouette.

DC: We first took a look at what other people were doing in the marketplace. If you think back a few years, some of the competitors that come to mind are companies like Sylantro, BroadSoft (News - Alert) , LongBoard, and VocalData. All of them started in other parts, whether residential or Centrex or even the hosted PBX market.

Many research houses like to bundle small and medium-sized businesses together, calling it the SME market, but small businesses — those with fewer than 50 employees — actually represent a very different market than medium-sized business. In reality, they have very little in common with their medium-sized counterparts in terms of their needs, and the world developed key systems specifically to meet those needs. The channels to reach the small business marketplace are significantly different as well.

So, we chose to model Silhouette on the key system model using multi-line key phones with all of the feature buttons there readily available and don’t need any training, because that is what those companies are used to. If you are delivering a hosted service, if you can deliver the key system functionality they are used to, you have a huge head start. One of the key characteristics of Silhouette was to make sure that it met those needs.

The second thing, which is certainly something that seems obvious in hindsight, is that the profitability of service providers is directly related to their operational expense. So, if you are going to be servicing a market like small business, which is very price sensitive, you have to have a good handle on operational expenses.

Our product is designed for what we call zero-touch deployment — there are no truck rolls and no service technicians required. The end user does all the configuration through a Web page. But what truly makes us different is the zero-touch deployment, which gives us the lowest deployment costs in the industry. Also, the ongoing support costs are dramatically reduced from anything they have had in the past.

So, the combination of those three things — a very simple product that’s simple to sell, simple to deploy, and inexpensive to support — drives the profitability for our customers, and allows them to make money.

RT: How do you define the small business market and its needs?

DC: Interestingly enough, I’ll talk about it the other way around. A mid-size enterprise has at least one IT person on staff. We went after the marketplace that doesn’t have those skills in-house and, at the end of the day, to put a number on it, those companies tend to have between 5 and 50 employees, or they might be a larger company with multiple sites, each with 5 to 50 employees. That’s really the sweet spot for us. Those companies don’t have the skills or resources that a larger enterprise has, and they have different needs and buying patterns. We are ideally suited for those smaller businesses.

RT: Tell me about your competitors and how Natural Convergence differentiates itself from them.

DC: I think the competition comes from three different camps. The first is the traditional key system CPE vendor, which is what a lot of small businesses are used to. They are used to buying their phone system from a dealer and then getting their local access lines from the phone company. They then buy long distance and their Internet access. In general, they tend to buy from five or six different vendors. So, we can differentiate against because they can get all of these services bundled from a single vendor and for a lower total cost. It actually competes extremely well with the traditional key system vendors.

The second camp is the network equipment providers who typically provide softswitches for the larger service providers. Many of the softswitch vendors are starting to add features for residential services, but then quickly add features for the SOHO market. They are coming up into the small business market from the bottom, so we compete directly with those types of solutions. To be fair, they are coming in from the bottom, and for anybody with a key system today and over five employees, our solution clearly has winning attributes.

The third group is the hosted applications group, primarily coming out of the Centrex market. The difference here is that they have built products for the medium to large enterprise and are trying to slim them down, and come up with a “Centrex light” approach for the small business market. It just doesn’t suit the channels. They have round pegs they are trying to fit into a square hole, or vice versa. They have products that are more complex, don’t lend themselves to zero-touch deployment, and generally require some technical skills within the channel. In my mind, that prices them out of the market.

RT: How do you address VoIP quality? There was a recent survey indicating that small businesses are concerned about the quality of VoIP. What would you tell them?

DC: Small business owners are consumers, so they have been hearing about VoIP and quality issues for years. But my customers are service providers and either own the last mile, so that they can manage the link into the small business, or they have a partner who owns the last mile. This isn’t delivered over the open Internet like some of the consumer plays are. So, the first thing is that working with those people who have that managed last mile gives you a foundation to build upon to deliver quality VoIP.

The second thing we do is make sure the phones we work with capture quality statistics. After every single phone call, those statistics are captured by my application and are delivered to the service provider, so they can closely monitor all aspects of call quality. There is no question that, if there is a hiccup anywhere along the line, they have the data to troubleshoot and figure out how to correct the problem.

RT: How do you define your areas of growth?

DC: For us, there are two mechanisms. We are a software company, so what we sell, at the end of the day, are licenses, and we license our product per user — not per phone or per port or per line. We create a profile for each user and that is what we track as our licenses.

First and foremost, as we win new service providers and help them get into service, we see license growth that way. But the second, and actually the far more powerful mechanism for us, is that once the service provider has launched the service, we help it develop channels and new approaches, so that the service provider itself can drive penetration within its footprint.

We have found this to be a particularly successful approach — we have customers that are generating 35% to 50% growth quarter over quarter. It appears that once they get past their first couple of hundred licenses, they really get the process nailed down. We help them with everything from agent recruitment to lead generation to sales training, so we kind of go above and beyond the call there. We don’t just sell them the licenses and hope that they will be successful. Instead, we stay with them as a partner, as a partner should, all the way through to help them drive that penetration.

RT: What is the biggest problem in terms of adoption of your technology?

DC: Our industry really does go after the big markets first, so there are huge numbers in the consumer market and very large customer opportunities in the enterprise market. Small business tends to wait for technology to trickle down, and that has always a challenge, because the technology that develops for another market doesn’t always fit the small business channels.

In the small business market, the challenge is not technology; rather, it is around the channel. You have to get the economics right and then you have to help them a great deal. But the real challenge is, clearly, making sure that the product you have meets that channel’s needs and fits their skills. Then good things happen. If the product is too complex or too costly, the channel tends to fail. RT: You have made some claims about being able to increase service provider revenue very quickly. Can you explain this a little bit? How are service providers benefiting from their relationships with you?

DC: The incumbents, the large Tier One carriers, have been largely distracted by competition in the consumer space and large enterprise space. This is just a huge opportunity now for competitive service providers — both voice services providers and managed desktop providers who want to add voice to their existing services. It’s a huge opportunity for them to win customers from the incumbents. We offer a very low-cost, simple, starter bundle to get them into service. It’s the hardware, the software, and the professional services to get it all together.

For $100,000, we can get a service provider up and running within six to eight weeks, and have done this repeatedly. Then we help them with their operational needs get them to the point where they have a repeatable process. When it’s time to get the first customer switched on you always go to a friendly customer. What’s important, thought, is that you can get the next 200 customers turned on just as easily, and it turns out there are three things you have to do.

You have to make it easy to sell and, to that extent, we spend a lot of time with a very comprehensive set of programs to help them to find the right price points, the right bundles, but in a way that makes them unique. Secondly, you want to make it easy to deploy, and this is possibly where we have spent the most amount of time and energy. We really do have a differentiator. We show them how we can get them both up and running quickly, and then how to achieve rapid deployment. And the third thing we do is, work with them on a set of channel programs. Once they get the service going, we want to really help them get their channels to market primed and running.

In some ways, it’s like throwing kerosene on a fire at that point. Every one of our customers goes through the early deployment, the growth to 200. But, after that, the services seem to grow organically, and it’s really, really fun to watch.

RT: With the channel being so important, what are some of the things you are doing to help the channels and their sales?

DC: We think the ideal model is to marry the service provider — who is good at hosting and good at delivering services — with the people that really do look after the small business on a day-to-day basis. For example, it might be whoever maintains their PCs and their LANs.

The small business is conservative and needs the loyalty that is found in a partnering relationship with their vendors. So, if you are a service provider and you want to get quick access to the small business market, you have to find those vendors that are already selling to small businesses. They are just not selling voice services, and that’s where we can help. We help service providers with recruitment programs and lead generation, to connect them with the people who already have relationships with small businesses.

RT: What do you see as the future of services growth in the small business market?

DC: For years, I was in the PBX (News - Alert) space and lived through the feature wars. But that is not what small business values. What I am seeing — and I’ll turn it around a little bit and talk about the consumer market — is the emergence of triple play and quad play service bundles.

Nobody has yet put together the triple play for small business, if you will. But, the obvious candidates for this are voice services, such as what we deliver with Silhouette, Web services, and cellular or wireless. That is the next wave. Every small business owner has a cell phone, and every one of his key employees has a cell phone. While the other parts of his communication costs are going down in price, his cellular bills are skyrocketing. So, being able to do offer triple play with wireless tied in, I think, is going to be the next wave of growth in the small business marketplace.

RT: What are your thoughts on how some of the players in this space are approaching the SMB space, like Packet8 with its video phone?

DC: Actually, I quite like to see what these companies are doing. I believe there are choices to be made in the marketplace, and I like the whole concept of hosted services. I don’t have a particular lead on video yet, but I will say this: The small business marketplace is very diverse. One thing that is clear, which is that, even in the under-50 marketplace, there is a whole range of hosted services that these small businesses want — there is something for everyone, from fast food restaurants, to junkyard retailers, to professional services firms. There is such diversity there, and there is going to be uptake for a variety of services.

RT: Do you have any thoughts on what some of these other services will be?

DC: Not the specific services, but I can tell you that, despite the very conservative nature of small business owners, once you open the door with broadband, they like to try things. And they are consumers as well, so if they see something in their private life, they often ask, “Can I get a version of this that will work in my small business?”

Whether it’s going to be tracking sites or tracking data, I think there are a number of location-based services that are now starting to show up for consumers. That will lead to some interesting ideas on how those services get brought into the business world. I think the small business owners will actually adopt this stuff a lot more quickly than people give them credit for.

RT: Does there need to be any more education for this small business owner, or are there already enough resources for them?

DC: It’s interesting, because I think small businesses in every geography that we are in have been laggard in adopting broadband because they didn’t see why they needed it. But now they are starting to see it, and when you put your voice services on top of a broadband link, it pays for the broadband.

So, now that the broadband is in place, you can now try a whole bunch of services that, in the past, wouldn’t have been practical with dial-up. Also, you couldn’t cost justify a broadband link based on that. So, in a lot of ways, VoIP is paying the freight here. It is the thing that makes broadband technology viable for a small business, and once they have done that, all of these other services become really practical.

RT: Is there anything else you would like to make sure our readers know?

DC: The one word of caution I would add is regarding the idea that one size fits all. It’s too easy to lump small business in with other things. In fact, no matter what geography you go enter, everybody tends to take small business and lump it in with something else. It is a huge market, and the opportunity is right, as long as you pay attention to the channel, because you cannot cost effectively sell direct to that small business.

Rich Tehrani is President and Editor in Chief at TMC.

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