Financial Crisis Cuts Both Ways

Despite the current widespread economic uncertainty for channel partners, Managing Editor Al Senia notes they could stand to benefit in the long term as outsourcing grows.

September 26, 2008

Al Senia

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The current economic uncertainty is impacting all segments of the economy, including the IT industry and especially the channel. This has become much too wild a game to predict a certain outcome, but there are certainly a few trends that already are becoming apparent. Channel partners may actually wind up benefiting in the long-term, but there they are likely to experience financial pain before they get there. There's light at the end of the tunnel, but it's an awfully dark tunnel.

The first realization is that IT companies are no longer able to compensate for the weakness in the U.S. market by seeking refuge overseas. Throughout this year, vendors and distributors have been able to shore up their financial statements by capitalizing on overseas demand and positive currency fluctuations. Now that equation has changed dramatically. National economies in markets like the United Kingdom, Ireland, Germany and Spain are tanking, unemployment and inflation are rising and their currencies have been weakening against the dollar. In Asia, slowdowns in growth are occurring in South Korea, China and Japan and stock markets have been decimated. Inflation is rising in most of the developed world. Little surprise that distributor Ingram Micro and hardware manufacturer Dell recently toned down their revenue and profit estimates for the rest of this year. The channel simply is not going to get any more "bounce" by playing the overseas card.

Things aren't a whole lot better in this country, where consumers and businesses are watching credit evaporate. Without sufficient credit, there's no capital investment, business expansion or hiring. "It's a bleak picture," Andy Golub, associate director of research at ChangeWave Research, recently told InternetNews.com. "There doesn't seem to be any immediate catalyst on the near horizon that will lift spending."

In its August survey of enterprise IT spending, ChangeWave reported 30 percent of enterprises cut their IT spending in the third quarter and 29 percent say they will cut it or stop it in the fourth quarter. Only about 12 percent say they will spend more than expected in those quarters. Another CIO study by Robert Half Technology found that 11 percent of respondents expect to add staff in the fourth quarter and 3 percent will reduce staff. Couple these statistics with the credit crunch impacting small and medium businesses, and you can project just how bleak things suddenly appear.

Of course, it's not all doom and gloom, Gartner reported recently that software spending worldwide will grow more than 10 percent this year and IT services spending will rise 9.4 percent. And I've seen other surveys that show networking and security spending holding up quite well. So businesses still will make some technology investments, but these better be able to demonstrate a strong and fairly immediate ROI.

The good news – and there is some – is that if channel partners can hold on through the current turbulence, there are likely to be smoother skies ahead. The financial sector is in an economic nosedive, but as thousands of IT (and other) workers get laid off, there's going to be a skills shortage that the channel is going to have to fill. You can bet IT outsourcing will be on the rise. And if you think the financial services industry had compliance issues for IT to solve before, just wait a little while. My guess is that after the current crisis recedes, the financial services sector is going to be using computers and software to document and store for oversight review every potential transaction you can imagine. The current slowdown is a good time for VARs to bone up on the financial vertical because, trust me, opportunity will be knocking.

(Al Senia is managing editor of ITChannelPlanet.com.)

TAGS: security,networking,outsourcing,economy,financial services

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