Looking Ahead, Channel Executives Stay Optimistic

December 24, 2008

Channel executives and pundits are surprisingly upbeat in their predictions for IT spending and the health of the channel in 2009, despite the stream of gloom-heavy news about the overall state of the U.S. economy.

Their predictions are based on positive data about IT spending, the strength of certain vertical markets, and rising demand for disruptive technologies (such as virtualization, managed services, and open source) that decrease customers’ costs and consolidate infrastructure, while boosting VARs’ profitability.

Global economic problems will impact IT budgets, but the IT industry and VARs will not experience the dramatic reductions seen during the dot.com bust, said Tiffani Bova, vice president of research, indirect channel programs and sales strategies, Gartner Inc. (NYSE: IT).

“In a worst-case scenario, our research indicates an IT spending increase of 2.3 percent, down from an earlier projection of 5.8 percent,” said Bova. “IT budgets aren’t likely to totally collapse as IT is much more embedded in businesses now versus 2001-2003 during the dot.com crash.”

Many other channel players concur. “We don’t expect to see a dramatic change in IT spending this year,” said Tom Tucker, president, Akibia, a solution provider in Westborough, Mass. “However, we expect companies to be more cautious with their spending, which will delay some projects.”

“The realities of today’s economy have accentuated businesses’ needs and demands for predictable IT spending and for less capital expenditure upfront,” explained Keith Bradley, president of Ingram Micro (NYSE: IM) North America.

Bradley expects that IT spending in 2009 will become much more of an operational (and therefore necessary) expense for businesses.

Although the United States will be one of the worst-hit countries, Gartner remains optimistic about the outlook for 2009, said Bova. “Hardware will take the biggest hit, with overall sales dipping 4 percent next year, the IT services sector will be flat, telecoms will grow 3.9 percent, while software will rise 8.6 percent,” she said.

Strategic Focus

Bova and others believe that smart VARs will weather the pending economic storms of 2009 by focusing on verticals and technologies that will have fairly limited impact from the recession and are strategic to companies’ long-term growth and desire to cut costs.

“Healthcare, telecom, financial, and public sector are just a few of the verticals that HP believes have growth opportunities for VARs in 2009,” said Tom LaRocca, vice president of strategy and marketing, Americas solution partners organization, HP (NYSE: HPQ).

Bova said Garter expects to see considerable IT spending from the public sector – mostly by the Veterans Administration, Homeland Security, Treasury, Energy, and the Health and Human Services Department, which operates the largest civilian IT budget.

“Resellers who focus on key verticals such as healthcare, government, and education should continue to find opportunities,” added Joe Quaglia, senior vice president of U.S. marketing, Tech Data (NASDAQ: TECD).

Education is another strong vertical, said Rich Black, director of marketing, Acer America.

“Very few schools have an IT infrastructure, while all face the challenge of bringing their institutions into the 21^st century via technology,” said Black. “VARs have plenty of opportunities to serve the IT needs of schools.”

As for picking verticals to avoid, most channel insiders didn’t have to think too hard: retail and anything related to real estate were automatic choices.

“Clearly, retail, real estate, and construction are verticals taking revenue hits right now, and those hits are translating into less IT spending,” said James Chinn, partner, Shadow-Soft, an Alpharetta, Ga.-based VAR that specializes in open-source solutions and SaaS.

“VARs should definitely avoid retail,” said Heather Clancy, vice president, strategic communications, SWOT Management Group, an integrated channel and sales development firm in Hillsborough, N.J. “Although retailers talk a good game about mobile solutions, as an example, they historically invest very little in innovation and tend to be technology laggards,” said Clancy.

 Opportunities in the financial services sector also will be questionable, said Chinn.“IT spending in the financial sector seems unaffected so far by the recession, but I think it could slow down over the next three to six months,” Chinn added.

Managed Services Opportunity

Within verticals and across IT as a whole, VARs, vendors and analysts agree that certain core technologies offer the strongest market opportunities for VARs. Those technologies include business intelligence software, managed services, SaaS, security, storage, open source, virtualization – and anything promoting a greener world.

“We’re seeing relative strength in certain technology segments such as software, storage, security and wireless,” said Quaglia. “Businesses are looking at ways to spend their IT budgets intelligently, with an eye towards long-term operating costs.”

Quaglia identified green technologies and newer, energy-efficient servers and storage devices as likely popular sales opportunities for VARs.He added that business Intelligence software and virtualization are big because they help businesses operate more efficiently. 

Clancy noted that anything positioned as a managed service, including software applications delivered as a service, will become more interesting because businesses won’t have to spend money upfront to take advantage of the functionality. “I believe the economic climate will accelerate the adoption of technology as a service,” she said.

“Managed services and SaaS-based offerings will bring a distinct sales advantage to partners in the coming year,” said Bradley, who believes corporate focus on predictable IT spending will likely increase the adoption and deployment of managed services and SaaS solutions.

Bradley also expects to see an uptick in sales of mobility solutions as companies try to improve productivity and efficiency. 

Despite the mostly rosy projections for 2009, VARs obviously cannot ignore the big black cloud of recession (did someone say recession?) hanging over every sector of the economy.

Tightening credit and bad debt will be the biggest landmines for VARs in 2009, said Chinn. “Tightening credit will impact cash liquidity for every business across the spectrum, straining operating capital and new capital expenditures,” he said, noting that a large portion of IT spending is typically financed.“The poor credit environment will force CFOs to find other ways to fund IT projects, or they will simply be postponed or scrapped,” he said.

Chinn also expects bad debt and bankruptcies to jump in 2009, forcing VARs to take a hard look at their credit approval process for both existing customers and new prospects.

HP's LaRocca believes many channel partners will have to watch expenses closely as they focus on the economic challenges. “Like any businesses working through a downturn, VARs need to focus on driving revenue-generating activities and being vigilant about expenses,” said LaRocca. “VARs should focus on what they do best and look to new/adjacent competencies to drive new revenue opportunities.”