"We're just steady as she goes and more, more, more of it," says Tracy Butler, president of Acropolis Technology Group, a solution provider in Wood River, Ill., with 2006 annual revenue of $3.4 million. But what Butler calls "steady" is, in fact, fruits of a maniacal transformation of his business model over the past two years from product-oriented VAR to a managed services solution provider. "Everything has to be a managed-service opportunity," Butler says. While his company's revenue was flat during the transition largely because of fewer product sales, Butler says he's on track to grow substantially this year. "We've been focusing on the bottom line as we transition from a products business to a services business," he said. "Now that we've completed that transition, we expect to grow 10 to 15 percent this year. " Butler's decision to target the managed services market for SMB customers in the St. Louis area mirrors the No. 1 growth strategy among rapidly growing VARs. Just over 37 percent of all VARs surveyed said they plan to target new markets over the next three to five years. But for the hypergrowth VARs, that number jumps to just over 55 percent. Also, more than 58 percent of VARs planning to grow more than 15 percent faster than the market this year have plans to expand product lines during the next three to five years. But as they transition to offering solutions rather than point products, solution providers say most of their focus will be on software.

"We're not adding hardware vendors," says Don Richie, president of Sequel Data Systems, an Austin, Texas-based solution provider with 2006 revenue of $27 million and a 2007 growth rate in excess of 25 percent. "We are much more focused on solution sets."

Richie's mindset matches those of the VARs identifying themselves as being in hypergrowth mode in the CMP Channel research. Only about 27 percent said adding new vendors was critical in terms of affecting their business' ability to succeed.

Richie said, however, that his solutions bent translates into stronger relationships with software vendors and a greater focus on services. Sequel, for example, has recently moved into SAP solutions. And Richie noted that virtualization is what's driving much of his new business. "Virtualization is our fastest-growing area right now, both for hardware, services and virtualization software, which in our case is VMware," he says. "We've dabbled in virtualization the last couple of years, but this year we got really serious about it and we'll do several million dollars in VMware applications alone."

Next: Driving Hardware Sales Bruce Geier, president and CEO of Technology Integration Group (TIG), a San Diego-based solution provider with 2006 annual sales of $282 million, notes that while hardware sales are still a large part of his business, it's imperative for VARs to focus on services as a way to drive product sales. "We have to build a compelling reason for customers to want to buy products from us, and the way we do that is by improving the services we can bring to them," he says. "One service that everyone should be in if they're not already is virtualization. Virtualization is huge today and VMware pretty much leads that charge."

Geier also notes that clustering of servers, security solutions beyond the firewall, VoIP and unified communications are all big business drivers for TIG this year as the company passes the $300 million mark in annual revenue.

TIG is in the process of expanding internationally, a new market focus that 21 percent of the hypergrowth VARs surveyed by the CMP Channel said they would pursue over the next three to five years. This year, TIG acquired a German solution provider to help serve U.S. military bases in Europe and it's also contemplating a move into China in partnership with a vendor that Geier didn't identify.

"You have to partner when you go international; you'd be insane to go in cold turkey," he said.

Close to 44 percent of VARs that plan to grow their businesses at least 15 percent faster than the market in 2007 said managing vendor relationships is critical to their businesses' ability to succeed.

Sequel Data's Richie agrees. Sequel added two full-time people dedicated to reselling Hewlett-Packard services this year with financing help from HP. Last year, Richie says he sold about $250,000 in HP services, but this year he expects to sell close to $2.5 million.

And Brian Deeley, manager of Graymar Business Solutions, a Timonium, Md.-based solution provider, says his strong vendor relationships should boost his growth from low double digits in 2007 to triple digits in 2008. That's because Graymar, with 2006 annual revenue of about $4.25 million, found out in August that it won the State of Maryland IT hardware contract.

"The vendor and distributor relationships are what's going to make the contract winners either succeed or fail," he says. "I truly believe our strong relationships with our vendor partners are what made us win the contract."

To win the contract, Deeley forged partnerships with 45 different vendors, including Cisco, HP, IBM, Juniper, Lenovo, Ricoh and Xerox, among others. In addition, Graymar helped vendors such as SMC Networks, Irvine, Calif., and St. Bernard Software, a security software specialist in San Diego, win slots on the state contract line card.

"Adding second-tier and specialty vendors will help set us apart from some of the other contract award winners," Deeley says. "There are vendors on the security and appliance side of the business that we have had relationships with for a number of years that other VARs tend to pass up. A lot of the other bidders never went to these manufacturers and said, 'Hey, here's an opportunity for us, a solution provider, to win the bid and get your product line on the state contract.'"

But VARs noted that vendor relationships can both help and hinder growth. Richie, for one, says that vendors have gone overboard in compliance audits for MDF and certification requirements. "I am audited by HP virtually every quarter," he said. "I'm now spending more time on audits and managing the vendor relationship than I am in the field trying to grow the business."

Financing growth is also a priority issue among growing VARs. While this select group of VARs has aggressive growth plans, their methods of financing that growth are decidedly down to earth. Virtually all of the growing VARs said they will seek money from multiple sources. But the No. 1 source of funding chosen by 51 percent of these hypergrowth VARs is financing expansion through cash flow, while 48 percent of the VARs with plans to grow in excess of 15 percent said they would opt for self-funding, compared to all VARs, who said self-financing was their top choice at 50.3 percent (see "Financing Options," left). Mentioned as the third most popular option among this group of VARs was financing through business profits, with about 44 percent of the solution providers opting for that route.

Next: Getting A Bank Interested Getting a Bank Interested
Taking on debt, however, is less attractive for fast-growing VARs. Well down the list is borrowing money from the bank, with less than 20 percent saying they would use that method. Solution providers said that as they shift to a more services-oriented model, banks, which traditionally view hardware as loan collateral, sometimes think twice about financing services.

Acropolis Technology's Butler, however, says that his bank is now on board with his managed-services model. "Most banks are interested in, if you default, 'What can I come get?'" he says. "My managed-services tools aren't worth anything to them."

The ability to finance growth is crucial for VARs that intend to grow 15 percent more than the market. Those same VARs listed cash-flow problems as their No. 1 obstacle to growth, with almost 50 percent of the growth VARs surveyed citing cash-flow problems.

Butler, however, notes that banks are starting to come around when it comes to financing a services business. "You need to be fairly profitable first doing it the old way. Services are just the next iteration. Then if you talk about the recurring revenue [from managed services], that really gets the banker's interest. My advice to VARs going to get money, just show them a recurring model vs. 'Hey, I've got this contract with a block of hours on it, and when it expires they don't have to do anything.'"

Butler, too, figures his move to a managed-services model helps solve the problem of finding qualified technical employees. CMP Channel Research found that nearly 40 percent of the fastest-growing VARs consider finding new sales employees critical to the success of their businesses, while 44 percent cited adding new technical and consulting employees as a crucial factor in reaching growth goals.