Rebound On The Horizon?

Businesses spent $586 billion on technology last year, and this year expenditures stand to drop between 12 percent and 15 percent to about $500 billion, according to Forrester Research. Next year, a sluggish first-half U.S. economy is likely to restrain IT spending growth, with expenditures climbing only to about $517 billion, Forrester projects. As a result, it will be up to solution providers,the soldiers at the front of the sales battle lines,to demonstrate to customers how new technology and services purchases can streamline operations, add revenue opportunities and fatten profit margins, channel executives say.

"Specialized, high-end solution providers that can implement solutions with an immediate, direct impact on business cost reduction and efficiency will have a strong year in 2002," says Peter Jackson, CEO of Intraware, a $100 million solution provider in Orinda, Calif. "Those dealing in lower-end, generic products and services will not do nearly as well."

Certain technology categories also will hold the key for success next year. Solution providers expect sales to be robust in security and disaster recovery, storage, voice-over-IP (VoIP) and telephony, Linux and enterprise management tools.

Most economists expect economic growth to return in 2002, with the economy gathering steam as the year progresses. And recent data has provided some rays of hope.

The services sector grew slightly in November, while orders for manufactured goods bounced back after a slide in October, according to the National Association of Purchasing Management. Relaxed interest rates have kept construction spending solid, and businesses are working off excess inventory faster than many economists expected. A full-fledged economic recovery, however, isn't likely until the second half of 2002. According to the U.S. Commerce Department, the economy shrank in the third and fourth quarters of 2001 at an estimated annual rate of 1.1 percent and 1.9 percent, respectively. And the Philadelphia Federal Reserve Bank, in its Survey of Professional Forecasters, projects only 0.1 percent growth for first-quarter 2002.

Yet that economic plateau isn't expected to last. The Philadelphia Fed survey forecasts a 2.4 percent annual growth rate in the second quarter, a notable improvement but still less than the growth rates seen in the 1990s. That will be followed by 3.6 percent and 4 percent growth rates in the third and fourth quarters, respectively, as the full effects of interest-rate cuts and a post-Sept. 11 surge in government spending kick in, the survey predicts.

The war on terrorism remains the big wild card for the economy. Consumers' and businesses' fears about the future will abate as the conflict in Afghanistan subsides and global authorities continue their clampdown on terrorism, economists say. But another terrorist incident could reignite the public's fear and short-circuit economic recovery, they note.

Other obstacles also could trip up a potential rebound. The U.S. Labor Department reported that 800,000 workers lost their jobs in the October-November time period, the fastest job-loss rate in 20 years. Continued shrinkage in employment could extend current declines in consumer confidence and consumer spending, which accounts for two-thirds of the nation's gross national product.

The climate for business investment remains cloudy as well. In the fourth quarter, business investment sank to one of its lowest levels since 1982, according to the G7 Group, a New York-based economic and political consultancy.

Such lingering uncertainties will push businesses to more closely scrutinize how technology benefits their bottom line, so they will be reluctant to do much, if any, discretionary IT spending. Companies might not be willing to commit significant new funds to their technology budgets until they see firm evidence of an economic recovery, whereas the usual case is for businesses to ramp up capital investment in anticipation of one.

Any increase in technology spending next year, therefore, could be limited. Forrester forecasts a 2.2 percent rise in expenditures,from $506 billion in 2001 to $517 billion in 2002,under its "most likely" scenario, and a 7.8 percent gain,from $516 billion to $556 billion,under its "best case" scenario. Still, neither of those projections stack up to the double-digit annual growth rates that characterized the decade-long rise in IT spending before this year.

That said, solution providers really hold the key for high-tech spending growth next year. The channel has come full circle since the boom times of the late 1990s, returning to the days when resellers had to prove the value of technology to skeptical business customers.

"The art of selling has been lost over the past five years, and we will have to rediscover it," says Debbie Milner, co-CEO and president of Jade Systems, a $120 million solution provider in Long Island City, N.Y. "This combines a detailed understanding of business and technology with strong customer relationships to build cost-effective solutions."

In 2002, small and midsize businesses likely will be the chief technology spenders, solution providers say.

"Firms with 100 to 500 employees will be the optimal market for solution providers next year," says Bill Walker, owner of Service Solutions, Davenport, Iowa. "These companies are looking to build a foundation to grow as times get better, and top-notch technology systems remain an integral part of that foundation."

The enterprise market will be a particularly tough nut to crack next year, says John DeRocker, vice president of sales and marketing at Nexus Information Systems, a $30 million solution provider in Plymouth, Minn. "It's hard to predict when Fortune-size companies are going to start really spending again," DeRocker says. "Also, a lot of these companies are bringing work back in-house, particularly in security. Given the internal procedures and sheer inertia these big companies have, they can't turn spending around on a dime the way smaller businesses can."

Customer size aside, however, solution providers foresee particular technologies promising solid sales growth in 2002. No. 1 on that list is security, which has become a top business priority in the wake of the terrorist attacks. In addition to firewall, antivirus and intrusion-detection software, companies will be shelling out funds for contingency-planning, disaster-recovery and biometrics products.

"Since Sept. 11th, we have been inundated with requests from businesses to assess how secure their IT systems are, to the point that we can't keep up with it," says Bill Margeson, president of CBL Data Recovery Systems, a $4 million Toronto-based solution provider specializing in data backup and recovery. "In the first quarter of next year, we plan to start offering risk-assessment programs tailored to specific businesses," he says.

Within the security category, vendors such as VeriSign, Symantec and Check Point Software Technologies are expected to play significant roles in solution providers' success next year. In the 2001 CRN Solution Provider Business Model Study, VeriSign and Symantec were among the most frequently named IT vendors respondents said they plan to add in 2002. Also, solution providers polled in the 2001 CRN Certification Study cited three Check Point certifications,certified security expert (CCSE), certified security administrator (CCSA) and certified quality of service expert (CCQE),as among those becoming more important to their businesses.

Like security, storage has been a sales standby during 2001. But next year, solution providers expect the storage segment to be even more lucrative.

"We think sales of both storage-area networks and network-attached storage will be strong next year, given the more attractive solutions packages and price points being offered," says Pete Busam, COO of Decisive Business Systems, a $5 million solution provider in Pennsauken, N.J. "The upper end of the SMB market, in particular, will see more widespread adoption of storage solutions in 2002."

Vendors such as EMC, Hewlett-Packard and IBM will be the key partners in the storage hardware arena, say solution providers. EMC holds a strong market position and, in recent months, has garnered more favor from solution providers for its channel programs. CRN research finds IBM's storage systems and management certifications to be among those increasing in importance to solution providers, who also gave IBM high marks for its hardware and software channel programs. And HP was also among the top 10 vendors that solution providers said they plan to add next year.

Solution providers say storage and security expenditures, in fact, have become more interrelated since Sept. 11, with data backup solutions linked to disaster-recovery services, for example. Nearly one-third of the solution providers surveyed in CRN's certification study said they plan to specialize in security or storage within the next 12 months. What's more, three of the top five certifications respondents said were growing fastest in importance were security-related.

Besides traditional hardware areas such as storage, solution providers also say newer technologies such as VoIP and telephony will emerge as key revenue streams in the coming year. Distributor Westcon Group, for instance, reported a 400 percent year-over-year increase in VoIP product sales in its most recent quarter.

"Voice-over-IP and telephony are no longer in the realm of new, unproven technologies," says Nexus Information Systems' DeRocker. "As a result, they are being supported by more and more solution providers and adopted by more and more businesses."

So far, much of the interest in these technologies has been confined to larger solution providers and the enterprise market, according to CRN's Solution Provider Business Model Study. For example, 35 percent of larger solution providers polled support telephony, compared with just 19 percent of smaller solution providers. Yet a broader range of solution providers stand to support VoIP and telephony as sales opportunities expand into the SMB market, channel executives say.

"IP/telephony has now become cost-effective, even for smaller businesses," says Decisive Business Systems' Busam. "This will be a big growth area next year as businesses look to disperse their business operations in light of the terrorist threat and connect them using broadband solutions."

Because partnerships play a central role in the implementation of complex VoIP technology, vendors such as Cisco Systems, Avaya and Nortel are well-positioned to take advantage of market growth next year, according to solution providers. And despite some recent conflicts, Cisco is still considered channel-friendly, say solution providers polled by CRN.

While VoIP and telephony are expected to make inroads next year, Linux is poised for a breakout, solution providers say.

"Linux stopped being a dark horse last year, and 2002 is when all patient groundwork by developers and businesses over the past couple of years will finally pay off," says Anthony Awtrey, vice president and director of integration at I.D.E.A.L. Technology, a Melbourne, Fla.-based Linux solution provider.

Awtrey foresees an especially big payoff coming on the enterprise side. Computing-intensive applications that traditionally run on Unix systems are moving to Linux. Lockheed-Martin, for example, is migrating its complex military and training applications from AIX to Linux, he says.

Continued confusion over the pending HP-Compaq merger also could give Linux a boost in 2002, Awtrey adds. "No one has made it clear which Unix-based products are going to be supported after the merger is completed," he says. "Anyone using Digital Unix or HP-UX has to be concerned, because the merged company can't continue supporting two full Unix systems without major investments in time and money, which they might not be willing to make. Businesses will be looking for a stable platform, and with IBM porting a lot of AIX-based technology over to Linux, the choice is going to come down to Linux or [Sun] Solaris."

In the Linux arena, Red Hat is positioned to solidify its market leadership next year. Solution providers polled by CRN cited the Red Hat Certified Engineer (RHCE) designation as one of the top three certifications becoming more important to their businesses, and they also named the Linux company as among the top five vendors they plan to add in 2002. Red Hat is also well-regarded as a partner. According to CRN's most recent Channel Satisfaction Survey, 43 percent of solution providers were satisfied with Red Hat's channel programs, while only 13 percent were dissatisfied.

While solution providers don't foresee a dramatic upswing in enterprise technology spending next year, some think enterprise management tools in general,and IT asset management tools in particular,will surface as a revenue source for the channel.

"We have already installed automated asset management systems for several of our largest clients," says Jade Systems' Milner. "There is a clear need for better control and utilization of technology systems in light of the current emphasis on cost-cutting. It is now a fundamental part of the business process."

Intraware's Jackson agrees, but notes that most customers will shun turnkey solutions,and lengthy implementations.

"Solution providers need to pay special attention to molding the solution to fit the particular customer, because if to takes more than light integration to make it work, businesses will say no," Jackson says. "Companies remember previous experiences with applications of this type that they thought would be easy to install but ended up being very expensive to integrate."