Welcome To the Big Leagues

This is the time of year when all eyes are on the Big Boys. That's right--we're talking about the VARBusiness 500, that crop of big, powerful solution providers that hold sway over the IT landscape. The companies that made the list are the most sought-after VARs in the market. Maybe that's because they're easy to identify and far easier to find than their smaller, lower-profile--but no less important--counterparts.

Consider the plight of your average VARBusiness 500 company. Vendors want them to sell or influence the sale of their goods and services. Distributors want their business just as badly, investment bankers want to take them public, and fellow solution providers want to team up with them or get acquired by them. Large and fast-growing end users want to do business with them because they have scale and know how to treat their customers. Considering all that, I suppose life can be tough for VARBusiness 500 executives. So many demands and expectations, so little time.

So there's good reason to worship these icons of IT, these sultans of solutions, whose companies collectively generated $378 billion in aggregate sales last year. The big got bigger, with growth that outstripped industry averages in almost every sector. The exception was IT sales to small businesses, although the numbers there continue to top the charts nonetheless.

Still, there are some signs of stress among the IT Goliaths. Last year, as we prepared for the VARBusiness 500 conference, 88 percent of companies on the list were operating in the black. The number this time around is 85 percent. Interestingly enough, this year's group performed slightly better than last year's in the way of gross profit margins, but not so when it came to net profit, which was a mixed bag. So somehow, all those costs that come between gross and net sales--depreciation, taxes, amortization--were a bit more problematic for this year's crew.

Of course, that could also be an indication of just how tough the services business is these days. The average 2006 VARBusiness 500 company generates about 38 percent of its sales from services and 5 percent of its services revenue from managed services.

It's hard to rely on averages when assessing the VARBusiness 500 field, because the megaplayers tend to skew the results, but the median net profit margin for last year's list-makers was 5 percent. While that's not extraordinary, it does show that these companies are on solid footing. And remember that more than half of these organizations are privately held, so if an owner decides to put aside a few extra bucks to reward himself or his staff, so be it. There are no shareholders to answer to, no directors to convene.

In fact, stories about the generosity of VARBusiness 500 company founders abound. These enterprising individuals often lavish their top salespeople with enormous salaries and give their most trusted assistants perks you won't find elsewhere in corporate America. Yes, I know of more than a few who run very tight ships, but who's going to argue? It's their ship to command, right?

When it comes to steering that vessel, is it true that the biggest and brightest VARs support the leading vendors? Yeah, it is. Think Microsoft, HP, Cisco and IBM. But they also work with Network Appliance, F-Secure, MySQL and Websense. So there's certainly room for new vendors to play.

And what of the myth thatVARBusiness 500 players sell only to the Fortune 500? Yes, a large percentage of their revenue comes from big business, but this group generates a good amount of revenue from midsize businesses and about 11 percent, on the average, from small businesses. And--now hold your breath--there are a few VARBusiness 500 outfits that sell to consumers. For the most part, they're doing the heavy lifting, IT consultingwise, for the Exxons of the world, but a very small portion say they're also dabbling in the SOHO integration market.

By the way, don't worry; our trivia contest hasn't gone by the wayside. We'll be back with another question in the next issue. In the meantime, let me know what you think of this year's VARBusiness 500. Send e-mail to rdemarzo@cmp.com.