Are You Recession-Proof?

Oil prices are at record levels, short-term interest rates are at their highest point in five years, and many economists are cutting their estimates for growth for the rest of the year. That has solution providers casting a wary eye toward the future and bracing themselves for another economic downturn.

The last recession, in 2001-02, was accompanied by a 20 percent—or $93 billion—plunge in business spending for computer equipment and software. At that time, many solution providers were caught flat-footed and struggled to adjust to the rapidly worsening sales climate. Others couldn't adapt and simply went out of business.

However, CRN believes the next economic slowdown should have considerably less impact than the last one on solution providers' revenue and profits. Rising interest rates and energy prices are also likely to have less effect on the channel's financial health in the future. Why? First, those solution providers that weathered the last storm have buttressed their businesses on the back of a rebounding economy that grew at an average annual rate of 3.1 percent since 2003. Business spending for information technology equipment and software has increased 33 percent, or $120 billion, since bottoming out in the fourth quarter of 2002. PCs and peripherals led the way with a 47 percent gain, while software spending was up 26 percent.

Beyond that, those that survived have learned the hard lessons of the past. And many solution providers have been taking wide-ranging measures to make themselves more recession-proof. These include developing closer relationships with clients, making major changes to business models, upgrading skill sets, and improving the attitudes of employees and managers.

"We are working more closely with our customers, learning not only what they are doing but what their competitors are doing," said Ed Solomon, co-owner of Net@Work, New York. "This allows us to better assess the technologies and solutions our customers really need vs. the technologies they would like to have but aren't really necessary."

In addition, solution providers are making major changes to their business models in order to develop more stable and predictable sources of revenue.

"Four or five years ago, our business came entirely from projects or product sales," said said Oli Thordarson, CEO of Alvaka Networks, Huntington Beach, Calif. "Now we get about 70 percent of our revenue from managed services. Being project-dependent makes for a very unpredictable future, as any little hiccup in the economy can lead decision makers to postpone project-based capital expenditures."

Upgrading skill sets to provide more customized solutions is another area where solution providers are concentrating their efforts. This has become a necessity, said James Earl, owner of Solutions In Design, a technology consulting firm in Marshall, Mich., because customers—who have become much more knowledgeable about new technologies and data management techniques—demand performance for their dollars.