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The IT channel seems justified in feeling more optimistic than IT manufacturers with a large emphasis on direct sales. The indirect channel has grown faster over the past 10 years than the IT manufacturing industry upstream from it. In 1997, indirect sales were 15 percent greater than direct. Now, indirect sales are 100 percent greater than direct, according to Gartner Dataquest.
And all indications are that indirect sales will continue to outpace direct. Major manufacturing executives such as Cisco Systems' John Chambers are reporting that enterprise sales growth is "lumpy" while the middle market is taking on greater importance. And who better to command the increasingly important SMB space than the channel? Even Dell has been dancing this past year or more in an awkward attempt to woo the channel, and mixed-model vendors are publicly proclaiming in unequivocal terms that they are more committed than ever to the channel.
For example, Jerry Lumpkin, vice president of business channel sales for Toshiba America Information Systems, said in November during his CMP Channel Virtual Trade Show presentation, "Unlike some of our past channel strategies, Toshiba absolutely will not compete with you. We are here for one purpose and one purpose only, and that is to grow our business through our channel partners."
Solution providers are driving growth because they can serve the growing SMB market best. According to State of the Market 2008 data, solution providers that saw a net gain of customers in 2007 were the rule rather than the exception: 53 percent increased their customer base while only 11 percent suffered a net loss of customers. The size of the overall channel customer base grew 10.4 percent in 2007.
But even while adding new customers, solution providers aren't seeing business from existing customers declining. In fact, it's quite the opposite. Even when adding new accounts, VARs realized a greater percentage of revenue from existing customers this year vs. last. New customers provided 27 percent of 2007 revenue but 33 percent of 2006 revenue.
Solution providers accurately projected this growth when surveyed for this project last year: 81 percent expected to see their revenue grow by at least 5 percent in 2007 vs. 2006. And the year before, in 2005, solution providers foresaw the gains coming in 2006: 79 percent expected to grow revenue more than 5 percent. That past accuracy makes it all the more important to heed the slight faltering of confidence apparent this year, when a large but diminished 73 percent expect to grow significantly. However, considering the general economic gloom cast by the credit crisis, rising oil prices and the falling dollar, the level of optimism among solution providers indicates that this industry is, for the time being, more resilient than many others in the face of these broad economic challenges.
"Despite budget cuts and continuing resolution, we expect 2008 to be a significant growth year," said Craig Abod, president of Carahsoft Technology in Reston, Va. "Our emphasis on delivering compelling technologies that can provide tremendous ROI continues to be of interest to our customers," Abod continued.
Better than the mildness of the dip in growth expectations is the fact that solution providers expect to grow profit nearly as much in 2008 as they did in 2007. While 65 percent expected profit to grow by more than 5 percent in 2007, a nearly equal 64 percent expects such growth again in 2008. This intent to grow profitably demonstrates a confidence that this growth can come without disproportionately large new investments.
Vendors that aren't yet working very hard to align partner interests with their own may begin to feel the pain soon. Vendors have an opportunity to benefit from solution providers' advantageous positioning in the midmarket as VARs are partnering with greater numbers of vendors. Unfortunately for vendors, there's also some churn. Although solution providers added an average of 3.1 vendors in 2007, they dropped an average of 1.6. And when a VAR drops a vendor, six times out of 10 they will not notify the vendor.
"If a vendor really lets you down, I think there are enough choices out there that you can build a relationship with somebody else. And everybody's hungry for the business," said Brian Deeley, a principal of Graymar Business Solutions in Timonium, Md.
When adding new vendors, VARs' top consideration is the relevance of the technology to their customers. About two out of three VARs rate this as very important. After that, the two most important considerations are product innovation and the opportunity to capture a larger profit margin. These are ranked high by more than half of all VARs.