Obama: Is He Helping Or Hurting Your Business?

Timothy Shea has been providing IT solutions for 21 years and has never worked as hard or felt as much economic pressure.

Shea, CEO and senior consultant at Alpha NetSolutions, a solution provider based in Marlborough, Mass., says his income as the owner of an ’S’ corporation that files a personal tax return has dropped 25 percent from 2007 to 2009. At the same time, the health-care costs for his eight-employee, $1.2 million business have doubled over the past three years.

Shea is one of many small-business solution providers interviewed for this cover story who feel that federal economic policies negatively affected business during that period. What’s more, these solution providers say, looking ahead they don’t see how the successful passage of President Barack Obama’s landmark health-care reform bill, which Obama signed into law on March 23, will help.

Shea is one of tens of thousands of small-business IT solution providers in the U.S., working in a field that for decades has created almost unimaginable personal wealth and countless jobs. But over the past year, many of these businesses have closed their doors and many more are struggling in the midst of what by all accounts is the biggest economic downturn since the Great Depression.

Research from CRN parent Everything Channel shows that after reaching a high of 250,000 in 2007, the number of solution provider businesses in the North American market dropped to 200,000 in 2009 as IT spending declined. Most of the solution providers that closed up shop generated less than $1 million in annual revenue.

And the squeeze is continuing.

Everything Channel’s Institute for Partner Education & Development, which provides channel research, consulting and education, reveals that the number of solution providers rated as ’in trouble’ based on net income data jumped to 9.3 percent in 2010 from 5.8 percent in 2009.

Some of the small businesses that closed their doors did not move quickly enough from capital-expenditure-based IT solutions to annuity-based IT services. But many were simply walloped by macroeconomic issues, which set into motion a flurry of federal government bailouts: large companies such as insurer AIG, General Motors and even financial institutions like Citigroup, among them.

Through all of this, many small-business solution provider owners feel that Obama has showed little understanding of the economic forces battering their businesses -- and is showing little fiscal restraint as they themselves are cutting back and pinching pennies to stay afloat.

Shea has watched three competitors go out of business in the past several years. And he knows if not for his company’s shift into managed services, Alpha NetSolutions might not even be around today.

Next: Much Ado About Health Care

Many of the small-business solution providers interviewed for this story give credit to Obama for attempting to address the rising costs of health care. But they just don’t see how the new health-care reform law -- which provides coverage to 32 million uninsured Americans at a cost to the government of an estimated $938 billion over 10 years -- will help their businesses. They say it does not address the underlying issues driving up health-care costs, even though the legislation provides a tax credit to small businesses with fewer than 25 workers for purchasing health-care coverage.

’I can’t imagine how much worse health care can get for small businesses than it is now,’ said Shea, who calls himself a moderate conservative. ’Unfortunately I’m afraid I’m about to find out how much worse it can get.’

Obama and supporters of the health-care law maintain that it will rein in rising costs and reduce the federal budget deficit. The Congressional Budget Office supports that view, saying that the legislation will reduce the federal budget deficit by $143 billion over the next 10 years.

But many small-business solution providers don’t agree with those numbers. They point instead to the latest posting from the Treasury Department showing that the national debt has increased more than $2 trillion since Obama took office. And even though Obama has said that government cannot continue to spend as if deficits do not matter, he has proposed in the fiscal year 2011 budget to add $8.5 trillion in debt over the next decade.

A phone call to the White House press office was not returned at press time.

Not all small-business solution providers disagree with Obama’s policies, of course. There are many in the solution provider community who feel that the health-care reform law will benefit all businesses. And some of those interviewed for this story say the president has pulled America back from a deeper and more prolonged recession and is now putting in place measures that will spark job growth.

Michael Healey, president of Yeoman Technology Group, a Portsmouth, N.H., solution provider business founded last year in the midst of the IT downturn, said solution providers should be rejoicing now that Obama has put a stake in the ground to control health-care costs.

’I don’t necessarily agree with 100 percent of everything that is in [it], but at least it brings the issue to the forefront permanently and requires government to act,’ said Healey, a 22-year IT veteran. ’The cost of health care has been a debate for years and years, and every year health-care costs went up. As a solution provider you were constantly tweaking benefits to try to address health-care costs. Finally the government is addressing this.’

Healey said he gives Obama credit for laying it on the line for health-care reform.

’In this case it seems to me that this wasn’t about next year’s election or whether he was going to run again, it was because he wanted to get it done and set a new course for health care,’ Healey said. ’Everybody knows this legislation is going to be tweaked, but now at least there is something there to tweak.’

However, Gregg Pickens, president and owner of Digital Dot Systems, a $1 million solution provider with four employees, believes that government legislating health care is not the answer. He says that in 10 years of running his business, 2009 was his worst year ever, with his income down 40 percent.

Pickens’ advice to Obama: ’You need to focus on getting the economy moving so businesses are healthy and people are put back to work. I don’t care how affordable he makes health care. If you don’t have a job you can’t afford it.

’Uncertainty and unemployment are the biggest issues,’ said Pickens, a self-proclaimed fairly conservative Republican. ’If we don’t have clients growing themselves, then we don’t grow.’

Gary Berzack, CTO and COO of eTribeca, a 15-year-old wireless solution provider based in the heart of New York City, however, says he is optimistic his health-care costs can be reduced, given that the legislation included at press time a tax benefit of about 35 percent or a subsidy for offering coverage for less than 50 employees.

’That is huge,’ Berzack said, given that the health-care costs for his business have soared 40 percent in the past three years to what is now about $1,500 a month for family coverage for an employee. If his costs had continued to rise at the same rate, that would net out to more than $3,000 a month to cover a family’s health-care costs in his company by 2015, he said.

NEXT: Spotlight On Jobs And Taxes

In his Feb. 1 budget message, President Obama said that more than 7 million jobs have been lost since the recession began two years ago.

But he stressed that his new budget has measures to help spur small-business job growth. ’Because small businesses are critical creators of new jobs and economic growth, the budget eliminates capital gains taxes for investments in small firms and includes measures to increase these firms’ access to the loans they need to meet payroll, expand their operations, and hire new workers,’ said Obama. And on March 18, he signed into law a $17.5 billion jobs bill that he said would help small-business owners.

Many small-business solution providers say that bill, which would excuse employers from paying 6.2 percent of federal payroll taxes for the rest of 2010 and give them a $1,000 tax credit if a worker is still on the books a year from now, is simply not enough.

These solution providers say they are looking for tax relief as they try to come to grips with higher taxes and even higher services fees in lieu of taxes. Add to all this the fact that some state Departments of Revenue are now closely scrutinizing whether managed services, the healthiest part of the IT solution provider business, should be taxed.

At the same time he has bet big on health-care reform, Obama has also pressed to eliminate tax breaks from former President George W. Bush due to expire at the end of this year. The Obama budget would push the top two income-tax rates, which affect people earning more than $200,000 a year or $250,000 for married couples, to 36 percent and 39.6 percent, respectively, up from 33 percent and 35 percent now.

Alan Weinberger, chairman and CEO of The ASCII Group, an organization that provides business-building tools to thousands of resellers, said the majority of his members make less than $200,000 a year. But he said these small-business owners are being asked to bear an unfair tax burden vs. larger businesses. ’There is a complete disconnect between Wall Street and Main Street,’ he said. ’Everything the Obama administration has tried to do is to contain Wall Street infrastructure. Obama has not really looked at the problems of Main Street and specifically small businesses and the small-business solution provider community.’

’My taxes are going up under Obama,’ said one solution provider owner who did not want to be identified. ’I’m not a fan of anyone who wants to raise taxes and spend their way out of problems.’ Citing the budget deficit, the business owner said: ’Spending $1.4 trillion when you don’t have it never made anything better. We are now one of the largest debtor nations in the world.

’As individuals, if we ran our household budgets the way the country is run, we would all be bankrupt,’ added the CEO. ’Every damn one of us. We are a country of individuals where for the most part the vast majority of us are fiscally responsible. But we have to fund a government that has forgotten what fiscal responsibility is.’

The CEO said that eliminating tax breaks for those making more than $250,000 hurts small businesses like his own.

’The net income from your balance sheet flows through to your taxes,’ he said. ’And don’t confuse cash with net income. They are two entirely different things. My income stayed the same last year but my taxable income went up 5 percent.’

Digital Dot Systems’ Pickens says the problem is most government officials don’t understand the pressure facing a small business.

’I don’t think they understand the dynamics of what it is like to run a business,’ he said. ’They are lawyers and career politicians. To them, profits are something to be taxed.’

ETribeca’s Berzack does not directly blame Obama’s economic policies for hurting his business. He says Obama inherited a plethora of fait accompli economic decisions like TARP (Troubled Asset Relief Program). That said, he is frustrated with the president’s response to broader economic conditions affecting small businesses.

’Obama inherited a lot of the legal and economic framework for the current economic crisis,’ said Berzack. ’But he and the administration have had more than a year to make significant changes for the better. Obama has failed to reach out to small businesses. The economic benefits from the Obama administration have all been federal to state and federal to large business with, at most, guidelines that are superfluous.’

ASCII’s Weinberger believes there should be a technology implementation tax credit aimed at helping small-business technology solution providers. He said industry technology giants like IBM and Google get R&D tax credits, but there are no tax credits aimed at sparking capital-expenditure-IT-based projects.

’Big business gets all the help, but it is the small-business solution providers that make technology work,’ he said.

The Credit Squeeze

Small-business solution providers are also dealing with a credit noose that has tightened around their neck.

Berzack sums up the feelings of many solution providers: ’In 2003 to get $100,000 of credit just required a signature. Now I think it requires a 100-page application including the blood type of my children.’

Today, a solution provider buys all the equipment for a sophisticated IT solution and the clock starts ticking on the 30-day net terms as soon as an order is shipped from a distributor or vendor’s warehouse.

William Adams, founder and CEO of ACS Services, a 25-year-old solution provider business in Easton, Mass., says the business environment today is the worst he has seen in a quarter of a century of delivering IT solutions. He says credit is the bigger issue facing small businesses.

’Obama and the administration are talking about all the solutions they are putting in place to help the small business and all we are seeing is banks not lending, and vendors scrutinizing credit lines to the point where if you are one day past 30-day terms they hold up your order,’ he said.

Adams says the lack of credit is strangling small businesses like his and even other ventures (Adams has real estate deals with prime clients that have also been negatively affected by the economic crisis). ACS, a $4 million company with 27 employees, at one time had a $600,000 line of credit through distribution partners and banks. That line of credit has effectively been wiped out.

Adams said larger banks have stopped providing credit and financing to small businesses. In fact, he said, ACS has moved its business from one large bank to three smaller banks to accommodate its day-to-day cash flow and to fund IT purchases.

’The companies that have not been able to adjust their day-to-day financing to survive have gone out of business,’ he said. ’I don’t see any help in the near future. People are just talking about it. By the time they get these initiatives approved, more small businesses will be wiped out. The cost passed through to small businesses is increasing. The taxes are increasing. Health care is increasing. The government is not offering any relief as far as taxes go. You still have to make payroll taxes, unemployment taxes and Social Security taxes. In the past year, those have all gone up.’

Berzack says there are also tax increases being foisted onto solution provider businesses as services fees. For example, he said, the fee per partner for an LLC (Limited Liability Corporation) has gone up in New York state.

As a result, Berzack has started budgeting up to 2 percent of sales annually as a ’cash flow reserve’ for those fees. What’s frustrating, he says, is those fees crop up without notice. ’It has become more complicated,’ he said.

At the same time, tax deductions for high-priced technology equipment for businesses have in effect disappeared. Since the cost of hardware is so dramatically less, this is no longer a key benefit to customers. As an example, some 20 years ago, tax deductions for computer equipment purchases were considerable. Twenty desktop systems could have come in at a total price of $50,000, which could be depreciated. Today, those same systems would be priced at about $6,000 effectively, for tax purposes, becoming an office expense rather than a capital equipment purchase.

’If you are selling something that was $5,000 10 years ago and now it is $500, even if the profit margin is the same the dollar margin has gone down,’ said Berzack. To make matters worse, as IT capital-expense-based projects have dried up, the hourly IT consultant fees have flat-lined.

Alpha NetSolutions’ Shea, for example, started in IT as an engineer for Computerland in 1989 making $150 an hour as a network guru. Today, Shea bills himself out for that same $150 an hour.

’That to me is the biggest reason we have to work harder,’ said Shea. ’We haven’t taken increases in pay over the years to fund our business at the same hourly rate. That is why you have to go to managed services and fixed-price agreements. You can’t charge by the hour. There is no growth to it. My plumber gets $120 an hour.’

Berzack says that one of the challenges facing IT solution providers is ’none of us have raised our rates in 15 years, compared to a basket of other professional services that require certification.’

’Our engineering rates as a group probably range today from $110 to $195 depending on the service and what you are offering,’ he said. ’Ten years ago we were probably charging more or less the same. Now look at lawyers whose rates 10 years ago were $250 an hour and now are $450 to $600 an hour.’

And, of course, the cost of carrying a vendor’s product line has soared in recent years with high-priced certifications becoming part and parcel of doing business.

’Customers aren’t paying any more for the increasing validation and knowledge of solution providers,’ said Berzack.

’The trick that we have lost is the trust,’ he said. ’We have started to lose the ability to price in trust. If I come in and build you a wireless network and I have 100 percent success for 15 years with my wireless deployments, how is that not worth more than going to CDW and buying six [wireless] access points?’

A Touch Of Optimism?

Shea, however, is optimistic that his business prospects are improving in 2010 with his sales potentially increasing as much as 40 percent despite anything President Obama does or does not do. That said, he points out that when he started his first business President Ronald Reagan was grappling with a recession and there was a different feeling in the country.

’The difference is at that time no one had any doubt we were going to get out of it pretty quickly,’ he said. ’Now it’s an unknown.’ Shea said he has not been politically active given that he is working 70-hour-plus weeks trying to keep his business going.

’Everything that has happened with Obama and health care has me rethinking that,’ he said. ’There are many small-business owners like me working 70 hours a week. We barely have time to keep up with business. With what is going on in this country maybe it is time for all of us to get up and get involved.’