Greenback Comeback

Arch Chemicals CIO Al Schmidt is still awaiting final approval on next year's budget, but he's hopeful about getting a funding increase.

"I think it's going to be a reasonable year," he says with caution. "We will still be challenged to constrain costs."

It appears the worst is over. According to VARBusiness' 2004 State of the Market survey, the typical large customer spends $200,000 per year, compared with $30,000 for typical midsize accounts and $10,000 for small businesses. Like many customers these days, Schmidt's IT recovery plan calls for a major multiyear infrastructure upgrade that will help the company reduce operating expenses and increase productivity. With help from St. Louis-based Horizon Consulting, Arch Chemicals plans to replace its Windows NT 4.0 server platforms with Microsoft's new Windows 2003 and Exchange 2003 server upgrades. That will include a global Active Directory rollout and a refresh of 6-year-old servers.

Much of that work will focus on consolidation; with 300 Wintel servers, Schmidt would like to drastically reduce that number of servers when the refresh is done. Also looming is an upgrade to Arch's current HP/UX platform, which is based on 25 servers and runs HP's OpenView platform and enterprise applications. The company must decide whether to update these systems or move to more cost-effective Wintel servers.

The story of Arch Chemicals is one of many that gives credence to the idea that the industry is on the cusp of a long-awaited uptick in customer IT spending, incremental as it may be. Across the nation, solution providers and IT consultants are getting downright excited about the opportunities now presenting themselves. That includes IT transformation projects, which may have been on the back burner for as many as five years.

"We are seeing signs that the worst of the downturn is over, and we're heading to a period of greater stability," says Chell Smith, a vice president at Cap Gemini Ernst & Young. And it's not just big, aggressive players that are benefiting from increased customer spending, Smith says.

Although Arch Chemicals, for example, considered several large systems integrators, it ultimately went with Horizon, a boutique firm. Horizon's key role is providing strategic technical consulting for this major systems upgrade, Schmidt says.

According to VARBusiness' exclusive State of the Market research, more than seven in 10 solution providers derive incremental revenue by selling technical services to their existing customers. Moreover, a growing number of VARs this year get more business from new customers rather than existing ones. According to our survey, small VARs generate more revenue today from new customers compared with a year ago (38 percent vs. 30 percent, respectively). It appears that this churn, or business from new customers, may have offset the losses from a VAR's existing customers this year. In the pages that follow, VARBusiness takes a closer look at what's driving customer demand today.

Customer Trends
While many customers are spending in a scattershot fashion, a growing number are coming to fore with definitive, comprehensive plans. That includes cosmetics giant Avon. Avon plans to begin looking for an implementation partner to roll out a JD Edwards applications package globally early next year. That likely will mean new business for one integrator, or perhaps for several, that specializes in JD Edwards software. Harriet Edelman, Avon's CIO, admits the Web-based business-applications revamping might have gone into production sooner had it not been for Oracle's hostile takeover bid for PeopleSoft, which recently acquired JD Edwards.

"We did have to take a pause during the summer and restructure our current phase to watch the events a little more," Edelman says.

Avon's overall 2004 spending will remain flat--3 percent of revenue.

"I don't see a dramatic increase, but we didn't experience cutbacks either," Edelman says. "We are just being very careful with the capital allocation process. We are continuing to dedicate resources to the things that need to be done."

Such sentiment is consistent among customers, indicating that this recovery could be long and drawn out. A recent survey of CIOs by Merrill Lynch concludes customers are stabilizing their IT spending but sees no significant growth in the near term. In addition, the CIOs say spending improvement is unlikely before the second half of next year, if not by 2005. Also, pricing pressure will likely offset any increases in spending, which will put further pressure on the margins of the vendor and solution-provider community. IT market researcher Gartner, which recently surveyed 400 CIOs, is more optimistic about the next 12 months than it was this time last year. After two years of cutting IT budgets, enterprise customers plan to increase their budgets by about 5 percent in 2004. Another encouraging sign that the worst is over: The percentage of IT spending based on overall revenue is expected to increase slightly to 4.23 percent in 2004 from 4.04 percent this year.

However, those improvements are not across the board, Gartner notes. Having surveyed CIOs from among 25 different sectors, 13 of those verticals are increasing their spending, while 12 are still making cuts.

Among those customer segments likely to increase their spending are those in the financial services, healthcare, petroleum and government sectors, while those reducing their spending are those in distribution (both retail and wholesale), education and transportation, according to Gartner.

For CDW, a leading provider of technology solutions, business started picking up in the middle of this year, says Steve Schuldt, vice president of corporate sales, and that appears poised to continue into next year.

"It looks like the demand we've started seeing is going to continue," Schuldt says. "Those customers that don't have the budget now are already planning for 2004."

What's helping VARs and other solution providers are the new offerings from several key vendors.

Kimberly West, CEO of SpyderWeb Technologies, an Atlanta-based VAR, says recent SMB offerings from HP and Microsoft, for example, are motivating customers to upgrade their systems.

"Midsize companies are starting to let go of the purse strings now, but smaller companies still seem to be wary of spending cash," she says. "Overall, we are seeing a significant rise on the dollar amounts of the projects we have going on."

How's she doing that? For one, West has stepped up her marketing efforts. A new marketing campaign is aimed at her core customer base: small and midsize businesses. Among other things, that campaign includes targeted e-mail messages that tout the company's alliances with firms that offer complementary consulting services, West says. She is also taking advantage of any opportunities to speak at events and trying to maximize the referrals she gets from telecom providers and vendors, notably HP. They are, however, not enough to sustain her company, which still depends on word-of-mouth advertising.

That said, revenues are up 25 percent, West says. Furthermore, she's predicting they will increase by the same amount next year.

Like a growing percent of VARs surveyed in VARBusiness' State of the Market study, the majority of new business West is getting today comes from new customers, as many of these customers are coming to the realization that aging infrastructures cost more to maintain than they do to upgrade.

"Next year is going to be better as long as something beyond our control doesn't happen," believes Barry Feldman, president and CEO of Database Business Solutions. The Chicago-based solution provider specializes in deploying software for small businesses in the accounting and legal industries.

A majority of VARs that focus on particular verticals or those with expertise in given technology specialties will remain "specialized" when the economy recovers, our research reveals. Feldman says the majority of revenue comes from existing relationships, but he's always looking for new ones as well.

"We're the clean-up guys; we get it all together and get it working. That becomes a very long-term relationship," he says.

A long-time provider of accounting software from Accountmate, Feldman is now beginning to broaden his offering--he will begin to offer new financial software from the Great Plains unit of Microsoft, although he sees Accountmate as a higher-end product.

"Microsoft is so big you have to get on the bandwagon," Feldman says.

For those selling to existing customers, two-thirds of midsize and large VARs surveyed by VARBusiness are upgrading existing solutions. About half say they are replacing decommissioned equipment, while some say they are being brought in to maximize IT resources. At Conqwest, a solution provider based in Holliston, Mass., 75 percent of sales are coming from existing customers. Hence, that's where CEO Michelle Drolet is focusing her sales efforts. Though her company specializes in providing security and intrusion-detection solutions, only recently have customers actually started increasing their spending. Much of that can be attributed to the virus and spam activity that has plagued customers during the past year.

"Because all the serious dollars have been lost due to these viruses, no matter how small or large, customers are opening up their purse strings a little bit more than they did last year," Drolet says.

Small VARs generate less business from existing customers--62 percent compared with 70 percent just one year ago, our research shows. To keep customers coming back, they're diversifying their product offerings.

"I get an occasional straggler where I get a new client here or there, but it's really my core customers I count on," says Bill Broyles, CEO of Nexgen Electronics, Fruitland Park, Fla.

For one, he is seeing more willingness by small customers to install Linux-based servers to network office PCs. The sole reason customers are buying Linux? Cost. It can save 10 percent on the cost of an overall implementation. "When you're talking about small businesses, that's a big difference for them," he says.

Like many small VARs, Nexgen has a small retail location as well. Because it's located near a large retirement community in the Southeast, there's a reasonable amount of consumer business as well. Broyles is delving into high-end consumer-electronics offerings and installing home-entertainment-theater networks. He admits they are few and far between.

"The problem is, you have to have a lot of money to afford them," Broyles says. "When I do sell them, customers are happy."