Making Alterations

The look on each partner's face told the story instantly. After two or more years of harrowing business conditions, these executives, respectively from EDS PLM Solutions, Standard Register, Hewlett-Packard and Equilibrium, were nothing if not battle-worn and tested. Equilibrium president and CEO David Monks, whose San Rafael, Calif., company develops automated imaging solutions, didn't mince words: "It's still a bitch out there," he said.

But that was the extent of the hand-wringing. The partners agreed that the worst of times seemed to be coming to an end. They had survived, due in part to the one characteristic common to VARs and ISVs of all stripes who have weathered the down economy: a willingness to adapt, even if that means dumping your business model, shifting your market demographic, or turning your sales strategy on its ear.

"We've found during this time that to be effective, we've had to pick our targets, then execute effectively so the customer makes money," says Doug Patterson, vice president of digital solutions at Standard Register, Dayton, Ohio. "We have had to turn ourselves into the trusted partner."

On the Mend
Finally, economists and other financial soothsayers are telling us that a recovery--albeit a slow-paced one--is here. IT mergers and acquisitions have begun to heat up, and corporate profits are rebounding among technology vendors. Analyst firm IDC is reporting several quarters of consistent sales growth based on aggregated revenue results for the top 300 IT suppliers worldwide.

So, how is your business? VARBusiness' 2004 State of the Market findings reveal some good news from solution providers. For one, the majority of VARs have seen signs of an economic recovery around IT products and services in the past six months. More than half have upgraded clients' existing systems during that same time frame, with more than one-third having seen increased demand for professional services, answering more proposals and finding more customers receptive. More than one-third also expect to hire more staff in 2004.

Storage is one sector that's doing particularly well, says IDC economist Kevin White. VARs looking to latch onto other growth practices might also consider specializing in security solutions, business continuity and disaster recovery, and wireless and mobile computing, he adds.

"And in terms of the shifts taking place right now, it's infrastructure upgrades like PCs and storage," White says. "It's not sexy, but it's stuff that needs to be done."

Scaling Back
Flexibility, innovation and a strong constitution--those traits have helped keep many a VAR afloat since the dot-com crash and its tenacious hangover. And while less than half of the VARs surveyed in our State of the Market study say they expect operating margins to improve in the first half of 2004, more than two-thirds of respondents are optimistic that revenues will jump during that same time period. Of that group, a whopping 75 percent of midsize VARs predict a revenue bounce in the first six months of 2004, and they expect that increase to average 24 percent year over year.

Survivors of the downturn include companies like Covansys, SBI Group and Ross-Tek. Each of those firms has maneuvered through the economic muck with tactics as varied as taking development work offshore to buying up leading-edge companies to focusing like a laser beam on an existing customer base. Their insights reflect those of a wider community on the mend.

For consulting and IT services giant Covansys, the past two years have been tough. Like other firms that racked up billable hours with huge packaged-apps implementations and sexy Internet engagements, the Farmington Hills, Mich., firm, which ranked No. 101 on our VAR500 list, felt the evaporation of customer spending acutely starting in late 2001.

President and CEO Martin Clague, a 30-year IBM veteran who took the helm at Covansys in early 2002, says skill sets that were in hot demand in 2000 suddenly had no place at the table. Covansys' 2000 revenue tallied $419.6 million; in 2001, it dropped to $404.7 million, and by 2002--the year of transition, according to Clague--it was $383.05 million. So far, 2003 revenue is on track to remain flat or gain slightly from 2002.

"A year ago, even, anything that moved looked like a good opportunity. Our maturity has been in knowing when not to bid," Clague says. "Don't bid if it doesn't fit your skills or market capability."

That maturity also came in the form of unflinching self-assessment, which has led to Covansys' narrowing of its market and industry focus. It is specializing in such granular areas as public employee retirement systems and animal husbandry. It is also devoting one-third of its time to public-sector work, but has scaled back to only specific government projects.

Covansys is also wooing business from midmarket clients. For example, it is mastering the Secure Supply Chain Initiative (SSCI) that many midmarket firms using bar code systems will find crucial. Also central to its recovery strategy is a continued investment in its offshore development arm in India, where it has added 700 employees in the past year.

And not surprisingly, given Clague's background, Covansys has also chosen to partner heavily with IBM, including running one of IBM's WebSphere Innovation Centers, where ISVs can build and test their applications on Big Blue's platform. Its partnering strategy has also extended to other solution providers, subcontracting parts of projects that do not fit its core business.

On the Offensive
Do the names Razorfish, Lante or USWeb/CKS ring a bell? They were dot-com darlings eventually gobbled up by SBI Group, whose legendary buying spurt has catapulted the company from $65 million in revenue in 2001 to an estimated $150 million in 2003. New York-based SBI Group's bold strategy of buying up leading-edge development and tech-consulting firms has paid off for a single company loaded with lots of human talent. Not only has its revenue surged, but SBI has also managed to convert 90 percent of the clients from its total of five acquisitions into SBI customers.

"We saw an opportunity to consolidate many of the leading players and create a new entity that was financially stable with the ingredients for market leadership," says CEO and president Ned Stringham, who helped found the company in 1997. "We saw this opportunity while other people headed for the cave."

With the Razorfish deal officially closed earlier this year, Stringham says he is moving beyond M&A duties to the next phase of his corporate strategy, "to become a thought leader and innovator in their market."

Lofty goals, yes. But what does it mean exactly? Stringham says SBI is trying to better focus its set of offerings, which has led him to divide the company into two separate divisions. SBI.Razorfish will zero in on online channel solutions, building Web systems that can be measured and benchmarked for their business value. This kind of work is infused with personalization technologies that fuel one-to-one marketing online, Stringham says.

SBI.Enteris, the other new division, is aimed at the burgeoning market for business-process consulting, %E0 la IBM Global Services. Stringham also cites the demand from customers to exploit existing IT assets--another focus area for this division.

Personalize It
For smaller VARs, acquisition strategies and offshore-development operations aren't options. The fact is that the down economy has been particularly tough on this demographic. In VARBusiness' State of the Market survey, only 21 percent of small VARs reported shipping more products to customers in the past six months, vs. 36 percent and 35 percent, respectively, for midsize and large VARs. And only one-third of small VARs created more complex solutions for customers in the past six months, as opposed to nearly half of their midsize and large brethren.

Truth is, many of those companies have been operating in survival, not growth, mode, and doing it the old-fashioned way: by personalizing their services and working their existing customer bases.

Ross-Tek is a six-person technology services firm and Microsoft partner in Cleveland run by president and CIO Fred Johnson. It has been in business since 1997, trying to "digitize" small businesses in metropolitan Cleveland. Ross-Tek has had sales fluctuating between $750,000 and $1 million, with the past two years being rough ones--20 percent to 25 percent reductions in gross revenue. The company sells hardware and software acquired from distributor Tech Data, but it really makes money through services deals, Johnson says.

"We never go out and push products. It's more about selling quality of life," says Johnson, who started the company with his wife in 1997. Johnson says his sales pitch has nothing to do with technology ROI. Instead, he shows small-business owners lacking an IT staff and budget how technology can help them get home an hour earlier every day.

Much of Ross-Tek's business centers around implementing and managing Small Business Server installations. Three years ago, the company won 8A certification from the Small Business Administration, a program that enables minority- and women-owned businesses to go after federal contracts without bidding. This certification, which involved an arduous qualification process, has helped steer Ross-Tek through tough times, Johnson says.

Johnson's new goal is to emerge from this year and 2004 unscathed. And he sees good indicators that business is picking up.

"I don't think small businesses can do their own IT, so we learn their pain points to do it for them," he says. "The message we have is that for legal needs, you call an attorney. When you have IT needs, call a technology consultant, not your brother-in-law who does computers on the side."