It's Not Business As Usual

We have often said that you will not find much in the way of revolutionary findings in our State of the Market study, but what you will find is the evolution of the VAR model. The most fascinating part of the study is examining just how adaptable solution providers are to market conditions today and the adjustments they make to their business models based on customer behavior and their attempts to drive profitability higher. But this year we have an exception, maybe a whole bunch of exceptions based on VARs adapting their business models to the deteriorating economic conditions.

Since this is the first major study of the VAR community following the meltdown on Wall Street and the credit crisis, the most startling finding is the acceleration in VARs' services sales. Revenue from professional, technical or managed services rose to 56 percent of an average VAR's portfolio from 49 percent last year. In fact, services revenue across all VAR sizes rose substantially as sales on average eased year-over-year, which was expected given the spending downturn the industry is facing.

Small VARs, those with less than $1 million in revenue, were the most services-oriented, but what was surprising was the surge in services revenue among VARs with more than $20 million in annual sales, which today are generating almost half their sales from service. In the past, the big boys were the most product-centric. This has broad implications for vendors that shape incentives and programs for their partners because it clearly demonstrates that today's VAR is motivated by a different set of financial incentives and is building out a sales force less dependent on product margins than ever before.

Despite the doom and gloom fed to us by the mainstream media, there is optimism in the VAR community when it comes to market growth. More than one-quarter of the respondents expect to grow their business more than 15 percent next year, with the small solution providers the most upbeat. The bulk of the solution provider community expects growth of between 5 percent and 15 percent next year, but what was surprising was the lack of negativity we picked up as only 6 percent of this year's respondents said they expect sales to decrease.

You can spend all day trying to pinpoint the reasons why VARs are optimistic, but let's boil it down to a few essentials. First and foremost, solution providers by their very nature are optimists. That doesn't mean you should discount the data. What it means is you should bet on these organizations hitting their numbers. They are opportunists and entrepreneurs, so they sensed companies would look for ways to reduce their IT costs as the economy tightened, which spelled a selling opportunity. More importantly, these organizations also knew their customers would be struggling with ways to increase--or at least maintain--sales during the coming year while looking for ways to improve processes. So while many companies lose ground during a recession, it is clear VARs look at this as a chance to get closer to their customers and gain share.

If you look at go-to-market strategies for VARs in the coming year, one of their top priorities is to introduce new technologies. Gee, many would guess just the opposite. The second go-to-market priority is to upgrade or refresh a customer's hardware infrastructure, which is closely followed by helping customers improve their business processes. Are those priorities you would expect to hear during tough economic times? Probably not, but if you read between the lines you will discover why today's VARs are more services-centric than ever before. Unless you have a strong professional services practice or are a competent business consultant, there is no way you could help your customers streamline their sales processes, make cost-saving improvements to their customer-service centers, or more efficiently handle customer complaints.

So, since this is our last issue of 2008, let's hope these VARs are correct in their prognostications. I wish you a healthy, happy and profitable 2009.

Robert C. DeMarzo ([email protected]) is Senior Vice President/Editorial Director of Everything Channel.