State of the Market Survey 2011: The VAR View

But despite a generally upbeat outlook for 2011, solution providers remain heavily dependent on a relatively small number of SMB customers for a big share of their business. And many say cautious customers and economic trouble in specific markets still pose obstacles to growth.

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Those are among the findings of an Everything Channel survey of 384 senior-level managers within IT solution provider companies in North America. The 2011 State of the Market survey, conducted in November, looked at business issues and trends in the first half of 2010 and business projections for 2011. Those statistics were supplemented by in-depth interviews with solution provider executives.

Most solution providers saw their businesses turn around in the second half of 2010, ending a two-year period beginning in late 2008 when sales plunged and new customers were especially hard to find.

And nearly all have big expectations for 2011.

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“We’re thinking about 30 percent growth this year,” said Sam Biardo, CEO of Technology Advisors Inc., a Des Plaines, Ill.-based solution provider. “We had two back-to-back really slow years, so we think there’s a lot of pent-up demand. The pipeline has been fuller than it has been in the last three years.”

“A lot of people have bigger budgets this year,” agreed Ernie Yenke, president of Lighthouse Computer Services, a Lincoln, R.I.-based VAR and Premier IBM Business Partner. And there’s more talk this year about rearchitecting IT systems to improve efficiency and competitiveness, Yenke said, as opposed to the product-specific upgrades that characterized most IT spending for the past two years.

The Everything Channel survey put the available North American IT market for solution providers at $428.1 billion in 2010, up more than 6 percent from $402.1 billion in 2009. In both years, the channel accounted for 68 percent of those sales, with direct sales making up 32 percent.

The survey found that many VARs remain heavily dependent on a relatively small number of loyal SMB customers for a big chunk of their business. Nearly 30 percent of solution providers had fewer than 25 customers while 10.9 percent had between 25 and 49 customers, 9.9 percent had 50 to 99 customers and 9.9 percent had 100 to 149 customers. Only 20.1 percent had 250 or more customers.

As for customer size, 43 percent of solution providers target customers with less than $5 million in annual revenue, while 10.4 percent service customers in the $5 million to $9.9 million range, and 9.4 percent target customers with sales between $10 million and $49.9 million.

Solution providers also said that more than two-thirds (67.7 percent) of their revenue in the first half of 2010 came from existing customers while only 25.1 percent came from new customers (7.2 percent weren’t sure). Even that relatively low figure is a testament to the doggedness of solution providers in the face of “The Great Recession” when new customers were hard to find.

NEXT: Feeling Upbeat

Solution providers are generally upbeat about the prospects for the new year. Generally speaking, about half expect revenue from consulting, managed services, software, technical services and hardware to be flat in the first half of 2011 while one-third or more expect revenue increases. Only a fraction of those surveyed expect decreased sales.

Blytheco LLC, a Laguna Hills, Calif.-based solution provider, hired 10 people in the last quarter, including sales, support and consulting personnel, after 2010 turned out to be “much better than I expected,” said CEO Stephen Blythe. Blytheco, a Sage Software reseller, reported total revenue growth of 30 percent last year.

“The real growth is going to be on the ‘soft skills’ side,” said Technology Advisors’ Biardo, pointing to increased demand for consulting services, such as user training/adoption and business process management. But a big part of his company’s business today is integrating siloed CRM applications with back-office systems, Web sites and third-party information sources. “Integration is hot right now,” he said.

Dresser & Associates, a Scarborough, Maine-based solution provider that focuses on human resources management and payroll systems, is providing a lot of business consulting and support services. “We think it’s important for our customers to maximize the value of their software,” said President Mark Dresser.

Some vertical markets show more promise than others in 2011 with the greatest number of solution providers (45.5 percent) expecting increased sales in the health-care industry, followed by financial services (33.1 percent), manufacturing (28.6 percent), and then education, retail and communications.

More than 60 percent of those surveyed, nevertheless, cited economic trouble in specific target markets and geographies as a potential obstacle to growth in 2011. More than 55 percent pointed to customers’ inability to justify IT investments as a hurdle, while 38 percent cited “customer inability to pay or finance.”

Yenke said the practice Lighthouse Computer Services developed around document management, e-discovery and litigation is “growing like crazy.” Security and data storage are also big, although the latter “has become as much of a software business as a hardware business. It’s all about the software now,” he said.

Providing users of mobile devices with access to corporate systems is also a fast-growing service.

“Mobile access is something that’s really attracted many of our customers,” said Michael Cohn, founder and marketing vice president at Cloud Sherpas, an Atlanta-based Google Apps reseller. That was echoed by Blythe at Blytheco, which developed its own Bly/Mobile Web client software for connecting mobile devices with Sage MAS 90 applications.

Forty-six percent of those surveyed said it is “likely” or “extremely likely” that they will expand their solution offerings into new emerging technology areas in the next 12 months. More than 25 percent said it’s likely they will form new strategic supplier partnerships, and more than 11 percent even said they are likely to acquire other businesses to expand into new emerging technology areas.

As for cloud computing plans among solution providers, the outlook is, well, partly cloudy. Those surveyed said 24 percent of their revenue came from cloud services in 2009, a number they expect to grow to 36 percent in 2012.

“Our business has really taken off,” said Cohn at Cloud Sherpas, which along with reselling Google Apps provides a range of cloud integration, data migration and development services. “I’m expecting our business to double [in 2011], if not more than that.”

According to the survey, 31.5 percent have or will offer cloud-based solutions in the next 12 months by adding new resources, while 22.4 percent have or will offer cloud aggregation services for end customers with multiple cloud solutions. But 15.1 percent won’t be offering cloud-based solutions due to security concerns, and 13 percent won’t do so because of pricing model issues.