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Solution Providers See Growth Opportunities Amid COVID-19 Pandemic, Even As Customer Uncertainty Looms: IPED Study

While it's unclear what the rest of 2020 will bring for customer spending, opportunities abound to expand recurring-revenue engagements such as managed services and cloud, according to a new study of solution provider businesses.

There is a strong belief among solution providers that the COVID-19 pandemic will represent an inflection point for the channel on par with the arrival of cloud computing and the 2008 recession, according to a new study from IPED Consulting.

Solution providers see the potential for greater opportunities in cloud, security, managed services and other solutions needed in the transformed business landscape, even as they see uncertainty in assessing the impact the global crisis will have on customer spending throught the rest of the year, the study found.

"We very much saw through the research that this is yet another market inflection point," said Rauline Ochs, senior consultant at IPED. "It's a time of dramatic change. There is no certainty that we're going back to our old world—in many ways, we won't."

Cloud solutions provider AllCloud sees the crisis as "an opportunity for extended growth," said AllCloud CEO Eran Gil.

"If you look at it in the grand scheme of things, cloud is still a small portion of most of the world's IT investments," Gil said. "I think people will inventory and reassess what they should be doing as it relates to their environment and in their space--meaning, should they continue to have data centers? Should they continue to co-locate? I think [the crisis] may expedite organizations' decision-making on transitioning to the cloud, whether that's infrastructure or an application."

The IPED study included a recent survey of 265 solution providers in the channel at large as well as interviews with 61 executives from managed/strategic solution providers, together representing a cross-section of company sizes and business models in the channel. IPED Consulting and CRN share the same parent company, The Channel Company.

[Related: Coronavirus Driving ‘Massive’ Surge In Tech Purchases: The Channel Company Research]

The first quarter was a record quarter for many in the channel, with surging demand for solutions to enable work-from-home and distance learning amid the COVID-19 pandemic, according to the IPED study. However, solution providers expressed major concerns about the current quarter. There is also widespread uncertainty in the channel about the third and fourth quarters of the year, the study found.

Among the solution provider executives who were interviewed for the study—who represented larger top-tier firms—53 percent said they expect a negative impact on second-quarter sales in connection with the COVID-19 crisis. For smaller partners, worries about the second quarter are even broader with 73 percent expecting a negative impact for the quarter, IPED found.

Meanwhile, over the next three to six months, 70 percent of solution provider executives who were interviewed said they expect a negative impact to their customer contracts and payments.

"The biggest watch point for us is, in the next quarter or two, how many of our customers are going to come out of this and how many are not?" said Tony Safoian, CEO of SADA Systems, a Los Angeles-based cloud solutions provider and No. 282 on the 2019 CRN Solution Provider 500. "How many are going to face bankruptcy or insolvency? And so in the management of our own business, if there are multi-millions of dollars of receivables that we're never going to be able to collect, what happens?"

Still, many solution providers see cause for optimism in some areas, particularly those that have a strong emphasis on recurring revenue streams. During the next three to six months, 60 percent of solution providers who were interviewed said they expect positive or no impact to their managed services businesses, while 50 percent expect growth in their cloud businesses.

Safoian said that cloud-focused SADA has recently closed several deals—including one of its largest deals ever.

In contrast to the optimism about cloud and managed services, 35 percent of large solution providers and 50 percent of solution providers serving small and medium-sized businesses expect a significant negative impact to their product reselling business over the next three to six months, IPED found. And 23 percent of large solution providers expect a significant impact to their project-based services business, due to challenges including constrained on-site access and inability to land new projects.

Not surprisingly, solution providers that are more diversified in terms of the industries they serve are likely to fare better, the study found. The most negatively impacted verticals for solution providers follow closely with the broader market—with travel, hospitality, retail and transportation the hardest hit for solution providers. Consumer packaged goods and selected health care markets were among the strongest verticals, IPED found.

"Some industries are doing really well and others are not," said Mark Wyllie, CEO of Boca Raton, Fla.-based Flagship Solutions Group, whose customers span sports and entertainment (including teams such as the Miami Dolphins and Miami Marlins), public sector, financial services, communications and other verticals.

"Fortunately we were never really heavily vested in any one industry,” Wyllie said. “We're known for some of the sports teams that we work with, and obviously they're on a major pause right now. But for the managed services that we have with them, they haven't stopped paying us. So that hasn't negatively impacted us."

Building new pipeline is anticipated as a major challenge in coming quarters. About two thirds of solution providers are expecting a negative impact to their ability to create new pipeline, though 20 percent see an opportunity to grow their pipeline driven by cloud, work-from-home, managed services and customer cost-cutting, IPED found.

The shift to an operating expense model instead of a capital expenditure model, for instance, should continue to help drive cloud spending, according to the study.

"I continue to see our customers looking for capital preservation," said Todd Pittman, CEO of Blue Bell, Pa.-based Anexinet, No. 218 on the 2019 CRN Solution Provider 500.

"Everybody wants to ensure that they have the capital required to keep their business operating through this uncertain time. And so I think that will continue to drive more conversations around leveraging the cloud, pay-as-you-go models, GreenLake," Pittman said, referring to Hewlett Packard Enterprise's GreenLake pay-per-use offering. 

That dynamic is also expected to increase managed services through expanded outsourced IT, said John Kolimago, executive vice president and general manager for cloud solutions at Anexinet.

"Clearly if we can help offload mundane or menial tasks from the IT staffs that we serve as our clients to free them up to deliver more innovative capabilities to the business, that's going to be perceived as a value," Kolimago said. "We do think there's a strong opportunity for us to grow that business in the coming months."

Along with cloud, work-from-home solutions—including virtual desktop infrastructure, collaboration applications, bandwidth and laptops—are seen as continued bright spots in the channel, the IPED study found. Many employers are expected to keep a bigger focus on remote work going forward, regardless of how long the COVID-19 pandemic persists.

With the shift to work-from-home, "we're selling a lot of laptops, printers, firewalls, managed security," said Mike Hadley, CEO of Boston-based iCorps Technologies, No. 484 on the 2019 CRN Solution Provider 500. "We've always done well with product sales. I see that increasing—I don't see any reason that wouldn't, especially with our focus on security. What you're going to see is the ability to work from the office and at home."

Many solution providers are feeling bullish about the opportunities in security over the coming quarters, IPED found.

"We've been successful at helping them implement work-from-home solutions. Now we're seeing a big pivot to securing those environments. That's top of mind for many of our customers as they've changed this business model," Kolimago said. "So there's a lot of interest and activity in the security space right now—making sure that we have the right tools and processes in place to ensure in a distributed model that these entities that we serve are not at risk."

At Buffalo Grove, Illinois-based ACP CreativIT, CEO Scott Dunsire said his firm is doubling down on its cybersecurity practice amid the current crisis, particularly when it comes to cloud security.

"We think there's more upside, especially with all the work-from-home situations," Dunsire said. "And so we're looking at companies like Arctic Wolf, Fortinet, Palo Alto Networks, and how we can enhance our go-to-market offerings around those solutions. And then we're offering obviously the engineering and technical support, because it's different at every company. But we think security in the cloud is definitely a significant opportunity, so we could adjust maybe more resources there."

IT infrastructure—such as servers, storage and networking—is generally expected to be more negative than positive for solution providers in coming quarters, IPED found. Potential difficulties include issues with replenishing pipeline, possible supply chain constraints and accelerated cloud workload migrations, the study reported.

At data center solutions providers such as Chicago-based AHEAD, however, an emphasis on consulting to help customers achieve business outcomes is "absolutely" resonating in the current environment, and is expected to drive continued demand going forward, said AHEAD President Stephen Ayoub.

AHEAD, No. 75 on the 2019 CRN Solution Provider 500, is "doing more around consulting now than we have in the past. We do data center, but we have over $100 million in our services organization. So we're heavily focused in helping set strategy, and more importantly, executing on the strategy," Ayoub said.

"I always say, we want to be the ones who are held accountable for a business outcome," he said. "I think it's becoming more important to the customers to make sure that where and when they spend money, it's going toward a strategy that's really tied to a business outcome."

Ultimately, IPED's study found that many solution providers expect to be facing a “new normal” in the wake of the coronavirus pandemic.

This inflection point will require adaptability and flexibility from solution providers, as customers' budgets will shift, IPED's study says. Partners that have transitioned to focus on monthly recurring revenue and have embraced strategic business solutions over pure infrastructure will benefit from more opportunities to capture customer spending, IPED reported in the study.

"This change that our customers are going through will create opportunities for us to better serve them, help them innovate and bring new solutions to bear to keep pace with the turmoil that this pandemic has created," Kolimago said.

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