State of the Market Analysis

Not surprisingly, nearly half of the solution providers surveyed (45 percent) profess that revenue in the past six months has been below expectations. They attribute the shortfall, in part, to reduced demand for system hardware, including workstations, servers and peripherals.

As the markets begin to stabilize, however, VAR optimism is returning. According to our research, a vast majority of VARs (74 percent) expect their revenue to improve in the first half of 2003. Profits are likewise expected to bounce back. A majority (59 percent) of respondents expect their operating margins to improve by the second quarter of the year.

That begs the following question: Where will you succeed in 2003? According to the solution providers polled in our survey, the vertical markets that offer the greatest opportunity for growth in the next three years are health care (30 percent of respondents said so), manufacturing (23 percent), banking/finance (19 percent), education (18 percent) and the federal government (16 percent).

According to VARBusiness' research, solution providers also plan to emphasize software and services in the new year. One reason: Amid cost-cutting that went on this year, VARs attribute a vast majority of their company's 2002 profits to services, consulting and software. In fact, profits from services and consulting grew to 48 percent in 2002, up from 40 percent in 2001, according to our survey. Moreover, profits from software deployments surged 26 percent year-over-year, to 24 percent, on average, according to the survey.

For some insight on why this is so, I turned to Wayne Harris, senior manager for Deloitte and Touche's security services group. Harris told me that consultants have helped customers optimize the environments they have in place today. "The goal this year has been to keep what clients have without spending any more of their money on hardware," he says. "Software as a prevalent purchase has helped customers get their business processes done in a better fashion based on existing business models."

None of this would be possible, of course, without a thorough understanding of a customer's business. Interestingly, our research reveals that during the past five years, technology providers have increased their reliance on existing customers. In fact, according to the research, 69 percent of the average solution provider's total revenue will come from existing,as opposed to new,customers in 2002, up six percentage points since 1997. Furthermore, approximately half of the solution providers polled (47 percent) report that revenue from existing customers has risen in the past 12 months. According to our research, solution providers have worked with a typical customer for an average of six years, about half the time most VARs have been in business.

However, our research also finds that customers are taking longer to make their purchase decisions. To the point, more than three in seven respondents (44 percent) say their average customer sales cycle has increased during the past 12 to 18 months. Today, closing a sale typically takes as long as eight months.

Like it or not, patience in 2003 will likely be as significant a virtue as attention to detail and execution.