Defeating Gloom and Doom

Don't talk to Jim Freeman about dismal economic indicators. Yes, interest rates and inflation are on the rise. Yes, falling housing demand and prices are dragging GDP down to its lowest growth rate in three years.

Yes, energy and health-care costs continue to sap businesses.

And yes, the level of global competition is relentlessly moving upward.

Throw in a little uncertainty caused by the midterm elections, poor progress in Iraq, instability caused by North Korea's nuclear program and the woes of America's automotive industry and you've got a recipe for economic gloom and doom.

Despite all of that, Freeman's business, Attain Technologies in Denver, is growing more than 70 percent year-over-year. Since making the transition from a traditional box-pusher to services, Attain is growing at a phenomenal rate and shows no signs of slowing down.

"Technology remains more complicated than ever, especially with all the security and regulatory compliance issues," says Freeman, a principal at Attain. "You have one-third the people doing the same work, which means they need more help."

Attain isn't alone. Channel optimism is bucking conventional economic wisdom, according to the VARBusiness 2007 State of the Market survey. Eight out of 10 solution providers surveyed anticipate that revenue will increase by at least 5 percent in the coming year, and one-third expect growth of more than 15 percent.

The VARBusiness State of the Market is traditionally a health check of solution providers' businesses and their expectations for the coming year. VARBusiness changed the approach slightly this year, asking more questions about how solution providers are running their businesses and the economic factors that influence their revenue and operations.

As revealed by the survey of 477 solution providers, the best route to growth is understanding your market, setting business goals and ensuring a business structure that maximizes profit potential.

Despite the challenges facing VARs, management's tenacity and not settling for second-best are what separate the successful--like Freeman--from the naysayers.

"We're stubborn and patient," Freeman says. "We're just never satisfied. Even if we achieve our growth goal, we're not going to be satisfied."

NEXT: Riding the economic wave.

On the whole, solution providers say the state of the national economy is having little impact on their businesses. The local economy among VARs is a more important indicator of the potential for their businesses' health in the coming year.

The State of the Market survey found that economic conditions, IT priorities and business patterns among solution providers will vary from region to region. Across the country, VARs see the most growth potential in wireless technologies, but secondary priorities shift in different regions among security, data management and VoIP.

Vendors are also pushing their best-performing partners to expand their local businesses into adjoining states and regions. The bet is that a successful local model can be replicated in an underserved or underperforming territory.

Despite the weak economic indicators, midsize and large VARs say they're benefiting from the state of the national economy. Part of this might be explained by rising stock prices.

Globalization, as well as worldwide economic conditions, is weighing on the minds of solution providers, particularly the small and midsize ones. Opportunities abound for VARs willing to take the plunge into offshore markets. Likewise, those same opportunities exist domestically for ambitious IT companies from India, China and Russia. Nowadays, it's not unusual to bid for a services contract only to see it awarded to an overseas company with access to cheap labor and infrastructure.

"We're pitching against India and Pakistan, and they're low-balling," says Keith Parker-Lowe, president of Parker-Lowe and Associates, Ocracoke Island, N.C.

Globalization and the global economy are obviously of greater importance for large solution providers, of which 46 percent have an international presence. Midsize and small VARs have substantially less international business--12 percent and 8 percent, respectively.

One way Parker-Lowe keeps his business vibrant is through services. As a document-management and imaging solutions provider, he often does consulting work that drives not only his own business but also that of competitors and vendors.

According to the survey, services are driving revenue and profit; solution providers reported that 50 percent of their revenue and 60 percent of their net profit are derived from services. Consulting (86 percent) and break-fix services (75 percent) dominate the services landscape.

Managed services are offered by 46 percent of VARs, but are cooling down a bit. On the average, solution providers expect those services to account for 16.4 percent of their 2007 revenue--down nearly 5 percent from this year. The slowdown is seen mostly among small VARs that often can't afford the big infrastructure investments involved with becoming an MSP.

A managed-services slowdown doesn't come as a surprise to the people at Cincinnati-based PC On Call, which is seeing more competition for remote monitoring and management. To compensate, the VAR ensures high-touch relationships with its 100-plus customers. It constantly has people on-site to maintain personal relationships with the companies it serves.

"The truck roll is about retaining stickiness with the customers and capturing more consulting work," says Kathleen Lusby, the company's purchasing manager. "We're moving more toward the consulting role."

Other trends include the rise of Internet-based selling, which is viewed as a huge plus for VARs, especially small and large ones; the increasing availability of credit and financing, which is generally a good thing, although rising interest rates are hindering the channel's borrowing power; and the war on terrorism, which larger VARs--especially the big integrators and government contractors--see as a boon to business.

While gasoline prices continue to wane, volatility in global energy markets has many solution providers concerned. The cost of supporting customers through on-site visits, travel costs, and heating and electricity prices did dampen profits.

The omnipresent issue among solution providers: health-care costs. Health-care insurance for employees is outstripping the ability of solution providers to pay for it. The greatest impact is seen among midsize VARs, which are faced with the cost of insuring their employees while expanding the business. "Health care is simply our biggest problem internally," Parker-Lowe says.

Small and midsize VARs registered the most pain associated with those health-care costs and other economic factors, while large VARs said many of those factors benefit them, with the exception of retirement-planning costs, foreign competition, energy costs and health-care premiums.

NEXT: Plan to succeed.

William Monticue, owner of The Computer Partner, doesn't concern himself with long-term planning or the larger economic trends. A one-man shop outside Pittsburgh, he mostly rides the wave of whatever trends are flowing through the channel. Nowadays, Monticue is doing a lot of cabling and wiring work to support VoIP telephony. He's also seeing a lot of desktop and laptop sales and support work. Both were hot trends in the State of the Market survey.

"The national economy doesn't seem to affect the local economy, and the local economy just seems to be chugging along," he says.

While this laissez-faire approach works for Monticue, it's not what most VARs would recommend for building a thriving business. In fact, according to the State of the Market survey, VARs that establish and manage goals put a greater focus on sales efforts. Likewise, those VARs are the ones that can project their costs and profits better and, as a result, maintain healthy profit margins.

Planning and management are also keys to maintaining the longevity of customer relationships. The average duration of a customer-VAR relationship is 8.7 years, up from 6.5 years in the 2005 State of the Market survey.

All of this shows the importance of managing by understanding markets and following technology and market trends. Solution providers following that formula will, undoubtedly, thrive in the coming year--regardless of any economic curveballs thrown their way.