Channel Optimism Rooted in Ongoing Transformation

Some 64 percent of survey participants said they expect increased profitability in the coming year of at least 10 percent—this at a time when oil prices and the mortgage crisis are prompting some less-than-enthusiastic predictions for the coming year.

Talk of a potential economic slowdown, especially during an election year, makes people nervous. The mortgage crisis has affected the financial sector and thousands and thousands of families. The election, meanwhile, causes uncertainty about what's to come, as decision makers wonder about potential changes in business regulations and tax laws.

The overall picture, however, remains fuzzy at best. And as of now, at least, the channel appears largely unaffected by the darker economic predictions.

To be sure, anecdotally some solution providers say they are already seeing a tightening of capital expense budgets, which translates to postponements of product purchases. A survey by CIO Insight, a sister publication of Channel Insider, found that one-third of 250 IT executives polled would cut IT spending or staff should economic growth slow to 2 percent or less or if oil hits $100 a barrel.

Still, many of the solution providers I have contacted in recent weeks, as well as the majority of the 393 that participated in the Outlook 2008 survey, appear confident about the new year's prospects.

Wishful thinking may be at play to some extent, but most of the positive outlook has to do with the transformation that has been underway in the channel in recent years as well as the customer base the preponderance of solution providers serves.

Providers that weathered the recession following the dot-com bust and the 9/11 attacks are a hardy bunch. Many of them have for years been working to transform themselves into service-oriented companies that, while not entirely abandoning product sales, have become adept at wrapping integration, maintenance and security service around the products they sell.

Decreasing their revenue dependence on products sales, which move on more of a feast-or-famine model, has increased the confidence of solution providers focusing more on services.

Especially confident are the providers that have shifted some of their business to recurring-fee models. The reasoning is that even if customers have to postpone product purchases to accommodate tighter budgets, they will continue to require the services called for in their fixed-fee contracts with providers.

Notably, this fixed-fee element is more significant in the managed services realm, since software as a service remains a low priority for solution providers. Though the model of hosted software carries the promise of opportunity for the channel, by and large it appears solution providers haven't quite figured out how to turn that potential into reality.

The channel's clientele, primarily the small and midsize business market, also has a lot to do with the channel's confidence about 2008. Small businesses and midsize companies have been providing the fuel to keep the economic engine churning, and they show no signs of slowing down for the foreseeable future.

Barring a catastrophe that would bring the economy to its knees, the six million or so SMB companies in the United States will continue to spend a healthy amount on IT, keeping the channel in business.

What exactly will happen in 2008 is anyone's guess, of course. But the channel's confidence, even if at odds with some economic indicators, can only mean that solution providers feel good about the steps they have taken to evolve their businesses and to maintain their focus on profitable customers. In the past, providers tended to be more guarded in their optimism, so if they are expressing confidence in the face of a potential slowdown, they must know something.

Pedro Pereira is editor of eWeek Strategic Partner and a contributing editor for Channel Insider. He is at ppereira@­ziffdavisenterprise.com.