Staying profitable

Sixty-two percent of the 393 solution providers that participated in the Outlook 2008 survey said they expect increased profitability of at least 10 percent from 2007, and they are looking at a variety of ways to make that happen. Acquiring new customers was cited by 54 percent of survey respondents as a profit-boosting strategy, followed distantly by increasing solution-based sales (24 percent), increased sales to existing customers (24 percent), and new and incremental services revenue (21 percent). Managed services came in at 17 percent, which is respectable for a stillemerging area.

The emphasis on new customer acquisition makes sense, said Dan Schwab, vice president of marketing at D&H Distributing. Because the bulk of channel companies focuses on small and midsize clients, they are always recruiting customers among newly opened restaurants, doctors' offices, law firms or real estate offices, Schwab said.

According to the survey, small companies of 99 and fewer seats will make up 29 percent of expected revenue for solution providers, and medium companies, with 100 to 999 seats, 23 percent. In comparison, large customers are expected to produce 22 percent of revenue; government/education/public organizations, 15 percent; and consumers, 11 percent. "The lifeblood of your business is always acquiring new customers," Schwab said.

Starr, of I.T. Works, agreed: "You have to have a constant new customer acquisition strategy in place." Starr, whose company has a strong focus on networking, telephony and mobility, said he gets many new customers from other solution providers who refer their clients to I.T. Works for that type of work. "We do a lot of partnering," he said.

The Outlook 2008 survey also found that most solution providers aren't focused on reducing costs or increasing markups. Many channel companies in recent years have worked to reduce costs, and the poll seems to indicate VARs are mostly satisfied with their cost structures. Only one fifth of solution providers said they will focus on lowering costs to boost profits.

Meanwhile, 14 percent said they intend to achieve profit growth through increased markups. Not surprisingly, this is not a popular strategy because of its inherent risks.

"Increasing prices is simply a shortsighted fix to a long-term profitability problem," Bova said. "Raising prices means that everything still revolves around price, and VARs are still thinking of their value and profitability based solely on price."

Instead, Bova said, solution providers should do business in smarter ways. "VARs need to streamline their back office, reduce their number of vendors— which will in return reduce the support costs and training costs—and start partnering with other VARs."