Despite economic indicators that create uncertainty and the misgivings of some VARs, executives at channel companies said replacements of aging equipment and adoption of new technology are fueling steady IT spending.
Though no one expects double-digit growth rates similar to those of the 1990s, many VARs said they feel good about business prospects for the coming months. They said this despite some trepidation caused by recent stock market floundering and signs the economy may be slowing.
Framingham, Mass.-based market research firm IDC estimates IT spending will increase at about 6 percent this year and predicts that rate will hold steady through 2008.
VARs look back longingly at the days of double-digit growth, but welcome the current steady stream of business, especially in light of a slowdown that lasted from 2001 until last year.
“We’re seeing a leveling out of the IT industry,” said Brian McCarthy, chief operating officer of trade association CompTIA, in Oakbrook Terrace, Ill. “It’s probably reached its bottom, from a downturn standpoint.”
The current growth rate is healthier in the long run than a sharp upturn because it is more reliable, McCarthy said. It indicates the industry is maturing and moving away from pitching technology for its own sake to providing solutions that solve real business problems, he said.
Advances in communications, home automation and business-process technologies such as RFID are allowing those technologies to become ingrained in daily life, making technology truly an enabler of lifestyles, he said.
VARs confirm McCarthy’s assessment of the shift toward enablement, as businesses adopt technology to become more efficient, control costs and automate time-consuming functions. But VARs also attribute a good portion of the current demand to pent-up need in businesses of all sizes, particularly in the SMB (small and midsize business) market, according to VARs.
“People are shopping, people are looking,” said Ray Morton, director or technical services at Daly Computers, of Clarksburg, Md. “They have all kinds of pent-up needs. Y2K is over and done, and now they need to refresh what they did back then.”
Customers are investing in blade servers, network security projects, IP cameras, mobile and wireless technology, and solutions geared toward the automation of business functions.
“Everybody was sitting on their hands so long, sitting and waiting, and then in ’04 they realized it was either upgrade or go out of business,” said David Hudgins, president of PC Products and Services, in Greensboro, N.C.
Hudgins is seeing spending across the customer spectrum, including education, SMB and large enterprises. Enterprises are opening their wallets for scheduled upgrades for projects that have moved from the optional to the necessary stage, and in the SMB space IT money is going into the automation of business processes, he said.
The SMB market is particularly dynamic, said VARs and industry analysts.
It is the fastest-growing segment in which distributor Ingram Micro Inc. does business, according to Kevin Murai, worldwide president and chief operating officer. SMBs are nimble and react more quickly to technology needs that affect their bottom line, he said.
Channel companies are keeping their fingers crossed, hoping the growth can be sustained not only in the SMB market but across the board. Some fear that a return to the dry years that followed the Y2K and Web development business boom of the late 1990s could be fatal.
Many struggled to stay afloat after the economy took a dive following the 2001 dot-com implosion and Sept. 11 attacks; it didn’t start to turn around until last year.
Hardware sales were particularly hard hit in the slow years, creating serious challenges for product-focused VARs and squeezing top-line revenues at large distribution companies.
An increasing number of VARs have been turning to services and solutions sales to generate enough income to keep them in business. Some are exploring emerging technologies such as RFID and voice over IP, while others are looking into managed services.
Through the managed services model, VARs and integrators can take over part or all of a customer’s IT departments. Under the model, most of the work, such as managing business applications and monitoring and maintaining networks, is done remotely.
Heartland Technology Solutions in Joplin, Mo., is one of the many VARs looking into managed services. The company is spending a lot of time exploring an entree into the managed services arena because of margin pressure and stiff competition on product sales.
Even so, said Heartland principal partner Jane Cage, formerly stagnant hardware sales are up. “For us, the service market is steady, but we saw a decline in hardware sales that is only now beginning to pick back up. We seem to have quite a bit in the pipeline so we are looking for an increase in product sales over the next quarter,” she said.
Other VARs, such as Future Vision Inc., of Raleigh, N.C., which has been moving toward services in recent years, also are seeing hardware sales increase.
“We expect this to continue throughout the year,” said Future Vision President Chris Redshaw. “Things seem to be picking up. The first quarter was slow for us; however we had a very successful December. Over the past two months, we have started to see a steady increase.”
In addition to hardware opportunities, Future Vision is getting a lot of business in upgrades of software applications such as Windows Server and Exchange, she said.
Redshaw attributes demand to issues customers are facing that only technology can solve.
“Over the past six to 12 months, end users have been faced with a great deal of IT issues, which can be quite overwhelming. Businesses are now facing regulatory compliance issues, security flaws, hardware and software upgrades, keeping up with the latest technology, as well as coping with growth,” Redshaw said.
Darren McBride, president of Sierra Computers Ltd., of Reno, Nev., said he hasn’t experienced the kind of demand that other VARs are telling him about, though his services business has been growing steadily.
However, McBride said, his complementary systems manufacturing business, Highly Reliable Systems, is up 40 percent year over year.