Signs of Economic Times Call for More Caution

One of the great things about the channel is that hope, especially at the beginning of any new year, springs eternal. So it should come as little to no surprise that out of 393 solution providers surveyed in Ziff Davis Enterprise’s Outlook 2008 study, the parent company of Channel Insider, 74 percent of them said they would be able to increase profitability in 2008 over 2007. And among those expecting to increase profits, the average increase in profitability year over year is expected to be 39 percent.

Most solution providers are owned by entrepreneurs who, as a breed, are known to be an exuberant bunch when it comes to their own business prospects. Still, unless they have all discovered massive amounts of inefficiencies in their own business processes, there appears to be little in the way of economic data suggesting that 2008 is going to be a banner year for business.

This doesn’t mean that profits will be down next year by any means. But it does suggest that there might be a certain amount of “irrational exuberance” in the channel at the moment. The factors weighing down the economy are well-known.

The mortgage crisis, coupled with the rising oil prices, has every economist worried that consumers will have less to spend in 2008, which, in turn, will result in a cascading series of lower revenues for just about every business on the planet. The counter to that argument is that the value of the dollar has fallen to the point that U.S. exports will be so irresistible to other countries that companies will be able to shore up their revenue thanks to overseas business.

Against those two macroeconomic factors, solution providers need to weigh specific trends related to IT, the most important of which is the general shortage of IT personnel that continues to push more customers to seek out managed services because they can’t find the people they need to run their internal IT systems.

And as technology continues to become more complex, the skills shortage is only going to become more exacerbated. This may account for why 58 percent of the solution providers surveyed in the Outlook 2008 study expect to increase their market share in the new year, while 54 percent said new customers will be a key driver for increased profitability.

Meanwhile, within specific technology segments, solution providers identified security, mobile solutions, managed services and business intelligence as the top four drivers of profitability in the coming year, which appears to dovetail nicely with what most industry analysts are saying about where IT budgets are headed in 2008.

Oddly enough, server hardware was not as far up the list as might be expected with the advent of virtualization and Windows Server 2008, which may just reflect the complexity of those types of offerings and the rate at which customers are willing to adopt them.

The bottom line for solution providers is that there will be plenty of opportunity for the channel in 2008 regardless of the general macroeconomic climate, but an ounce or two more of caution may be called for, given the potential tidal impact that oil prices and the mortgage crisis could have on the willingness of companies to spend money on IT.

Michael Vizard is editorial director of Ziff Davis Enterprise. He can be reached at michael.vizard@ziffdavisenterprise.com.