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While the IT spending outlook for the remainder of the year remains strong, concerns are growing about prospects for 2006.

Forrester Research reported early this month that CIO confidence has dipped to the lowest level since the first quarter of 2004, which the research firm warns could translate into IT spending cuts.

For the channel, this would be bad news, especially since so many VARs and integrators have finally hit their stride over the past year or so after the painful slowdown that ushered in the new millennium.

VARs and integrators will have to immunize themselves against any potential slowdown by putting a greater emphasis on services, which carry a considerably higher margin than product sales.

Forrester said business growth and a spurt in job creation is making CIOs feel good about current conditions. Seventy percent of the 200 CIOs the company polls quarterly to assess CIO confidence in the second quarter reported a strong or very strong current business climate.

But when asked about the future, CIO sentiment dropped by 10 points on Forrester’s 100-point scale.

While 78 percent of CIOs said they are increasing spending in 2005 over last year, the number is dropping to 64 percent in 2006.

Still, only 6 percent of the CIOs at this point anticipate spending less next year. That number could increase as IT decision makers find reasons to worry in such economic indicators as high oil prices, a weakened dollar, a rising trade deficit and Wall Street unease.

Even though Federal Reserve Chairman Alan Greenspan has sought to allay fears by saying the economy is on “reasonably firm footing,” the picture for 2006 looks anything but firm once you take into account some conflicting projections.

In the chip industry, for instance, some analysts predict growth in 2006 while others are projecting a drop.

This year sales are increasing at an estimated 6 percent clip, even though the projection for the year originally was flat sales.

By and large, VARs feel good about the current business climate. Customers have opened their wallets to replace aging equipment, and more and more companies are becoming interested in managed services.

Click here to read more insight from Pedro Pereira about how automation is good for VARs.

Through managed services, VARs and integrators take over part or all of a customer’s IT functions. Such arrangements are becoming increasingly popular with small and midsize companies that cannot afford an IT staff.

Should a downturn occur next year, VARs and integrators with managed services contracts will be in far better shape than those that continue to rely too much on product sales.

Because VARs bill customers for managed services on a monthly basis, much like a phone or cable company does, they are assured a revenue stream.

And, like the phone or cable company, they will continue to get paid even when customers start deciding to cut back. Customers will cut their capital expenses first, so planned purchases will be put on the back burner or cancelled altogether. But they will still need to keep their systems running, and if their IT department is a local VAR, that VAR is going to keep making money.

“The more they cut back capital expenses, the more they need the services,” said Peter Sandiford, CEO of LPI Level Platforms Inc., Ottawa, a provider of managed services software to VARs.

In addition to managed services, VARs and integrators looking to immunize themselves against a downturn should be looking at partnerships with other VARs and integrators.

Larger customers with multiple locations require a wider geographic reach than many VARS can provide. The best way to get around this is by partnering with other VARs in the locations where a large customer needs IT services.

These partnerships are another opportunity for recurring revenue from customers who need services on a regular basis.

Whether a business downturn awaits the channel in 2006 is anyone’s guess at the point.

But should it happen, VARs and integrators that have been diligent about adopting a services model will fare better than those that remain too focused on product sales.

Pedro Pereira is a contributing editor for The Channel Insider. He covered the channel from 1996 to 2001, took a break, and now he’s back. He can be reached at