The channel, it appears, is not so immune to the woes plaguing Wall Street. Despite continued assertions by solution providers that they’re not feeling the effects of the economic downturn, new Channel Insider research finds that the failure of financial services firms, rising energy costs and inflation are taking a toll on IT reseller and services businesses.
The Channel Insider Mid-Year Outlook report—based on a survey of more than 300 solution providers—is a follow up to a similarly study conducted last fall. At the beginning of 2008, three out of four said the expected profits would be up compared to 2007. Eight months later, that ratio was reduced to one in two. Those still expecting full-year profits to increase have adjusted their expectations by lowering their forecast by nearly 50 percent. And only 44 percent say that their year-to-date sales are in line with expectations.
A slowing of sales, revenue and profitability should come as no surprise, given what’s happening across the country in the financial services and energy sectors. Even before the September 15 failure of Lehman Brothers and the massive Wall Street sell off, the economy was on shaky ground. Forrester Research reported last week that nearly half of U.S. enterprises have cut back IT spending and nearly all have frozen discretionary spending. The industry with the deepest cuts, according to Forrester, is financial services, which is also the sector that spends the most on IT products and services.
The economic slowdown and the impact on IT should come as no surprise. Since late 2007, the U.S. economy has been gripped by the subprime mortgage meltdown, in which defaults on risky home loans ballooned as property values plunged. Making matters worse, skyrocketing oil prices have made everything from shipping to air travel to plastics to food more expensive. At the time this survey was fielded (August 5 to August 25), crude prices were fluctuating between $135 and $147 per barrel and the price of gasoline was pushing $4.50 per gallon.
In the new Channel Insider report, solution providers say that their customers hare delaying IT projects and spending (53 percent), taking longer to make purchasing decisions (51 percent), scaling back IT deployments and spending (39 percent) and pushing back on pricing (34 percent). As end users are finding it harder to come by cash and lines of credit, they’re cutting back on everything from IT projects to coffee to curb cash outflow.
Complicating matters, vendors and distributors are passing along their cost increases and shaving points off channel partners’ margins to compensate for their losses and lower performance. Solution providers said that their vendors and distributors have increased the prices of goods and services (53 percent), decreased discounts and incentives (36 percent), applied surcharges for logistical support (32 percent) and tighter credit terms (30 percent).
So far, solution providers say they’re resisting the temptation to pass along price increases to their customers, except in some key areas: professional services, custom application development, system integration and managed services. These are also among the strong revenue and profit centers for solution providers; they’re not recession-proof, but they are either essential to increasing IT effectiveness or decreasing operational costs.
The Channel Insider Mid-Year Outlook study finds little consensus among solution providers on how to reverse the trends, but most see either adding new customers or new products and technologies to their portfolio as a means to increasing revenue and profitability. This remains consistent with the 2007 Channel Insider study, which found that many solution providers were looking to increase their customer base and expand into new markets. The objective then was business growth, while today it appears as though it’s a goal of business necessity to ensure viability.