VARs Should Stave Off Spending Cuts with Services

Dropping CIO confidence could be bad news for the channel, but partnerships and managed services could help keep VARs afloat.

While the IT spending outlook for the rest of this year remains strong, concerns are growing about prospects for next year. Forrester Research reported early last month that CIO confidence has dipped to the lowest level since the first quarter of last year, which the research company warns could translate into IT spending cuts.

For the channel, this would be bad news, especially since so many VARs and system 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 are making CIOs feel good about current conditions. Seventy percent of the 200 CIOs the company polls quarterly to assess CIO confidence reported in the last quarter a strong or very strong current business climate.

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But when asked about the future, CIO sentiment dropped significantly on Forresters 100-point scale. While 78 percent of CIOs said they are increasing spending this year over last year, the number is dropping to 64 percent next year.

Still, only 6 percent of the CIOs at this point expect to spend less next year, according to Forrester. That number could increase as IT decision makers find reasons to worry about such economic indicators as high oil prices and a weakened dollar.

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

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

Through managed services, VARs and integrators take over part or all of a customers 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 a 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 canceled 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.

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"The more they cut back capital expenses, the more they need the services," said Peter Sandiford, CEO of LPI Level Platforms, 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.

Whether a business downturn awaits the channel next year is anyones guess at this 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.

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