What Lies Ahead In 2003

Congratulations! If you are reading this, chances are that you and your company survived 2002, the worst year in IT history. (Our sympathies to those who are unemployed and reading for insights to use in future job interviews.) Regardless, you're no doubt interested in market trends, business forecasts and technology tips to help you prepare for 2003. We've got them in spades. For example, did you know that 43 percent of IT business partners, including VARs, consultants, solution providers and service companies, are looking to hire more people in 2003? That sure defies conventional wisdom. So does the following, which undermines the notion that you must sell products to retain account control: Nearly two-thirds of software VARs work as consultants to recommend or influence the purchase of products even though they don't actually have a hand in the sales transaction. Then there's this nugget, which supports the idea that no man (or organization) is an island: Three-quarters of companies that belong to the IT solution-provider community generate, on average, 21 percent of their business through revenue-sharing relationships with other VARs.

Before you go it alone in 2003, or make any move for that matter, consider those and other conclusions gleaned from VARBusiness' annual State of the Market survey, the largest study of its kind in the IT solution-provider community. This year's study unmasks a number of startling findings that underscore why things are the way they are in the industry. Ever wonder what really makes Microsoft the dominant powerhouse that it is in software? Well, it may be that VARs are nearly three times as likely to get training from the Redmond, Wash., software giant than from most of the other leading software vendors. Microsoft's hands-on approach is clearly having an impact on the market. Fully 56 percent of VARs, for example, expect Microsoft's fortunes to improve,somewhat to greatly,in 2003. (Note to Novell fans: You don't even want to know what your counterparts said about your favorite company; suffice it to say, it's virtually the inverse of what they said about Microsoft.)

Add it all up and the 2003 State of the Market survey provides you with the most complete picture of the IT solutions market available. The research, for example, measures how solution providers work with customers, what technologies they deploy, which vertical markets they target and what opportunities they believe will fuel their growth in 2003. In all, more than 1,100 solution providers participated in the study. (See "2003 State of the Market Methodology," page 38, for survey details.)

The stories that follow focus on the key findings from this year's study. For example, senior editor Jeffrey Schwartz analyzes the technologies customers will prioritize in 2003. Contributing editor Dennis McCafferty provides survival tips from several VARs who have weathered the economic downturn better than most. Senior editor Sonia R. Lelii looks at where solution providers prospect for new business, and associate editor Rob Wright goes deep to find out why Microsoft spends so much on training VARs. Finally, we look at what smart companies are doing to formalize their partnerships and alliances, which account for more revenue than ever before.

To author those articles, VARBusiness editors interviewed dozens of VARs, vendors and thought leaders. We pored over the results of our exclusive survey and examined products closely. Our conclusion: You can weather virtually any 2003 market forecast if you sync your strategy with the market trends and opportunities before you. That's what our cover subject, Kerry Gerontianos, president of New York-based Incremax Technologies, has done. It's why, despite layoffs and other setbacks, his company survived 2002 intact and, moreover, why it's well-positioned for growth in one of the hottest segments of the market,software development services for Microsoft's .Net framework.

In mid-2001, Gerontianos recognized that the market downturn was going to last through the end of the year. So he refocused his company's energies on helping clients gain the maximum efficiencies from their existing IT assets. To that end, the company created a new catchphrase and methodology that it dubbed "Increasing Technology Asset Value." What the title lacks in pizzazz, the approach makes up for in salability. That's because Incremax starts with the basic premise that a company can double or triple the output and value of its in-place technology assets for a nominal cost.

Many VARs, of course, have packaged their services in a similar fashion. What distinguishes Incremax from others is the way Gerontianos has been able to identify several market dynamics at once, be they business- or technology-oriented. For example, he has studied technology trends and positioned his company to take advantage of growing customer interest in Microsoft's .Net software platform. Further, Gerontianos realized that companies with formalized partnerships seemed better at getting more new business leads and improving customer satisfaction than those that took partnering lightly. It's a big reason why he became involved in the International Association of Microsoft Certified Partners (IAMCP) and why he has twice served as its worldwide president. Incremax secures additional work through its affiliation with the IAMCP, not to mention new friends within Microsoft. (No wonder 17 percent more VARs are partnering with other VARs than one year ago, according to our study.)

"We used to worry about survivability," Gerontianos says. "Now we are again thinking about growth and maximizing the opportunities before us."

Business Drivers For 2003

If time does heal all wounds, then 2003 could be a great year for recovery indeed. "From what we can see, 2003 is largely going to be driven by the need to do a fairly major infrastructure refresh cycle on all the stuff that's worn out post-Y2K," says John Parkinson, vice president and chief technologist at Cap Gemini Ernst & Young, the 28th largest IT consultancy in North America, according to the 2002 VARBusiness 500.

Parkinson, for one, notes the fact that Microsoft will no longer provide the level of support for Windows 95 that it once did as one reason PC upgrades are likely to increase. Further, he and others say millions of cell phones, PDAs, hard drives, laser printers and routers the world over are aging. As they do, the cost to own and maintain these devices skyrockets. Next year, companies will likely realize that new technology outlays will cost less than ongoing maintenance of old devices.

All of that could have a domino effect on IT purchases. The move to upgrade Windows 95 software will likely lead to hardware upgrades, Parkinson says, because machines purchased to run Windows 95 in the late 1990s cannot effectively run newer versions of Windows such as Windows XP or even Windows 2000 Professional. "I think there's going to be a fairly big desktop refresh," he says, adding that the server consolidation wave will likely continue for at least another year, fueled by vendor-driven promotions of Itanium 2 and Windows .Net Server.

Interestingly, there's little consensus among VARs as to which technology will drive sales most in 2003, though certain areas, including security (identified by 36 percent of VARs as the part of their businesses that will likely grow the fastest in the next 12 months), networking and wireless devices, rated high in our State of the Market survey. Already, companies including Cap Gemini Ernst & Young report a need to hire more people trained in security, enterprise application integration, business and technical simulation, and other areas. On the flip side, Parkinson says, certain skill sets, including basic Java programming, are rapidly commoditizing. Most VARs are reacting accordingly and shifting their businesses to take advantage of higher-margin opportunities. More than ever, that has meant taking on new vendors.

According to our survey, two in three solution providers plan to add vendor product lines in the new year. That's 22 percent more than one year ago. Most say they are adding new vendor lines to embrace emerging technologies that customers are looking to adopt (68 percent). Other popular reasons for adding new lines include improving revenue and profit potentials, and extending core competencies. More than half of those who plan to add a new product or vendor say they will do so if they can "offer a competitive alternative to a brand currently supported."

The flip side of taking on new companies is dropping vendors whose products or policies no longer serve VARs' needs. That's something one-third of VARs say they are likely to do in 2003. As CTO of Cambridge, Mass.-based solution provider Sapient, ranked No. 120 on the 2002 VARBusiness 500, Ben Gaucherin is responsible for making sure his organization has the right technological capabilities to meet its customers' needs. As he did throughout 2002, Gaucherin believes customers will focus intently on server consolidation projects in 2003. That's going to put pressure on second- and third-tier vendors as companies such as Sapient focus on top vendors for customers embarking on projects that put more apps on more capable servers or replace expense T-3 lines and multiplex traffic over multiple T-1 lines instead. In one instance, Sapient helped a major telecommunications company consolidate some 2,000 intranet sites into a more manageable 40 to 50 sites, saving the customer $500,000 on hardware and software costs alone.

"People are trying to formalize processes so they can justify infrastructure expenditures," Gaucherin says. "These types of projects help them achieve their aims."

Defying Conventional Wisdom

Conventional wisdom says the time to offer expertise on basic desktop PCs and notebook computers has come and gone. Yet 75 percent of VARs say they still deploy or support basic PCs, according to our study. Dan Young, president of PCLaptops, a Sandy, Utah-based system builder of notebook computers, is one of them. Young's company, which pulls in $10 million in annual sales, is flourishing in a market segment that scores of companies have abandoned due to shrinking margins. PCLaptops, for example, has roughly twice the head count of an average VAR, but three times the sales output of one. Young's secret? Marketing and customer satisfaction. While other white-box builders focus on supplier relations with the hope that they'll get a break on component prices, Young instead focuses on improving customer support. He routinely surveys his clients to see if his company is meeting expectations. The reason is simple: In a world where there's always going to be a price leader, PCLaptops has come to realize that customers will pay more for better support. That's why the company operates four retail stores in the greater Salt Lake City area, and why Young spends lavishly on outlandish television advertising to convey that message.

"We may be white-box builders, but we're competing against companies that spend tens of millions on advertising," Young says. "Our advantage over Dell and others isn't better technology, which we have, or a better known name, which we obviously don't have, but better support. At the end of the day, that resonates most with our customers."

With momentum building, PCLaptops is looking to expand into new territories, including Seattle and Phoenix, where Young believes customers are being underserved. And, yes, like 43 percent of other VARs, he's looking to hire more people.

"According to the experts, a company like ours should not be able to exist, let alone flourish," Young says. "But there's money to be made in virtually every segment of the market, so long as you understand what customers truly need."

Another solution provider defying conventional wisdom is SBI and Company, also of Sandy, Utah. Last month, the company, ranked No. 318 on the 2002 VARBusiness 500, purchased Razorfish for $8.2 million. It's the fifth failed Web-integration company SBI has bought,others include Lante, Scient and MarchFirst. Ned Stringham, VARBusiness' 2002 CEO of the Year, doggedly pursued the assets others thought were damaged beyond salvation. He saw that these companies survived for some reason. If, he wagers, customers were willing to stay with these organizations despite stock collapses, management turnover and bankruptcy proceedings, there must be value there.

"Within each of those companies were client relationships. Those were the pieces of each of these businesses that survived and sustained. The best of the best people were around those relationships, and that's what we have pulled together," Stringham says. He now believes he has the prototype solutions-oriented company with the expertise required to compete with the big, tier-one IT consultants and outsourcers,but at a much lower cost. Not only is the company reaching scale with an estimated $200 million in annual revenue, but it has already achieved profitability without incurring any debt.

"What we are hearing is that customers are unhappy with the quality of people they are getting from the big outsourcers, who, in an effort to cut cost, are deploying lower-salaried individuals to help customers," Stringham says. "That's led to a customer-satisfaction shortfall we think we can address."

Interestingly, only 7 percent of solution providers say they lose business due to customer dissatisfaction, according to the SOM survey. But, as SBI has demonstrated during the past several years, that 7 percent can translate into a whopping opportunity for a nimble, enterprising organization.

If SBI can make the most of such an opportunity, then, perhaps, so can you.