How the economy is impacting your business

VARs don't like the old saw, "If it ain't broke, don't fix it." There has historically been a lot of money in replacing or upgrading perfectly functional technology with something that adds a little "zing" to the equation. But today, that "zing" doesn't mean as much. Customers are still spending, but not on non-essential projects. R.W. Baird analyst Jayson Noland summarizes the situation, saying "It has to be tangible, make sense, and be less than 12 months. Anything that's squishy and nice to have, is just not going to play well in this environment. If you've got a project to replace something you just don't like, it's going to be delayed. You can get by with what you're using longer than what you think. That's true for applications, and that's true for hardware refreshes in general, and you can delay those things whether it's on the PC side or the server side. You can't delay them forever, but you can delay them for a few quarters."

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William Dunn, president of Dunn Solutions Group, has observed that "Things that are purely internally focused, like applications or projects that are employee-oriented, tend to get cut first. So for instance, if there was a thought of doing an employee portal for HR, that might get cut in this type of environment." Joe Brown, president of Accelera Solutions, also sees budgets tightening up and deals getting delayed, saying, "Software and hardware manufacturers who are in the 'nice to have' column tend to suffer more than others do, who are in foundation technology markets."

"People are just holding on," says Steve Ferman, President of Compunite. "They're not making any huge decisions or big purchases, they're just holding onto what they've got and trying to maintain it. That's not always the right thing to do, but in this economy, they're scared and don't know what to do."

But VARs are holding on, and the consensus among VARs is that they haven't felt the brunt of the crisis just yet. Jobs in the pipeline are still there, but there is concern about what is coming next quarter. Jayson Noland, analyst at R.W. Baird, says "Certainly companies that are sitting down at the table now and looking at spending for next year are going to rake the comb through those projects a little deeper. There are some companies that are just in dire straits now, and will put a hold on everything, but I don't think that's the typical company."

Dunn echoes the sentiment. "What I'm seeing is that some projects have been put on hold temporarily while people are getting a read on which way the economy is going. Most of the projects we have in progress are still in progress. I don't think we've had any projects cancel, but in terms of new projects, some have been put on hold while people figure out what's going to happen."

In addition, deal size has become smaller. According to Noland, "say you need a thousand seats of a product for the next year, but instead of buying a big bucket at once and getting a deeper discount, you buy in piecemeal. It's smaller deals, smaller purchase orders, and buy-as-needed as opposed to big strategic buys. That impacts revenue for everybody, the vendor and the VAR."

On the positive side (for VARs, anyway), the negative effects of the slow economy will be mitigated by massive layoffs across the board (such as the recent elimination of 25,000 HP jobs in response to the EDS acquisition), which will result in a shortage of skills. The CFO may mandate a budget cut and staff reduction, but the work still needs to get done - and IT outsourcing will benefit as a result.

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