Many solution providers have enjoyed the robust economy of the past several years, using profits to expand business both organically as well as through acquisition. However, with economic indicators increasingly worrisome--such as continuing high fuel costs and the ongoing turmoil in the credit markets--some solution providers are taking steps to better position their businesses in the event of a slowdown, or even a full-fledged recession.

Although VARs are not of one mind regarding the current business environment, they do agree that now is the time to take stock of business strengths and use them advantageously.

"I do think the U.S. is heading for—if it's not already into—a recession, driven by access to financial capital," says Joe Mertens, president of San Antonio-based Sirius Computer Solutions (VARBusiness 500 No. 77). "It's cyclical, and Sirius has weathered these in the past. Often, the big, well-run companies survive better off. We've come back stronger -- but no one wishes for it."

Not all VARs agree that the U.S. economy is tanking. Indeed, the most recent Purchasing Manager's Index for January rose from the prior month, signally not only stronger performance in the manufacturing sector, but also indicating a slowly growing economy.

"I don't know if we are heading toward a recession," said Shawn O'Grady, president of Boulder, Colo.-based Incentra Solutions Inc. (VARBusiness 500 No. 291). "We are still thinking our business is going to grow. Quite a bit of that is from the businesses we've acquired in the past 12 months. Those companies' customers now have access to a bigger portfolio, so because we're offering more, we are seeing an increase in sales productivity."

Buying smaller competitors is one way successful solution providers have expanded selection and service capabilities. Offering customers more options has meant increased business for Incentra: O'Grady said the VAR has added roughly 10 salespeople from the fourth quarter to the end of the first quarter of this year. And Mertens noted that he's seeing more VARs for sale right now. "They are playing off their strength of last year, but are concerned or worried about making it in 2008," he said.

Business Survival Strategies

Solution providers who still focus entirely or mainly on reselling hardware may be in for a rough year, many executives noted. Because margins are slim on products, expanding a services practice—or starting one—is a practical way to strengthen customer ties. But some solution providers say don't give up on the hardware sale, but rather combine it with a services offering. Customers often are eager to use the solution provider they used to procure the product to provide service.

"There is still a lot of hardware being sold, but the gross profit with services is much higher, say 50 percent in services vs. 5 percent with hardware," said Alan Weinberger, CEO of the ASCII Group Inc., Bethesda, Md., a consortium of 3,000 VARs worldwide. "Hardware prices are going down, while the prices of services are going up. Most of our members want to do the whole job though, because their customers want to know it's going to all work together. They're not going to lose on the deal by calling a distributor to partner with."

But the answer isn't merely getting into services, it's finding the specific services that your customers want and providing them in a world-class fashion that demonstrates you understand they are looking very, very closely at ROI.

With typical product refreshes on longer time frames, customers are forced to focus on solutions for specific business problems. Successful solution providers are aligning their investments with that in mind. Says Mertens: "The typical server hardware business will be very challenged in 2008."

Business survival is all about providing mission-critical, necessity services that clients can't live without. In addition, at the end of the day, they need to have bottom-line consequences that are evident within a relatively short period of time, between 12 and 18 months. "IT service providers that own businesses with revenue that's dependent on break-fix or that are project based are more likely to feel the pinch of an economic downturn," said Ronnie Parisella, founder of Primary Support Solutions. "Managed service providers who offer a flat fee for the proactive support of their customers' networks are less likely to be affected."

As belts get tighter, more customers will look at headcount reduction and redeploying staff as a means of cutting costs. VARs that take on those responsibilities, by being MSPs or acting as de facto IT departments, will benefit.

"Companies like ours will be well off because what they do [for clients] is to reduce cost," said Gabriel Rozman, executive vice president at New York-based Tata Consultancy Services Limited (VARBusiness 500 No. 32). "Companies are looking at technology to see how they can use it to reduce costs."

TCS uses a network of IT consultants from India, China, Latin America and Eastern Europe to provide customers services that are often much less expensive than they could provide for themselves. But, experts said, U.S. firms can also provide outsourced services. They may cost a little more than going offshore, but they'll be geographically closer, and still save customers' money.

"Look at all the positives that are out there: We've got incredible people doing incredible things in the U.S. and we should leverage that," said Bob Venero, founder of Future Tech Enterprise Inc., Holbrook, N.Y. (VARBusiness 500 rank 297). "As opposed to keeping everything inside your company, outsource to other U.S. companies."

Providing managed services and other outsourced services is becoming increasingly popular among VARs, Weinberger noted. But there are other trends afoot as well.

"It's true we're seeing more interest in managed services, but we're seeing resellers looking at Google apps also. There is a major push on that," he said. "We see more emphasis on open source. Google will drive that ... it's a slower process than people think, but particularly on the SMB side, it could take off, especially since there are no licensing costs to deal with."

Think Outside The Box

Today's customers, in addition to tightening their own companies' overall spending habits, are smarter than ever, solution providers say. They are asking questions about standard offerings and are asking for alternatives. Increasingly, those alternatives are open sourced.

"Service delivery in the most cost-effective manner with quantifiable ROI is where open source comes into play," said Alani Kuye, president and founder of Phantom Data Systems Inc., Norwalk, Conn. "Any VAR will tell you that services is where money is made, and open source gets you up and running faster than proprietary software."

Open source's growing appeal to customers is based on the fact that the software is less costly up-front (sometimes free) and there is no hassle involving licensing and fees. It's a reduction in time and cost they can see immediately. That's important, as many executives need instant bottom line gratification.

For those customers who can hold out and realize gains a bit into the future, VARs might consider offering "green" products and services. "We have customers that are building into their RFPs a green initiative. Often we are asked for pricing for a standard solution and a green one," Venero said.

"At the end of the day, there are a lot of hidden costs that crop up that you don't realize: For instance, an LCD may cost more initially, but it uses less energy and is easier to get rid of than a CRT."

It's crucial to monetize all those costs so that the customer can make the best decision. The best time to approach a customer with a green proposition is when they are considering upgrading equipment, especially within a data center.

"CPUs today use a fraction of the power that they did five years ago. Customers get a natural power efficiency through updating hardware. And there is new technology emerging, such asAMD (NYSE: AMD)'s Barcelona, which, because it has hypervisor embedded in it, should produce additional efficiencies in virtualization. And virtualization means using a more streamlined architecture, creating less heat, which uses less energy, and means fewer pieces of hardware, which will need less service," said Rockwell Bonecutter, managing partner for the Accenture Data Center Technology and Operations Practice in America. "It's the holy grail of IT propositions: It's right for the environment, it lets you upgrade hardware and see ROI."

Further, he said the costs of green computing to an organization would be recouped within 18 months.

"It's realistic that you could generate a 30 percent to 40 percent savings in the first year,' said Bonecutter, "and use the savings harvested to fund the rest of the consolidation and virtualization in order to have that positive cash flow within two years."

However the economy unfolds, VARs are going to have to adapt to survive. Those that understand their customers' needs and can come up with innovative, bottom line-oriented solutions will weather the storm intact -- and, possibly, with a healthier, expanded portfolio.