In-Depth

Half Full? The Channel vs. The Economy

Unemployment remains high, growth projections are modest and systemic risks remain a concern for the economy in 2011. But IT analysts project slightly better growth in technology spending, and Microsoft partners report filling pipelines for the start of the year.

For the start of the second year in a row, expectations for economic growth remain tepid -- with few experts predicting that demand exists for the kind of growth that will pull the global economy out of the giant ditch created by the Great Recession of 2007 to 2009.

In the technology sector, prospects are slightly better as the relatively stable economic environment seems to be reassuring buyers that hardware and software upgrades are once again a sensible investment.

And as always in the IT industry, companies that are in the right place at the right time can hit it big. As Microsoft partners assess their actual 2010 revenues and check their 2011 revenue expectations against the reality of their first quarter pipelines, many are encouraged by what they're seeing.

The Big Picture
Overall for 2011, the economy is throwing off a lot of mixed signals, which isn't a major change from 2010 when recurring European debt crises roiled markets in the short term, but stocks performed extremely well through the whole year; corporate profits were high, but so was unemployment; and housing markets continued to bump along the bottom worldwide.

For the global economy in 2011, even New York University economist Nouriel Roubini, whose bearish predictions over the last few years earned him the nickname "Dr. Doom," is calling for global economic growth of as much as 3 percent -- but with caveats. A major source of late 2010 optimism came from holiday season sales, which were relatively robust.

Still, the elephant in the room, no matter how positive growth projections get, is unemployment, with its significant drag on worldwide demand. There was some good news in the United States in January, when the U.S. Bureau of Labor Statistics reported that the unemployment rate fell to 9.4 percent in December from 9.8 percent the previous month. That new unemployment rate represented a 19-month low.

"After seeing a delay in refresh cycles during the recession, IT decision makers across the board are evaluating current technologies and planning to invest in areas that will bring value to their organization."

Thomas E. Richards, President and COO, CDW

But, of course, that wasn't the whole story. Much of the drop came because the official statistic no longer counts people who have stopped looking for work. Once those people start looking again, the unemployment rate may go back up. The other piece of negative news in the latest unemployment report was that the U.S. economy added only 103,000 jobs in December. While certainly an improvement over the approximately 700,000 jobs shed in a month at the nadir in January 2009, it's nowhere near the pace needed to restore America to full employment. A graphic by the Hamilton Project circulating widely around the time of the December jobs report showed that with the average monthly job creation rate of the best year of the 2000s (208,000 jobs per month in 2005), it would take until 2022 to recover all the jobs lost in the recession. The December increase in jobs is only about half the rate needed to recover all those jobs in 11 years.

Meanwhile, housing prices stayed well below the peak, and a dip in sales figures toward the end of 2010 raised fears of a coming major drop in U.S. house prices with the market's ongoing backlog of foreclosed properties.

Even as the general economy makes a slow recovery, systemic shocks upset any progress. Financial reforms in the United States seemed to do little to stem the consolidation at the top of the banking system -- in many ways it's gotten more concentrated making the too-big-to-fail banks even bigger compared to the overall market. The banks also face increasing legal scrutiny over mortgage paperwork as they move forward on housing foreclosures. And another obvious issue that could derail any global recovery is the ongoing possibility of a default of a major European government, such as Greece, Spain, Portugal or Ireland.

Three years after the start of the recession, the question of what alphabet letter will best describe it remains open. Out of the four main candidates, V-shaped, U-shaped, L-shaped or W-shaped, only the best-case, V-shaped possibility has been eliminated. The double-dip recession represented by the letter W remains a discussion point among economists, while the L-shape that defined Japan's recent decade remains a haunting possibility. The new best case now is the U-shaped recovery.

IT Spending
While the economic growth forecasts are moderate for 2011, observers are expecting IT spending to do better than just piggyback the overall economy.

Analysts at market research firm IDC are forecasting a solid year of recovery in IT spending. Worldwide IT spending is expected to hit $1.6 trillion, an increase of 5.7 percent over 2010. Hardware spending is expected to be one of the best areas, IDC projected in December, with the space projected to bring nearly 8 percent growth. Software spending was expected to jump by more than 5 percent and related project-based services spending is expected to increase by 3.5 percent. Outsourcing is also supposed to see gains of about 4 percent in 2011, IDC said, a projection that is borne out by a construction boom among India's largest technology companies. In December, The New York Times reported on a futuristic new complex for 24,000 employees of Tata Consultancy Services (TCS) in Siruseri, India, and a new 15,000-employee campus for TCS's national rival Infosys.

Last month, analysts at Gartner Inc. revised their 2011 IT spending predictions upward to 5.1 percent, but mostly to account for currency exchange fluctuations in the U.S. dollar-denominated forecast.

Gartner now projects IT spending to hit $3.6 trillion in 2011. The firm's forecasts are substantially higher than IDC's because the Gartner figures include telecom equipment and services. Compared to 2010, that's an expectation for slightly slower growth. In 2010, Gartner estimates that IT spending came to $3.4 trillion, which is 5.4 percent higher than 2009 outlays.

The new 5.1 percent growth outlook improves on a 3.5 percent growth prediction, issued in October. According to Gartner, 1.6 percentage points of the 2.2 percentage point increase is due to the devaluation of the U.S. dollar against other currencies.

"Aided by favorable U.S. dollar exchange rates, global IT spending growth is expected to exceed 5 percent in 2010, but a similar level of growth in 2011 -- while forecast -- is far from certain, given continued macroeconomic uncertainty," Richard Gordon, research vice president at Gartner, said in a statement.

"While the global economic situation is improving, the recovery is slow and hampered by a sluggish growth outlook in the important mature economies of the U.S. and Western Europe. There are also growing concerns about the ability of key emerging economies to sustain relatively high growth rates. Nevertheless, as well as a fundamental enabler of cost reduction and cost optimization, investment in IT is seen increasingly as an important element in business growth strategies. As the global economy repairs itself in coming years, we are optimistic about continued healthy spending on IT."

By IT sectors, Gartner projects increases of 7.5 percent on computing hardware, 7.5 percent on enterprise software and 4.6 percent on IT services.

Music to the ears of Microsoft partners comes from a CDW survey released in mid-December. In a survey of more than 1,000 IT decision makers, CDW found that 46 percent rated IT investment as a top spending priority in 2011, up from 36 percent in a year-earlier version of the survey. For partners hoping to pivot off Windows 7-based PC sales in the new year, the CDW survey had more good news. More than half, 55 percent, planned to purchase new PCs. Other areas where CDW respondents planned to spend were mobility (34 percent) and virtualization (32 percent).

"After seeing a delay in refresh cycles during the recession, IT decision makers across the board are evaluating current technologies and planning to invest in areas that will bring value to their organization," Thomas E. Richards, president and COO of CDW, said in a statement. "Solutions like virtualization, which reduces operational costs and helps to eliminate downtime, also will play a stronger role in demonstrating the growing business value of IT."

Among small business IT decision makers, CDW is seeing more confidence in terms of spending plans than at any time since the recession began in December 2007.

Forty-nine percent of IT decision makers at small businesses expect to replace or install new hardware in the next six months, CDW reported last month from a survey run from Nov. 30 to Dec. 6. That figure was up 10 percentage points from the October version of the survey. CDW also reported that the "robust confidence level among small businesses is echoed in the medium business segment. Ninety percent of IT decision makers at medium size businesses expect to purchase new hardware in the next six months, also up 10 percentage points since October 2010."

"[Our pipeline is] very strong compared to last year. We have both verbal and signed agreements to give us a Q1 better than last year."

Bob Longo, Vice President of Business Development, ClearPointe

Hot Technology Areas
Analysts at IDC predict that three technologies in particular will ignite some spending in 2011 -- cloud services, mobile computing and social networking.

"In 2011, we expect to see these transformative technologies make the critical transition from early adopter status to early mainstream adoption," Frank Gens, senior vice president and chief analyst at IDC, said in a statement. "As a result, we'll see the IT industry revolving more and more around the build-out and adoption of this next dominant platform, characterized by mobility, cloud-based application and service delivery, and value-generating overlays of social business and pervasive analytics. In addition to creating new markets and opportunities, this restructuring will overthrow nearly every assumption about who the industry's leaders will be and how they establish and maintain leadership."

IDC sees spending on public IT cloud services growing at more than five times the rate of the IT industry this year, or 30 percent. The analyst firm sees SMBs leading the way for cloud usage.

"What really distinguishes the year ahead is that these disruptive technologies are finally being integrated with each other -- cloud with mobile, mobile with social networking, social networking with 'big data' and real-time analytics," Gens said. "As a result, these once-emerging technologies can no longer be invested in, or managed, as sandbox efforts around the edges of the market. Instead, they're rapidly becoming the market itself and must be addressed accordingly."

Gartner analysts are also looking to cloud computing, smartphones, tablets and social computing as big drivers in 2011, but also identified another key trend for the year. At the Gartner Symposium/ITxpo in October, global head of research Peter Sondegaard said one huge factor will be context-aware computing, described as a new Internet fabric based on the proliferation and availability of wireless technologies coupled with an explosion of intelligent devices in the hands of consumers, which are beginning to drive corporate usage.

"The right business processes which dominate enterprise organizational architectures today are well-suited for routine, predictable business activities. But they're poorly suited to support people whose jobs require discovery, interpretation, negotiation and complex decision making," Sondegaard said. "Social computing -- not Facebook, or Twitter, or LinkedIn, but the technologies and principles behind them -- will be implemented across and between all organizations, it will unleash yet-to-be-realized productivity growth, it will contribute to economic growth." Sondegaard also predicted that "pattern-based strategy," a framework for proactively seeking patterns from traditional and non-traditional information sources related to the above converging trends will drive innovation and spending this year.

(To see how Microsoft plans to roll out technologies for partners to sell in 2011, see "The 2011 Microsoft Roadmap.")

Partners Have High Expectations
With a wave of strong 2010-branded products to push last year, many Microsoft partners report that they wound up the calendar year strong and are enjoying full pipelines.

Jeff Johnson, CEO of Little Rock, Ark.-based ClearPointe, leads one of those firms that has been in a good position the last few years, with its managed services provider (MSP) business. "This year our growth will be more like 50 percent, the same as 2010, which came in at 54 percent," Johnson says. Johnson's optimism is supported by ClearPointe's current pipeline, which according to Bob Longo, vice president of business development for ClearPointe, is "very strong compared to last year. We have both verbal and signed agreements to give us a Q1 better than last year."

Howard M. Cohen says the experience of ClearPointe falls on the higher end of the range of feedback he's getting from other partners in his role as communications chair for the U.S. board of the International Association of Microsoft Channel Partners (IAMCP).

"While it's still a little mixed, more members are telling me that their business is increasing, and quite a few more are apologizing for taking so long to reply because they're so busy. That's obviously nothing to apologize for. It's great. Busy means business. I guess I give more credence to it because it's so matter-of-fact. I believe the smart partners are all enjoying growing pipelines," says Cohen, who is also senior resultant for the TechChannel Partners' Results Group Inc.

WORLDWIDE IT SPENDING FORECAST (BILLIONS OF U.S. DOLLARS)
2010 2010 2011 2011
Spending Growth (%) Spending Growth (%)
Computing Hardware 364.1 8.9 391.3 7.5
Enterprise Software 235.9 6.1 253.7 7.5
IT Services 782.0 2.5 817.9 4.6
Telecom Equipment 426.6 14.0 465.4 9.1
Telecom Services 1,593.0 3.9 1,647.4 3.4
All IT 3,401.6 5.4 3,575.8 5.1
Source: Gartner Inc., January 2011

"Remember that we're coming off year-end, where partners are more focused on what they've just accomplished and heading into their planning for 2011. I'm consistently hearing astounding numbers like 25 percent year-over-year growth in this tough market. Part of that is probably because 2009 was so awful, but I believe a big part of it comes from the incredibly smart things members are doing to build their businesses and create better customer solutions," Cohen says.

John Joyner, a Microsoft MVP with ClearPointe, is also reporting strong interest in standard, on-premises products. "There's no move away from the core Windows, Active Directory, SQL Server [and] Exchange stack. Demand remains high," he says. He says ClearPointe customers are seeing a lot of value in several other Microsoft technologies, including OCS/Lync, Forefront and System Center.

Those experiences are in line with the areas Microsoft says saw good growth in the first quarter of its fiscal 2011, which covered the period from July through September, the most recent quarter for which Microsoft had reported financial results at press time. (Microsoft planned to release its second quarter results, covering the rest of calendar year 2010, in late January.)

Discussing those results in late October with financial analysts, Microsoft CFO Peter Klein said, "The Microsoft business desktop is thriving, with enterprises and small and [midsize] businesses investing in our products and services. Not only are companies adopting Windows 7 and Office 2010 at historically high rates, they are also investing in our Office productivity platform including SharePoint, Exchange, Dynamics CRM and Lync, the newly re-branded Office Communications Server, all of which grew double-digits this quarter. The server and database businesses had strong momentum as our datacenter and cloud offerings remain a top priority for our customers as they continue to adopt the Microsoft platform."

For IAMCP's Cohen, 2011 seems to be shaping up as a two-wave year. "If I were wearing my Kool-Aid-sipping hat, I'd tell you it's all about the cloud. But I think we're going to see a double wave this coming year that smart partners ought to focus in on. The first wave will come as partners become more effective at showing their customers that cloud computing strategies simply do provide better service at lower short-term and long-term cost. That's just undeniable, which is clearly what Microsoft leaders like Vahe Torossian, Kevin Turner, Jon Roskill and others have been telling us. Don't deny it, don't resist it. Roll with it and build yourself solid recurring revenue streams," Cohen says.

"But the second wave is even more exciting to me. I can best sum it up by asking 'what's the biggest obstacle to initiating a SharePoint project?'" Cohen asks. The answer, Cohen says, is the actual implementation of a SharePoint server, which is a big decision because it's a big expense and a time-consuming process.

"Enter Office 365 and the SharePoint service is just right there waiting for you. It begs the customer who hesitated because of the big price tag to find ways to take better advantage of what they've already bought," Cohen says. "Smart partners are creating small SharePoint 'apps' for their BPOS customers to try out. Gets customers thinking about what else they could be using SharePoint for. [That] sells lots of training and consultative support."

Cohen believes that as the year progresses, partners will stop looking at cloud as a technology and see it simply as being an enabler. "Provisioning is just less expensive than purchasing and procurement. I think smarter partners are looking at this now and figuring out how to best leverage it come June or September when Office 365 actually arrives."

In any case, hot technology opportunities abound for partners nimble enough to grab them in traditional, on-premises implementations, in the cloud and in social computing-enablement scenarios. Fast-filling Q1 pipelines are an unequivocal positive sign for the year ahead, although smart partners will keep it in the back of their minds that everything about this gradually improving economy could change in an instant.

As Scott Glenn's character says in "The Bourne Ultimatum," "Hope for the best, and plan for the worst."