As business IT spending slows, VARs brace for hard times

The slow IT spending climate, shaken by the failure of Lehman Brothers, will take its toll on solution providers' business.

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The IT spending climate looked bleak Monday as Lehman Brothers -- which survived the Great Depression -- filed for bankruptcy protection, the gigantic insurer American International Group scrambled for capital, and the Bank of America launched a $50 billion rescue buyout of Merrill Lynch.

And, like the rest of the business universe, IT solution providers are carefully picking their way through the rubble.

Market reaction was predictable. The Dow Jones Industrial average fell 2.6% or about 300 points at mid-day. Tech-heavy Nasdaq was down 2.06% or about 60 points.

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As financial services sector trims IT spending, VARs step in

None of this bodes well for business IT spending. VARs and others who provide IT services face a double whammy. First, financial services companies like Lehman tend to be big technology spenders. When their numbers fall, so do the business opportunities for outside tech providers. Second, the overall financial crunch means that even companies not directly involved in this mess will cut back on purchases until the situation is sorted out. (Third, adding insult to injury, many tech solution providers are also investors who will see their portfolios take a hit from this financial meltdown.)

"This is a big deal for all businesses, including IT. Here in Boston, where there's a lot of financial services, it's huge. On Friday, I heard from a wealthy client, who had a bunch of stuff teed up for Q4, that they're cutting back," said Robert Shear, president of Greystone Solutions, a Boston-based IT solution provider.

AIG saw its shares fall nearly 50% Monday afternoon, following a 31% plunge on Friday. It is now selling off assets and has reportedly appealed to the U.S. Federal Reserve for help. While there had been much chatter about Lehman and AIG last week, the news Sunday that Bank of America was buying Merrill Lynch caught many by surprise.

"The truth is -- as an amateur economist -- there's a whole bunch of big enterprises [that] if you honestly valued them would be bankrupt by now," Shear said.

The outlook for business IT spending was already darkening before this week's deluge. A recent Forrester Research report said that more than 40% of the 950 large businesses surveyed had already cut their IT budgets in the second quarter. On the brighter side, the same research showed that spending on related IT services -- including hosted applications -- was stable, with 45% of respondents planning to increase their use of outsourced applications and another 43% planning to outsource networking infrastructure.

A South Florida-based solution provider said his experience bore out these findings. "The economy has to play out. What we're seeing is that [software license] renewals are not the best in the world. People are sitting on their wallets and carefully timing their purchases. But our consulting revenue remains fine," he said.

Gary Berzack, chief technology officer and chief operating officer of eTribeca, a solution provider in New York, said there will be both good and bad fallout for VARs in the New York tri-state area where many of the affected financial services employees affected by the news are based. On the one hand "you will have $250k IT guys from Lehman" out on the market looking to start their own solution provider businesses. That's going to create competition, he said. On the other hand, the financial people coming out of these large firms will take "what's left of their money and fragment into small hedge funds," creating opportunity for VARs that have experience providing technology for financial companies.

Others said they think the disruption will be minimal. "In the IT world, most people plan out 15 months in advance on projects, so unless the market just went into a depression, we won't see much impact," said Mick Gallagher, managing partner with LS Technologies, a Fallbrook, Calif., solution provider specializing in life science-related work.

Having said that, Gallagher admitted that some deployments are being delayed. "What we have seen in the last six months is there are lots of opportunities out there, but the cost of finding those opportunities has risen substantially. We're probably making three times the amount of calls to get the same results we did a few years ago," he noted.

Still, all is not lost in the world of business IT spending. There is only so long customers can put off buying core technology even in rough times, and that bodes well for VARs.

"We are dealing with a lot of companies that are still on 10- or 12-year-old technology. Eventually they have to go new or they can't be competitive and stay in business," said Glenn Conley, CEO of Metropark Communications, a solution provider in St. Louis, Mo.

Putting the current macroeconomic climate into perspective, Conley added, "If you think about it, we had a massive surge in the '90s and we had some rough times in 2001 and 2002, and we got past all of that."

Rivka Gewirtz Little contributed to this report.

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