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As financial services sector trims IT spending, VARs step in

Recent earnings conference calls by IBM, Cisco and HP highlight the troubled U.S. economy and its impact on IT spending, particularly in the financial services sector. But VARs say they have yet to feel the spending pinch.

As far as IT spending trends go, Hewlett-Packard Co.'s fourth-quarter conference call on Monday gave the channel additional insights into U.S. technology spending, which has been affected by difficulties in the housing and credit market as well as a weak U.S. dollar.

The strong earnings Hewlett-Packard (HP) posted last week were encouraging to investors, but showed a weakness in overall IT spending in the U.S. that may be a bad indicator for the channel.

HP's stronger-than-expected fourth-quarter net profits showed revenue of $28.3 billion, up 15% from a year earlier. However, the company's sales were strongest overseas, growing 19% in Europe, the Middle East and Africa and 20% in Asia-Pacific.

Earlier this month, Cisco Systems Inc.'s chairman and CEO, John Chambers, predicted the U.S. IT market would lag during 2008 and stated that orders from U.S. banks showed "dramatic decreases" during the last quarter. In October, IBM's chief financial officer, Mark Loughridge, said his company was already seeing a "financial services slowdown."

Economic trouble stemming from the home-mortgage market could still spread to other sectors and drag down overall spending on IT, but there are no clear indications yet whether that will happen, or when.

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"Commercial IT spending typically trails the general economy by six months," said Joe Pucciarelli, IDC's program director of technology financing and management strategies. "Personally I don't think you're going to see the kinds of broader slowdowns, if they occur at all, until perhaps the middle of next year."

Pucciarelli said financial services companies use IT more intensely than other sectors and have felt some of the pangs of recession sooner than other sectors of the economy.

Checks with many value-added resellers (VARs) show that while they are cognizant of the economic difficulties the financial sector faces, they have not as yet felt the effects of an IT spending slowdown. Most are making preparations anyway.

"I've not really seen any changes. There's no hack-and-slash on budgets," said Britton Almy, senior consultant for enterprise systems and storage at Lewis Center, Ohio-based SARCOM Inc., whose largest customers are regional banks. "A slowdown would tend to follow a six- to eight-month cycle, so going into fiscal '08, maybe the June timeframe, is when we are going to see some of that effect come through."

To buffer any downturn in IT spending, Almy said his company projects a client's IT needs over three years, because companies want to get a three-year return on whatever they are buying. They also want to see the four or five different phases of a project -- a plan that helps clients better assess their IT needs.

"If budgets are great we might combine phases 1 through 3 in the next two months, but if budgets are lean maybe we'll want to spread the project out a little bit further. The thing is to be proactive rather than reactive," Almy said.

Raleigh, N.C.-based VAR Alphanumeric Systems Inc. services midsized community banks and insurance firms that have smaller IT budgets and are looking to curb IT spending.

"Frankly, we have ongoing projects, and people are looking at ways to use the technology they've got more efficiently," said Steve Chase, Alphanumeric's executive vice president. "There are customers that are asking us for project help to accelerate things. We have seen some tentativeness, but no one has pulled the plug on a project," Chase said.

Still, with customers showing caution, Chase has picked up business on the services side from clients that prefer to outsource their IT services instead of hiring additional employees.

"Several financial firms have come to us asking for our engineers to supplement their existing IT team," Chase said. "The services side of our business has gone up by 10% to 20% year over year, in part because of the increase in the needs of our financial clients," Chase said.

Another VAR picking up consulting contracts among financial sector clients is Atlanta-based LatusPoint. The four-year-old VAR has aggressively marketed its services to the financial sector, and its clients include federal and community banks and asset management firms. LatusPoint provides Web, email and security hosting services to these clients.

"We are seeing an uptick in consulting services with the financial sector and we've actually received in the last 30 days two very large purchase orders from two of our clients in the financial service vertical," said Megan Burton, LatusPoint's president. "Our hosting business in the third calendar quarter of 2007 has increased 18% compared to the similar period last year, and a great deal of that is because of the business we picked up with our customers in the financial sector."

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