Managed and Hosted Services Bright Spot for VARs

Managed and hosted services could be a bright spot for channel partners amid the gloom of the recession and IT spending cutbacks, according to a new study from research firm AMI Partners Inc..

The study, announced this week, found despite an expected contraction in overall IT spending in 2009, U.S. channel partners predict their managed services revenue will actually grow by 20 percent in the next 12 months.

“That’s good news for both the channel partners that offer these types of services, and the manufacturers that continue to make significant investments in these solutions. About one out of every three U.S. channel partners offers these types of services, and, ironically, this economy presents a strong opportunity for them,” said AMI senior analyst Avinash Arun. “Revenues from IT services and support, particularly in a slowing market, are important for partners, so many of them are struggling to shift their business models to focus more on value-added services.”

A key reason that partners continue to look for ways to grow their services business is the relatively higher margins they yield compared to hardware. According to the AMI study, U.S. partners stated that they derive, on average, 41 percent margins on sales of IT services, 36 percent on Internet services and 35 percent on custom software development. Comparatively, the margins they earn on sales of computing and networking hardware are typically about 50 percent lower.

According to Arun, this has led to a sales model where partners offer basic, low-margin computing hardware products with the hopes of generating profits by bundling in higher value services such as integration, systems maintenance, support, and training.

Hardware sales continue to contribute about one-third to partners’ total average annual revenue. Despite the increased focus on services, the revenue balance hasn’t changed much over the past year, underscoring the challenge that partners and manufacturers face in making the transition.

For the channel partners’ small and mid-sized business customers, the deteriorating economic environment means increased scrutiny on all IT investments. According to AMI’s most recent SMB quarterly pulse surveys, 67 percent of businesses are expecting decreased revenue in the coming months and 66 percent expect to restrict cash flow during the same time. This, in isolation, appears to be a grim forecast for IT channel partners. However, it could also mean increased services and consulting opportunities, as half of the businesses surveyed also indicated that they plan to look for ways to leverage technology to reduce costs and drive efficiency and productivity.

According to AMI Channels Vice President Ryan Brock, this is good news for the relatively small but valuable segment of partners that are able to provide these consultative, value-added services to SMBs.

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