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Cautiously Optimistic
 The first half of FY2009-10 has been a mixed bag for partners. While their business outlook for H2 looks positive, challenges remain
When CRN conducted the Channel Confidence Survey in May 2009, most solutions providers (SPs) and corporate resellers had projected a growth of more than 20 percent for the April-to-September (H1) period of the current financial year. The sentiment among respondents was that of optimism. Six months later, though the mood is still upbeat, there’s a significant amount of caution as well.
Of the 145 business partners polled in the newest survey, over 50 percent respondents said that H1 was below their expectations. The primary reason given for this was that the JAS quarter, which is usually a high-selling period, didn’t fare as well as expected.
“There was the expectation that with economic sentiments improving and good quarterly results posted by most sectors in AMJ we would see enterprise buying, which had been dormant for the last three quarters, kick-start in JAS. While we did see resumption of enterprise buying, the capex allocation was much lower than expected,” says KV Jagannath, Managing Director, Choice Solutions.
Agrees Piyush Vibhakar, Director, Insight Business Machines, “Our expectations for H1 haven’t been met. The reason is that customers are still cautious and yet to get into the capex mode. In the segments we operate—BFSI, media and entertainment—the focus of companies is still on consolidating costs and doing more business with what they have. They are waiting for the demand for their products and services to pick up, and only then will they look at expanding capacity. That’s when we expect the IT capex cycle to kick in.”
For Ashtech too H1 was below expectations. “Sure, sentiments have improved, but not to the extent we would like. In September, we saw many customers showing interest in resuming purchases. However, the conversion rate has been slow because they are taking time to make decisions,” comments B Shankar, Director, Ashtech.
Half-full or half-empty?
While half of the respondents weren’t happy with their H1 performance, the other half, mostly catering to verticals such as government, education and manufacturing, met their targets for the first half of the year with as many as 10 percent over-achieving it.
Ace Brain, a government reseller, has seen above-expectation growth. “Governments are investing in IT with purpose and speed. The approval of projects has become fast, and the deal size bigger,” says Yogesh Godbole, CEO, Ace Brain Systems.
According to him, apart from a number of states investing in data centers, the upgradation of LAN infrastructure across government departments is happening in a big way. “Another focus area for the government is going to be security. Across states, several biometric security projects are on. Maharashtra, for instance, is deploying biometric solutions across 16,000 government offices.”
Opines AL Srinath, CEO, Shell Networks, “The education sector has been a growth area for us during H1. The demand from education remains robust, and we have bagged several campus network projects.”
Surprisingly, for most SPs, manufacturing emerged as the high-demand sector. This sector, which was one of the first-hit and most-hit by the slowdown, has been the first to revive IT spends. “Manufacturing has seen significant investments going into automation as a means to make its processes efficient. While small manufacturers have been investing in ERP automation systems, large companies have been investing in upgrading from an older version of ERP to a newer version,” explains RS Shanbhag, Managing Director, ValuePoint Systems.
Focus on services
Nearly 72 percent of the respondents said that their services revenue has seen positive growth compared to product sales which has either stagnated or taken a negative trajectory. An apparent reason for the higher services revenue is that in the AMJ quarter most customers renew their AMC and FM contracts. Another reason for the increased focus on services was the lower IT capex among customers.
“Many of our clients didn’t want to invest in new solutions,” says Srinath. “Rather, they wanted to optimize their existing infrastructure and hence we began offering them facility management services. This taught us something important: that customers are willing to pay for services if you can prove the value of the services. The focus on services has also helped us maintain our bottom-line during the slowdown.”
Following the shift in the customer’s mindset, Kinfotech has entered the field of managed security services (MSS). “We are already offering MSS to customers in the education sector, especially those who have institutes in many cities,” informs Prabhakar Kini, Managing Director, Kinfotech.
With the importance of services growing, a considerable number of partners (41 percent) said that they have moved into RIMS during the past six months. “Due to the slowdown, many customers wanted to renegotiate their annual contracts by almost 30 percent. We knew that such a deep discount would impact our profits badly. The alternative was to optimize our service delivery system to ensure cost-effectiveness, and that’s where RIMS has come to the rescue because it allows you to provide better service with less field staff,” says Jiten Mehta, Director, Magnanimous Systems.
What’s in store for H2?
SPs are optimistic that enterprises will come to the buying table in the JFM quarter. A large number of respondents (44 percent) said that their customers have begun to plan their IT capex cycle and are likely to go into an investment mode in Q4. However, there still remains a certain amount of caution, with almost 36 percent of respondents suggesting that their customers are still not confident about the economy and have not yet started thinking about capex.
Deepak Jadhav, Director, Enhanced Software Solutions, believes that customer sentiments are delicately poised. “On one side things are looking up, but there’s still the fear that the economic revival may be short-term, hence they are moving slowly on any planned investment.”
Despite the caution, partners seem to be preparing themselves for demand resumption. This preparation includes focusing on areas which promise to help customers save costs: data center solutions, virtualization, unified communications (UC) and SaaS.
Many respondents believe that the slowdown may have brought a shift in the way customers invest in IT. “Optimizing capex, reducing infrastructure management costs and creating more overall efficiency will drive their investments, hence we have moved into areas such as virtualization, UC and data center solutions,” states Vibhakar.
Vasant Vartak, CEO, Kalyx Infotech, is betting on virtualization. “Many of our mid-market customers are talking about thin clients and virtualization. There are a lot more inquiries from them to know how this can help bring down their costs. While I don’t think they will immediately invest, the customer buzz is positive.”
Having seen good results from IT firms, many are hopeful that the demand from IT and ITeS will soon revive. There are also expectations that the demand from BFSI and telecom will go up. The good showing by stock markets may lead to the expansion of financial services companies which in turn will fuel demand. Banks, which have been cost consolidating, have seen good results in H1, and this will eventually result in them going into a branch expansion mode. With 3G on the anvil and new entrants getting into the fray, expectations from the telecom sector are high. However, many partners apprehended that the issues surrounding the allotment of new licenses and the delay in awarding 3G licenses remain factors which could prevent this sector from doing well in JFM.
The government will continue to fuel demand, but education, which has been a top-performing vertical, may take a back seat in the second half. Shell, which has entered the IP security surveillance space, forecasts that government spending on physical security will climb. “An estimated Rs 300 crore worth of IP surveillance projects are up for grabs in Delhi alone courtesy the upcoming Commonwealth Games as well as the increasing focus of the government on installing the latest physical security solutions across its departments and critical establishments,” Srinath says.
Godbole has similar views. “NIC has readied applications for a number of departments. These applications can be deployed by the states very fast, with minimum customization. A number of departments across states will therefore start computerization or upgrade to new infrastructure. The state wide area networks which are coming up in several states will see fresh tenders for buying more PCs.”
Vendor support needed
With payment delays still an issue, SPs polled expect vendors to provide financial support for large projects. Other expectations partners have from vendors include more qualified leads, more marketing funds for business development, and more qualitative support.
“It’s imperative that in tough times vendors help partners to generate more business, and for this they need to provide better marketing support,” says RP Harish Kumar, CEO, Connoisseur Electronics.
“I am not sure what I need to do at this juncture because markets are changing, new technologies are evolving, and innovative business models are emerging,” comments Vartak. “I believe that several mid-market partners like us are finding it difficult to take decisions about the next course of action. Vendors need to help partners move to the next level, to a more solutions-centric business. When business is less they also need to help partners with leads and closure, utilizing their own account management teams more effectively.”
Adds Anirudh Shrotriya, Director, Shro Computers, “Vendors are increasingly advising us on bottom-lines and margins because they have begun to realize that channel partners are not profitable. However, we would like some concrete action from them to ensure partner profitability, action that will actually ensure margins for us.”
The CRN Channel Confidence Survey shows that while there are a lot of expectations from the market in H2, there is also much caution. What is heartening is that channel partners are reinventing themselves to meet the evolving needs of their customers. Staying relevant in a changing market scenario will decide how well they do over the next six months and beyond. |