VARs Brace For Enterprise Network Spending Lull

Economic uncertainty and fluctuating markets could diminish enterprise network spending, with Cisco Systems taking a hit in the enterprise market, a recent study has revealed. But VARs are bracing themselves to be ahead of whatever may come and are looking at other markets to sustain them if the enterprise well dries up.

Jerry McIntosh, national director for Cisco business practices at ePlus, a Herndon, Va.-based solution provider and Cisco partner, said he has yet to see any immediate impact to ePlus' Cisco business in the enterprise, but said uncertainty has him looking at other options in the event a recession hits.

"I wouldn't say that we've seen a slowdown yet," he said. "But we anticipate that things could slow down in the enterprise space."

According to McIntosh, an economic downturn should have little impact on enterprise projects ePlus currently has on the books, and CIOs have assured him that they are committed to complete projects that have been approved and budgeted. However, McIntosh said that while projects will move forward, the pace of those projects could slow down. For example, he said, a $10 million project that was to be spread out over four quarters could now be stretched to take place over five or six.

In anticipation of a lull in enterprise sales, McIntosh said ePlus is taking several measures, some he said he isn't at liberty to publicly divulge.

"We're doing a few things," he said. "There will be an intensified focus and investment in the commercial sector."

By commercial sector, McIntosh said he means accounts that have between $100 million and $500 million in revenue and about 1,500 employees. McIntosh said ePlus isn't waiting for the other shoe to drop before turning up the heat in segments other than the enterprise.

"We're not waiting to see it happen before we make that shift," he said. "We see it coming and we're positioned to change our go-to-market strategy accordingly. It's almost an equal split between enterprise and commercial, so we've got a pretty healthy head start if one tails off a little."

ePlus isn't alone.

A recent CIO survey released Wednesday by Goldman Sachs Group indicates that enterprise network spending is on a decline. The survey, which asked 100 Fortune 1000 CIOs about their 12-month outlook for network-related spending found that 62 percent of CIOs are calling for continued growth in network spending, a six percent drop compared to the previous year's survey. Additionally, 10 percent of survey respondents said they expect to decrease their networking equipment spending over the next year, while 23 percent of respondents said their network spending will plateau.

When asked specifically about their spending with San Jose, Calif.-based Cisco, 34 percent of CIOs called for growth, which Goldman Sachs said is "still far below healthy mid-50s to mid-60s range" that respondents reported in past surveys.

Despite the immediate dip, the survey indicated that trends will remain in Cisco's favor, mostly due to current and future network demands and the need to support more advanced applications.

"We reiterate our view that Cisco is well-positioned to benefit from the network infrastructure upgrade cycle, advanced enterprise technologies as well as bandwidth growth," according to the study.

That, coupled with a potential upturn in the SMB space and other areas ripe for growth, Cisco should remain strong.

"It is important to remember that large US enterprises represent about 13 percent of Cisco's revenue, and are not the engine for growth anymore," the survey indicates. "Growth in SMB, emerging markets, carriers, and the public sector will likely prove more robust than large-enterprise over the next 12 months, and should benefit Cisco as it has significant exposure in these areas."

NEXT: Spending Gets Conservative

Goldman Sachs estimated that Cisco's carrier business and SMB business will likely continue to grow by 20 percent or more year-over-year. In emerging markets, which is 13 percent of Cisco's total sales, should continue to grow 30 percent to 50 percent, the study noted.

Cisco's Chairman and CEO John Chambers, during a conference call to discuss the vendor's first quarter fiscal 2008 financial results, said the company had experienced a slowdown in the US enterprise market, prompting Cisco to overhaul some of its popular enterprise platforms in hopes of jump-starting US enterprise sales. Cisco will host its second quarter fiscal year 2008 financial earnings call Wednesday evening.

"The US enterprise, probably as a surprise to no one, is experiencing some softness," Chambers said then. "We expect and continue to expect US enterprise growth to be very lumpy both by U.S. areas and industries moving forward."

Juan Guivera, director of Cisco solutions for Agilysys, a Boca Raton, Fla.-based solution provider, said his enterprise customers in recent months have been looking for ways to cut costs, but so far, that hasn't eaten into business.

"Most of our customers are coming to us asking to help them find cost improvements," he said. "They're going to be more conservative [with spending]."

Guivera said he foresees traditional network spending trailing off a bit, but added that new technologies that enable convergence and new services will continue to flourish, especially as Cisco continues to make plays in the storage and data center arenas. He said Agilysys will rely heavily on new technologies if enterprise spending on traditional networking gear slides.

"I don't see a cutback on the new products," he said, adding that many customers, despite a possible economic downturn, are investing in technologies that will have a proven ROI, like WAN optimization solutions and Cisco's new Nexus 7000 line of data center switches. "Cisco is going to be depending on partners to push and sell new concepts, such as storage, data center solutions and virtualization. We have to bridge that gap."

Tim Carney, CEO of The Network Guys, a Freemont, Calif.-based solution provider and Cisco Gold Partner, agreed that taking advantage of some newer offerings, like Cisco's data center solutions, could help VARs weather the downturn in network spending. He said he expected to see some projects get put off until the economy stabilizes, but that so far hasn't been the case. Carney added that security offerings will also help VARs stay strong if networking sales dwindle.

"New technologies that have hit the mainstream, like email encryption and others, will weather any economic downturn," he said, because SOX and HIPAA compliance require tight security. "I think there's a looming market there."

Aside from shifting some of its product focus, Carney said The Network Guys has kept staffing levels low in case of a recession and likely won't hire throughout the year.

"We've maintained a skinny staff," he said. "We haven't over-hired, just in case."

McIntosh said it could take up to six months to shake out and see where things stand with both overall network spending and Cisco-specific spending in the enterprise and from there he will adjust accordingly.

"If the economic state worsens globally, everything could change pretty fast," he said. "We're keeping a very watchful eye on the environment."

Carney, too, is keeping tabs on the economy and planning accordingly, depending on how things transpire over the next few months.

"If we can get through another couple of months with low interest rates and so forth, we might just pull out of it," he said.