As 2017 approaches, IT channel analysts and executives can all agree on one thing: Changes are ahead.
This past year saw many channel partners taking bold steps to change their businesses, resulting in upticks in their revenuegains. Tech acquisitions were almost a daily occurrence, and new competition from nontraditional sources cropped up in unexpected places. And while the IT industry was dedicated to business transitions throughout 2016, more change is on the way. With the election of Donald Trump and formation of a new administration that could potentially introduce sweeping changes to tax and trade policies, channel executives will likely see an impact on their businesses and customers in the 2017 Trump economy.
The small and medium-sized business (SMB) market -- a key segment for the channel -- appears upbeat about the current state of the economy and bullish about the impending Trump economy, said Anurag Agrawal, CEO of Techaisle, a market research firm that closely follows the SMB segment.
Agrawal, while acknowledging "pockets of opposing views" within this segment, said "in general, businesses are looking for change." Trump's campaign promises, such as to restructure taxes, reduce healthcare costs and increase manufacturing within the United States, resonated well with SMBs.
"It's [a] hope-driven business positivity," Agrawal said of the general mood, "but nobody knows whether it will come to fruition or not."
IT trade organization CompTIA described the current business climate as cautiously optimistic in its preview of its IT Industry Outlook 2017 report, which it will publish in January. "From a channel perspective, you want a positive business climate, and that is something that Trump has spoken about," said Carolyn April, senior director of industry analysis at CompTIA. However, it's unclear how the incoming administration intends to execute on its goals for improving economic conditions. "It's going to be interesting for us to just watch and see ... at this point."
Jamison West, president of Arterian, a Microsoft cloud solutions provider and subsidiary of Aldridge, said Arterian's customer base is generally optimistic about the 2017 Trump economy and increasingly interested in moving more of their workloads to the cloud. "Every time there's an election, first you get some interesting shifts in how people are feeling bullish or nervous about what's going to happen from an economic standpoint. And once the election is three days in the past, everyone calms down and gets back to business."
According to Charles Weaver, CEO of MSPAlliance, the coming year heralds more growth for IT services and bodes well for managed services providers (MSPs). He cited Gartner research on global IT spending, published in October, which stated that spending on IT services was on pace to grow 3.9% in 2016 to reach $900 billion, and increase to 4.8% in 2017 to reach $943 billion.
"We're getting strong signals from the new administration that corporate taxes are going to be reduced significantly and regulatory burdens on small businesses particularly will be reduced significantly. Those two things ... are having an undeniable impact, and the growth that that should produce is going to be very real," he said.
Offshore outsourcing: The Trump administration's impact
Some industry watchers expect the election of Trump to have a major influence on the industry. In a blog post, Phil Fersht, CEO and chief analyst at HfS Research, an analyst firm in Cambridge, Mass., that covers IT services, contended president-elect Trump's anticipated protectionist policies will discourage offshore outsourcing.
In offshore outsourcing, companies in the U.S. hire vendors with personnel in low-wage countries to take advantage of labor arbitrage. IT outsourcing and business process outsourcing (BPO) contracts may have an offshore component, for example.
"Change is going to happen, and it will likely have a very significant impact on global IT and BPO service delivery," he wrote.
However, Bozhidar Hristov, senior analyst at Technology Business Research Inc. (TBR), a technology market research company based in Hampton, N.H., said he believes policy changes -- and their impact -- may not be immediate due to the legislative process.
"It might be a while before actual policies have a direct impact on IT services revenue," Hristov said. Hristov said he may have to go back and revise his thinking in mid-2017 if something drastic occurs.
While IT services companies that rely on offshore labor may take a hit, cloud service providers may actually benefit from any anti-offshoring policies. Fersht said enterprises may shed legacy systems support through offshore contractors and, instead, adopt cloud-based offerings that don't relay as heavily on offshore labor.
Vertical opportunities: Security help wanted
Channel partners may find success in a number of familiar verticals, especially when approached from a security angle. Weaver said that financial services and banking will remain at the forefront of vertical market opportunities. Healthcare, to a lesser extent, will remain a dominant vertical market as well.
"I think that banking [and] financial services are going to be seeing a boom time over the next five to 10 years that we've never seen before. There is no way that internal IT departments for these organizations have anything close to a real chance at stopping [the security threats] being aimed at them," he said.
These organizations will need to rely on IT service providers to help them bolster their security and monitoring and management capabilities as well as determine what assets require protection and from whom.
He said in the 2017 Trump economy he also expects to see expanded opportunities related to national infrastructure protection, which would include everything from protecting power, water treatment, city services, city government, municipalities, and banking and financial services at the national, state and local levels.
Data storage in light of Brexit
Political upheavals, of course, were not limited to the U.S. in 2016. The United Kingdom's vote to leave the European Union (EU), or Brexit as the move is called, took place last June, but the negotiations that will make the split a reality are expected to begin in March 2017.
Spiceworks' annual State of IT report suggests Brexit is on the minds of many in the IT industry. The company, which runs a network for IT professionals, surveyed about 900 IT buyers in North America and EMEA for its report. Among the findings: Nearly half of the survey's respondents aim to keep their data close to home in light of Brexit and political change. Forty-seven percent of the IT buyers said "they're not up for rolling the dice on where they store their data," according to Spiceworks.
Brexit has created concerns over the potential for a patchwork of privacy regulations. While the EU would operate under the General Data Protection Regulation, the U.K. would presumably have its own laws. The trend toward data localization could affect managed services and cloud providers with international operations.
Tony Connor, head of EMEA marketing at Datapipe, also cited data localization as an issue surrounding Brexit. He said Datapipe has been registered for EU-U.S. Privacy Shield certification. Privacy Shield provides a framework for protecting personal data moving from EU nations to the U.S.
"This gives peace of mind for EU companies whose data is processed in the U.S.," Conner explained. "However, we believe that data sovereignty is a growing key concern and a number of businesses are actively looking to keep their critical and sensitive data local now. Not just local in the sense of the EU but local to their country."
Connor noted that Amazon Web Services (AWS) and Microsoft Azure have deployed local regions within the U.K. He said within a day of AWS' announcement, Datapipe received an inquiry from an existing customer that asked whether it could move its AWS deployment to the U.K.
"This demonstrates that there is demand for local data centers, and we believe the demand is not just because of Brexit; it is because data sovereignty is a growing concern."
Hristov said Brexit will keep the industry in a wait-and-see mode as negotiations unfold. But he noted that at least one part of the IT services sector stands to benefit from Brexit. He said the larger, multinational consulting firms view Brexit's potential for disruption as an opening to provide advisory services.
"They see [Brexit] as an opportunity ... for consulting," he said.
The Trump economy: The impact of automation
Hristov said discussions around Brexit and the Trump administration have ignored a trend that may have a bigger impact on IT: automation. He said few people in the mainstream media are talking about automation's impact on the IT workforce and the complexity of creating jobs that are augmented, rather than displaced, by automation.
"That is the bigger piece of the equation that is going to start impacting the market," Hristov said of automation.
Fersht, meanwhile, suggested the Trump administration's offshoring position could well accelerate the trend toward automation as an alternative to offloading IT chores to overseas personnel.
Professional services sector to rebound
TBR expects modest growth in the professional services sector. The company is projecting a 4% expansion in 2017, based on its study of 50 professional services companies. The group includes large service providers offering BPO, management consulting, systems integration and cloud among other services.
The anticipated increase represents a turnaround from 2014 and 2015, when TBR reported a professional services revenue decline. The companies in TBR's study group saw a collective revenue gain of about 2% in 2016. TBR noted areas such as cloud computing and analytics are expected to grow in the double digits, but added that those markets represent a small portion of total professional services revenue.
Hristov said the sector will see a momentum boost as proof of concept projects around digital transformation become larger-scale engagements.
"It's a rebound from what we have seen in the last couple of years," he said of professional services growth prospects next year.
Expanding channel portfolios, business models
The channel in 2016 "has done rather well despite the fact that there are challenges," Agrawal said, noting nearly two-thirds of channel partners have seen their revenues increase. These companies have taken "bold steps to really transform their businesses," he said.
Looking ahead, Agrawal said partners should focus on four generic technology areas that go "hand in hand" -- cloud computing, mobility, security and collaboration. Internet of things, for those partners that are ready, is another area for partners to target, as SMBs gear up to invest in IoT initiatives.
He added that partners must also start paying attention to cloud orchestration, specifically application orchestration and data integration. In terms of application orchestration, partners have focused more on selling applications and services but should now look to play an advisory role in guiding their customers through their cloud adoption journeys. As for data integration, partners should help customers connect the applications proliferating in their organizations and break down the silos.
Arterian, which targets the SMB market, has seen its customers' attitudes toward cloud change in recent years. Customers now generally trust that the cloud offers stability, speed and security and understand the value of "making operational expense out of everything they do instead of large cash expenditures." Whereas customers had previously questioned whether or not they should move any infrastructure to the cloud, he said they now are asking, "What should we move to cloud next?"
New York-based company Valiant Technology, an MSP that focuses on the creative industries, such as advertising and media companies, also recognized this shift among its clients' attitudes and has retooled its business model to embrace the changes.
"For the past five or six years, we've seen a slow decrease in the tech spend when it comes to hardware investment -- just a gentle decline ... as there's been more BYOD [and] a rise of cloud replacing on-premises solutions," said Thomas Clancy Jr., president of Valiant. As a result, Valiant has increased its skills and changed its orientation from general day-to-day tech support operation to consultation, business intelligence, CRM and integration of multiple cloud platforms.
MSPs will likely make strides, augmenting their portfolios and the revenue that they derive from their managed services offerings, April of CompTIA noted. For the last decade or so, the channel has made a slow transition into the managed services business model, yet managed services continues to represent only a fraction of many firms' total revenue. April said she expects to see "an iterative movement" of companies deriving more of their total revenue from managed services next year and for the adoption rate of managed services to grow.
April also predicted that MSPs will begin to augment their bedrock businesses with advanced services around data analytics, cloud infrastructure, software as a service and IoT. Additionally, more MSPs will look to develop a business-centric, consultant-type bent to their sales conversations and services.
Mergers and acquisitions in the IT services arena -- a big trend in 2016 -- will likely persist next year, April said. Growing competition from nontraditional channel firms will also likely endure in the 2017 Trump economy. These nontraditional firms run the gamut from pure consultants to the army of partners connected to the SaaS-ISV community. She noted that even non-IT companies, such as law and accounting firms, well versed in the particular software that they use, have entered the space via referrals.
Both April and Weaver agreed that one the biggest challenges for partners going into 2017 will be around staffing and acquiring talent with the right skill sets to address new technologies and industries.
"That's been a challenge for some time, and I don't see that subsiding," April said.
Adjacent to hiring issues, she added, is the fact that the channel is aging. The industry will soon have to figure out how to get young people interested in filling the void created by numerous channel executives that will soon hang up their hats.
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