The VARBusiness 500 Bellwether

How much revenue did the 2007 VARBusiness 500 generate? It was $343,564,927,172. We've rounded that to $344 billion--or 18.7 percent greater than the 2005 tally for the 2006 list. This is the second year of the VARBusiness 500 rebound. Following the dot-com bust, the channel elite suffered a series of low (and even negative) revenue growth years. After all, it was a period of low demand, low supply and low innovation.

That changed in 2005, when the cash started flowing freely again and collective revenue jumped 16.5 percent. The revenue increases reflect the innovative technologies produced by vendors and the superior value-added services delivered by the channel.

But times are changing rapidly, and the challenges to continued success are mounting--labor, interest rates, globalization and consolidation. On a macroeconomic level, companies across all industries are finding it increasingly difficult to recruit and retain talent. According to staffing firm Manpower, 42 percent of all U.S. companies are having difficulty hiring, and the most difficult position to fill is salespeople. When the government opened 65,000 H1B visas for foreign high-tech workers, 125,000 applied in just the first few hours, forcing the closure of applications. Part of the reason corporate profits have skyrocketed over the past several years is the suppression of wages and headcount. Economists say companies have squeezed as much productivity out of their workforces as they can, and they'll have to start hiring, which will lead to wage increases and cut into bottom lines.

Wage increases lead to inflation. The Federal Reserve has held the line on the prime rate, but increasing energy and food costs, as well as the shaky secondary mortgage market and the receding housing market, could stall the economy.

It takes a while for macroeconomic factors to creep into the tech market, but it's possible that any slowdown will crimp IT spending. Many VARs are running up against a Catch-22 with growth: They have either the capital but no people or people but no capital. Part of the reason Javed Khan, CEO of Jeskell (VARBusiness 500 No. 199), sold his company to FusionStorm (No. 138) is difficulty in financing growth. There's no doubt that credit and financing will become some of the most vexing problems facing many of the smaller and midtier VARBusiness 500 companies in the coming years.

When faced with rising labor costs and limited capital, many companies turn to offshoring. Globalization is impacting every facet of the economy, including the channel. The new No. 1 company on the VARBusiness 500, EDS, admits that its misreading of the offshoring/outsourcing trend hurt its business because it didn't capitalize on cost savings from overseas operations. Solution providers--big and small--are no longer competing on a local, regional or even a national scale; they must compete globally. Some of the biggest companies on the VARBusiness 500 are subsidiaries of foreign-flagged corporations: BT Global Services (No. 3, U.K.), BAE Systems (No. 10, U.K.), Atos Origin (No. 15, France), Dimension Data (No. 30, South Africa) and Tata Consultancy Services (No. 32, India). Likewise, companies such as Perficient (No. 171) have acquired overseas assets to augment their capabilities without increasing costs.

Consolidation in the channel is happening, and nowhere is that more evident than the VARBusiness 500. Last January, Logicalis (No. 65) CEO Mike Cox predicted that the channel would constrict to a dozen or so mega-VARs and a few hundred regional VARs with a handful in the middle. We're not quite there yet, but M&As are happening at an increasingly rapid pace.

Economists predict a slowing of corporate revenue and profit growth in the coming 24 months, and undoubtedly, some sectors of the IT market will experience deceleration. If you want to know what's going to happen next, watch the VARBusiness 500.