The widening credit crunch and fear of recession have led to a drop in confidence among IT buyers. New projects are being delayed or sliced into smaller pieces that are easier to pass through the purchasing and financial departments. Rather than invest in new kit, companies have begun to make the most of what they already have.
The vast majority of companies have a patchwork of technology that has been purchased and installed over the course of years, and as the belts get tightened, those in the channel that can service legacy systems and integrate them with emerging technologies are in a good position.
“Despite the advent of newer Web 2.0 technologies and platforms, the stark truth is that the majority of global organisations still run their IT infrastructures on systems that have been installed, in some cases, for many decades,” says David Stephenson, director of UK sales at software provider Micro Focus.
“Today’s economic climate is forcing all departments to tighten their belts when it comes to spending, meaning an IT overhaul or implementation of an entire new infrastructure is highly unlikely,” he adds.
Stephenson maintains that the cost of overhauling systems that have been in place for several years is expensive and risky.
“The implementation of major new systems always involves disruption to the business and this is not the time for major companies to be distracted by these types of problems,” he says.
Paul Phillips, channel sales director at network vendor Extreme Networks, says customers are prolonging the life of their networks, rather than renewing them, as they would have done in the past.
“The trend I see is that customers will not upgrade unless they are
adding another application to the network, like video or VoIP. Not many customers that I see want their networks to run faster,” he says.
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Change the business model
For resellers who have based their businesses on selling new hardware and new systems, the changed economic climate means difficult choices. Resellers can cut prices and continue to look for new deals that are likely to be increasingly elusive, or they can turn themselves into a services business.
But selling services is not easy. Reseller sales teams are used to selling the features and benefits of particular products, rather than the longer-term consultancy needed to justify a service contract. There are other costs involved: a highly qualified network engineer expects a salary of £70,000 plus overheads; more than most resellers are willing to pay.
Some resellers are turning to third-party service providers likes Crewe-based Comms-care, which is a channel-only based business that offers resellers a wide range of network support services, round the clock system monitoring and service desk facilities that are often beyond the range of the ordinary reseller.
“We are multi-vendor, and can consolidate a range of service contracts under one contract,” says Comms-care sales director Ben Davies.
“Resellers can decide what level of service they would like to offer their customers, ranging from a four-hour response, eight-hour response or next day,” he adds.
The service makes sense when a customer has kit from three or four different vendors, all of which may have supplied hardware under different terms and different warranty periods. Comms-care will centralise those vendor warranties into one agreement, serviced by one telephone number and a central service desk.
Good margins and new business opportunities are on offer for resellers, maintains Davies, especially when the reseller is able to offer the customer cost saving incentives to sign up for a service agreement that lasts for more than one year.
Panacea Services, another reseller, says that although it would employ a third-party company to supply services where it has no geographic coverage, it makes sense to supply services direct to the customer. Commercial strategy director Alan Brown has noticed customers making more of the systems they already own.
“People are sweating assets longer than they would normally do. We are definitely seeing that,” he says. “Customers have said that rather than refresh their kit, they would prefer to take out another year’s warranty from the vendor, or take out an extended warranty with us.”
Brown says there is increasing demand from City-based financial institutions that want to use third parties such as Panacea to service and monitor networks, cutting down on their own internal support staff. He says the rewards for getting a successful service business right can be substantial. If the company is able to sell one network engineer’s skills to several clients, then it can expect to make up to 55% margin on the engineer’s costs.
“We have a pretty straightforward formula: we multiply an engineer’s salary by 1.84 to allow for our overheads, and then divide that figure by the number of days he works every year. We then have to sell engineers at that daily rate,” he says.
Panacea says its services are popular because they simplify back office administration.
“It is unusual to find servers, desktops, laptops and workstations from different vendors that have warranties that end at the same time. We will package up different warranties so that they all end at the same time,” says Brown.
Teneo, a reseller specialising in optimisation technology, says customers have begun to take a hard look at the technology they already own.
“They are asking how can we make our organisations more productive, how can we use what we have in the best possible way,” says marketing director James Hall.
One of his customers, a firm of architects based in Birmingham and London, found it was taking 45 minutes to copy large AutoCAD files across the company’s wide area network.
Rather than buy a new server, or increase the WAN bandwidth between offices, the firm’s IT manager deployed Riverbed Steelhead appliances in both offices, which has cut the time taken to open AutoCAD files across the WAN to next to nothing. Staff in both offices can work on the same version of the file. The network optimisation works with advanced delta caching technology that reduces network traffic.
“If traffic has already gone across the network, then we don’t send it again; we need only send the differences between two files, rather than all the similarities,” says Hall.
“There are two benefits to reduced network traffic: applications work much more quickly; and we show clients they can postpone or cancel investments in extra bandwidth or infrastructure.”
For some resellers, who have had a long history of in-house service, employing a third party is not attractive.
“We would never consider a third party because we would worry about the quality of the job and the definite availability of the service engineer,” says Phillip Mitchell, managing director of Epsom-based VAR IntraLAN.
“We employ two people full time on our own helpdesk for our SME customers, as well as 10 field engineers. The helpdesk is central to our organisation – if we don’t provide service to our customers, they may look elsewhere.”
For others the focus is on improving business processes for customers despite a reduction in budgets.
Nottingham-based Quantix, a managed services provider, believes there are business opportunities even when companies are cutting back on capital expenditure.
“I think our business model benefits from a downturn. Customers want to reduce costs, but they still have to maintain their essential services and databases,” says managing director Richard Salmon.
Quantix is in a fortunate position: in 2007, private equity firm ISIS backed the company in a £10m management buyout. One of the reasons the company looked a safe bet was that its service model brings in recurring revenues from clients who will usually pay upfront for the annual maintenance and service of their Oracle and Microsoft databases. Quantix revenues grew from £6m in 2007 to £8.25m in 2008, and are forecast to reach £9.5m in 2009.
“We expect margins of 20% to 30% on packaged software services, and 40% to 50% on enterprise software services,” says Salmon.
Customers will pay for managed services because they fear their financial audits may not be signed off unless they can show their systems are well serviced and maintained. The main attraction, however, is the 50% reduction in IT support overheads that Quantix claims to offer.
Attractive as the service model appears, there is a risk that customers will not renew their contracts, or will try to negotiate monthly payment terms, rather than paying in advance for annual services. Teneo’s Hall says resellers may have to offer an added extra, such as a free system audit, to close a service renewal contract.
Even so, the service model that shows customers how they can make the most of their legacy systems is a more tempting argument than new capital expenditure.
“Operational budgets, where service contracts are generally drawn from, are still healthy,” says Hall.
“Being able to offer competitive service agreements alongside new hardware deals is what the forward-thinking reseller should focus on. If your business model is ‘pile them high and sell them cheap’, then you should look at service contracts that can add value to a customer’s bottom line,” he adds.