Services with a smile

As product margins have progressively eroded over the past decade or so, providing value-added services has become increasingly important to many channel partners in order to make a decent living.

As product margins have progressively eroded over the past decade or so, providing value-added services has become increasingly important to many channel partners in order to make a decent living.

“In the 1980s and 1990s, you could make good margin from selling products such as routers and switches, and companies were almost giving away free services. But that has changed and many now resort to services to make a profit from the deal,” says Bob Dalton, managing director of network services provider Intact Integrated Services.

Nonetheless, it has not proved enough to simply move from selling commodity products into commodity services such as break-fix maintenance. Compared with even five years ago, relatively few organisations focus solely on this area unless they are large players that can achieve the volume necessary to make money.

“Resellers are finding that they really have to move up the value chain and provide more proactive services rather than just selling a maintenance contract and waiting for someone to call,” says Antony Young, director of services, security and networking at value-added distributor Bell Micro.

On the one hand, this is because offering wrap-around activities such as implementation services, systems integration, remote monitoring or quarterly reviews provides a chance to charge more.

On the other, it also creates an opportunity for partners to become more deeply ingrained in customer accounts – an important consideration in times of economic downturn as both IT and business managers increasingly look to consolidate their supply chain both to cut costs and reduce management headaches.

“Value-added services become a way to provide more stickiness in an account so if someone says ‘I can do that 5% cheaper’, the customer is more likely to stay with you because they trust you and know you add value to their business,” Young says.

Kate Hanaghan, a senior analyst at the Bathwick Group, agrees. “Technical consulting enables resellers to develop a more strategic relationship with the customer and to have a bit more control over future spending.

“The pressure on product prices means there is a need to diversify and provide more value to customers, but there is also a pull from the customer side. Mid-sized and smaller companies are generally more inclined to buy from one partner, so the more services you can supply, the better,” she says.

Given the economic downturn, however, it is vital to think carefully about how to package such services and present them to customers.

“Over the next 12 months, buyers will be thinking about how to run the business more cost-effectively and IT will be part of that, so any proposition that a reseller makes will have to lead on this,” says Hanaghan.

“There will be some discretionary spend around for more innovative projects, but the focus is mainly going to be on how organisations can optimise their existing investments.”

The current economic climate is already making project sign-off slower and more difficult, with higher levels of rigour being applied to the sales process. This is leading to growing demand for more “granular” services, says Dalton.

“It is a refocus rather than a change. There has not been a huge hit on the brake, but it is becoming more difficult in certain areas, although there are two main areas where people are still making money,” he explains.

The first is “advanced solutions” such as unified communications technology, where it can prove beneficial to “invest early to become an expert”. The second is in “rounding out technology offerings with more business and process-focused expertise”. This involves acquiring skills in best practice methodologies such as ITIL for service delivery and Prince2 for project management, both of which are in high demand, particularly in the mid-market.

Business process focus

“We have seen traditional business consultancies such as Accenture increasingly move into technology, but there is also an opportunity for the channel to become more business process-focused,” says Dalton.

“Technology companies have been slower to set off on this journey, but you
ignore the systems, process and people element of a project at your peril – you cannot maximise value unless the project maps onto what the
business requires.”

Another important consideration is being able to provide more granular service level agreements (SLAs) when managing different elements of key infrastructure. “Providing a standard level of warranty is no longer good enough. You have to understand the cost and consequence for the business of different systems going down and attach the right level of service to them based on that. There is no one-size-fits-all any more – it is about moving into more of a consultancy role,” Young says.

Alan Brown, commercial strategy director at Panacea Services, agrees that the day of the SLA has come. “Traditionally, if someone was short of headcount, they came to us. But from about 2000, people started wanting a bit more. Now it is about providing SLA-based services around things such as how many helpdesk calls you are getting.

“IT is seen by a lot of businesses as strategic rather than simply a cost centre, so you have to deliver it back to the business using SLA-style
contracts,” he says.

But the market is likewise moving away from basing customer rates purely on time and materials towards providing more fixed price projects.

“People like the option of different approaches. I would say there is now a 50/50 split in our business, but it is important to educate customers that they need to compare like with like when evaluating resellers,” Young says.

Nonetheless, he says progress among the reseller community in embracing these new approaches has been mixed to date. But delay is understandable given the fact that moving towards a service rather than product-focused business model is not necessarily easy. As a result, for many organisations, there is still an uneasy co-existence between two often distinct sides of their business, even as they realise that moving into more of a services-based sell may be critical to survival.

“Everyone understands that moving to higher value activities is potentially a good idea because to make margin in services today you have to deal with more complex areas than you did in the past,” Young says.

The problem is that organisations are “a bit wary of how to get there” and the timing is difficult given the current economic situation.

“You are talking about a reputational change and a potential need for investment, which over the past nine months or so has not been particularly easy. Change is always scary and people are nervous about investing resources until they see the business is there,” Young adds.

Question of identity

“It is partly about identity, with people asking, ‘Do we want to become a services firm and if so, how far do we go and how do we make the investment in the skills required, particularly because it can be expensive?’ But it is also about keeping the balance right and working out how the product part of the business will operate with the services bit,” Hanaghan says.

This means that although margins in desktop products, for example, may be as low as 1% or 2%, many resellers still see such offerings as an important means of generating pull-through sales for higher margin services. The problem is that the two sides of the business are frequently run in parallel rather than being integrated and often have their own individual sales teams.

“To shift from purely selling desktops to doing something like technical consulting is quite a leap and any change in business model has to be evolutionary, but it is risky,” Hanaghan says. “One of the fundamental questions is whether to do it organically or inorganically and to invest in acquiring a services firm, no matter how small, but it is a risk as you are taking on a people rather than a product business.”

Moreover, technical consulting is a broad term that covers everything from auditing hardware and software assets to assessing how well they are functioning and making recommendations for optimisation.

This means it is more a business sale than a technical one and sales staff “have to speak the right language and highlight the business benefits”, Hanaghan says. They also need to be incentivised differently as the situation will no longer be about quick volume sales but about building long-term strategic relationships.

To overcome the skills-related issues, however, another option for resellers is to partner with organisations that have complementary expertise or to work with value-added distributors such as Avnet Technology Solutions. Its approach is to act as a service aggregator and to bring in specialist expertise on different projects where it takes a lead role.

Simon Stevens, professional services manager at the company, says, “We have in-house staff, but we also have an associate programme where we go to the market and work with best-of-breed partners in target areas. We are at the top of the tree and act as a one-stop-shop because customers like one throat to choke. So we manage the contracts on their behalf and I believe this will be an increasing trend.”

Another growing trend is the move towards managed services and
software-as-a-service, which is manifesting itself in two key ways. On the one hand, some vendors have built up their own datacentre infrastructure to provide branded services to customers directly but employ channel partners to resell their offerings and manage the account for a percentage of the deal value.

“This is good for the vendors because it extends their reach, but it also allows the channel to have high value conversations with customers and provide complementary services such as an ITIL service delivery programme around their network or a business process review,” says Dalton.

Partners can also choose to build up the necessary infrastructure themselves, although this is inevitably an expensive option in terms of capital outlay. One way to get around this is to involve a financing company.
“We own our assets but they are funded by a finance company, so they buy them, we rent them back and at the end of three years, they are ours,” Panacea’s Brown says.

Panacea also has an arrangement with a co-location specialist, from which it rents datacentre space and the necessary communications infrastructure. “They provide the datacentre space and we provide the management around the infrastructure as well as SLAs around business-as-usual,” Brown adds.

Another organisation that has chosen to go down this route, meanwhile, is ADA Technology Services. Lee Ganly, chief information officer at ADA, indicates that its business is evenly split between managed services and traditional, mainly infrastructure, projects, with security and disaster recovery (DR) being big growth areas. He believes the former model will prove a key engine for growth.

“Some customers opt for managed services right away, but others want to try us out first with a project and prove that we have the capability before going down this route. So we can give them the option of either managing their infrastructure themselves or providing them with managed services. People that do not see IT as a strategic activity will not be interested, but there will be space for both depending on their attitude to IT,” he says.

Moving investment

One of the attractions of the managed service approach at the moment is that many customers are trying to avoid high capital expenditure as a result of the credit crunch and are instead trying to move investment onto their operational budgets.

“We have had increased interest over the past year, particularly among professional services organisations such as lawyers, who have seen their compliance business dry up overnight. They know they have to have things like DR and to upgrade their infrastructure, but paying by subscription enables the lumps to be taken out and it becomes a consistent payment,” Ganly says.

And this deferred payment is attractive for channel partners too, because it provides stability and ensures an ongoing revenue stream. Nonetheless, Ganly indicates that “the space is not overcrowded” as yet, although he does see a growing trend for people to try to make the transition.

But such a shift is not simply about introducing the right technical infrastructure. “You need a clear strategy as this will require investment and it is very much around your people because it involves a different skill set,” explains Ganly.

“The issue is that if you’re used to putting in projects, writing some documentation and providing break-fix, you don’t necessarily have the experience of running an environment, which requires very solid processes.”

It also means finding ways to control costs and drive out value by making those processes as automated as possible. “A lot of people will struggle because it is a big transition. It is also a completely different sales model, so it depends on the commitment of not just the board, but the whole organisation. You cannot wake up one day and say ‘let’s do that’. It has to be thought through strategically,” Ganly says.

What all of this is likely to mean over the coming year, however, is a shake-out of the channel, not least due to the recession.

“Consolidation will be the order of the day for a while. Big healthy players will take over small healthy players and unhealthy ones will go bust. You cannot bury your head in the sand any more, but the bolder companies will see the need for change and react,” concludes Dalton.

Read more on Sales and Customer Management