IT and Business Insights for SMB Solution Providers

Measuring the Margins of Service

Two system builders challenge the conventional notion of do-or-die service offerings, saying product margins have not dried up and any shift toward a service-oriented model needs to be done strategically and incrementally. By Geoffrey Oldmixon

In the broader IT world, conventional wisdom says, "It's all about the services." Conventional wisdom also warns, "Start offering managed services to realize recurring revenues or find yourself closing up shop."

Measuring the Margins of ServiceSome system builders do not perceive it that dramatic. "I don't pit service vs. product," says Joe Toste, vice president of marketing at Equus Computer Systems Inc., based in Minneapolis. "It's always been solutions oriented." Toste says that system builders are surviving in the marketplace right now by "performing more break service work and upgrading computers." He adds, "The latter is an example where product is still very relevant."

Does that mean Toste pooh-poohs today's clamor for the service model shift? Not at all, but he does think business owners should temper that passion with some strategy. "I agree that services are very important," he says, "but you simply cannot just move your personnel that have been building systems right to selling or maintaining remote managed sites."

Service Shift, Not Service 'Switch'

Toste isn't the only one raising an eyebrow at the notion of a service switch. In fact, NASBA Executive Director Frank Raimondi suggests system builders not make a hard switch at all, but instead a series of logical shifts.

"Services are great," Raimondi says. "But if system building is step one and offering services is step five, you can't go from step one to step five overnight." Instead, both Toste and Raimondi suggest making incremental adjustments.

"If you're selling notebooks and you've never added a service, don't go full into a contract," Raimondi advises. "Try things out. There are bigger things just one step further. Wherever you are, just take that next step." When you do decide to add a service, says Raimondi, "make sure [your] salespeople are prepared and trained to make it an active part of their complete set of offerings."

Best Service Bets

So what categories best lend themselves to the strategic services shifts Raimondi and Toste describe? Toste says Equus likes contract manufacturing services, such as custom imaging, private labeling, and customized warranties. He also likes storage. "Storage is certainly one of the areas where system builders can routinely beat the tier-1 manufacturers," he says. "However, to be in storage requires strong product competencies."

Raimondi likes storage too. He also sees promise in T1 or phone services: "Anything that can show added value, including obvious services like cheaper Internet or phone lines," he says. "Also, consider things outside the IT world, such as merchant services, data retention services, and even vendor rating tools."

At the end of the day, both Toste and Raimondi recommend that system builders begin intelligently edging their way toward a model that provides at least some recurring revenue. "New service markets, like managed services, still remain in their hype cycle," Toste says, "but less than 10 percent of system builders are participating."

Toste believes there are still strong product competencies that are important. "But what has changed is that system builders can no longer simply buy product and mark it up with the same margin they did for 10 or 20 years," he says. "There needs to be an added value."

About the Author

Geoffrey Oldmixon is a freelance writer based in Western Massachusetts.

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