Maintaining profit margins is a big issue for IT solutions providers. So big, in fact, that it ranked as the No. 2 challenge -- among a list of 25, second only to the impact of the current economy on client spending -- in a recent survey of 215 U.S. and Canadian channel professionals conducted by SearchITChannel.com.
While many different types of companies make up the IT channel, the challenges of maintaining profit margins are just as numerous and diverse as the channel itself -- and are contingent on the individual company's business model.
You can make markups whatever you want if you add value. At some point, whatever I'm charging isn't a cost because they are getting value out of it.
James Dowd, director of managed services and special projects at Flexible Business System
The problem "depends on the size of the channel partner," said Heather Margolis, president and founder, at Boulder, Colo.-based channel strategy consultancy Channel Maven Consulting. A lot of channel companies under $3 million have contractors instead of employees, she said. "They're ebbing and flowing based on how much work there is. When it's a true employee, they need to make sure that employee is doing what they're best at, and selling what they know. Every margin they're making, they need to take into account how much it's truly costing them," she said.
Bill Court, director of sales for Santa Barbara, Calif.-based Data Hardware Depot, a networking hardware solutions provider that employs about 17 people, confirms: "What we've seen is, especially for a company of our size, unless you have a big account that keeps people busy, trying to keep service people on payroll is a huge cash drain."
"You have to have enough money to pay your employees, taxes, keep up on your bills, and those kinds of things," said Jason Sparks, vice president of storage and systems at Xiologix, a Tualatin, Ore.-based solutions provider. "That's the first portion of your cost of goods. The second is a profitability bucket."
The degree to which maintaining profit margins is a challenge depends on the company's line of business. According to Sparks, maintaining margins in his practice area is an "extreme challenge" because prices are coming down on storage. "The price per terabyte capacity is less than it was five years ago. So we're selling a shit ton more boxes for not the same growth rate and not the same margin rate," he said. "Today that's the big challenge: Customers buy on capacity. They don't understand performance."
Know when to walk away
Sparks said he tries to educate customers on the importance of performance, but it doesn't always work. "They don't understand the concept of balanced input/output versus capacity, so we run into a lot of customers that are buying on capacity, and those are deals we walk away from. Those are low-margin deals that you can't sustain a business off of," Sparks said.
Other channel professionals agree that finding the right customer is an important part of maintaining profit margins. "As a sales guy, that's what you're trying to qualify up front: Is this customer a good fit based on the business I have behind me to support their business?," said Court. While Data Hardware Depot helps companies find and replace aging equipment, it does not provide implementation services. "I steer away from different industries knowing they rely on a partner like me more than we're able to support. I go where I know they have the [implementation] expertise."
Tips for maintaining margins
- Hire project-based workers per contract until your yearly revenue reaches a level high enough that you can afford those workers as full-time employees.
- Assess whether a prospective customer is a good fit for your company in terms of the services you deliver and the services the customer needs.
- Know your real staffing costs.
- When bidding on a project, set a profitability goal. If taking a deal means not meeting the profitability goal, walk away from the project.
- Sell value-based solutions so customers feel like they are getting much more than a product – they are getting your expertise.
- Build long-term relationships with customers for repeat business.
It's important not to undercut yourself. "Never cut off your nose to spite your face. We'll walk away from business that doesn't make sense," Sparks said.
Communicate and deliver value
The second key to maintaining margins is to deliver value. For many solutions providers, that value is delivered in the form of experience. "A lot of what the CIO or CTO has to face they face once or twice, where we do it over and over again, so [the customer benefits] from the experience we bring virtualizing hundreds of infrastructures," said Glen Jodoin, vice president of marketing and operations of Kittery, Maine-based GreenPages Technology Solutions, a virtualization and cloud consulting and integration company. "We're bringing in not only the solutions, but the questions to help them avoid problems they'll face in an implementation – things people often forget."
James Dowd, director of managed services and special projects at Flexible Business Systems, a Long Island, New York-based full-service IT company, agrees: "You can make markups whatever you want if you add value. At some point, whatever I'm charging isn't a cost because they are getting value out of it."
Focusing too much on price at the expense of value can be dangerous. "The VARs that I've seen close their doors in the last five years are out for super high margins. They can't adapt and they can't compete effectively. They are what I like to call the price sales VARs. They … never [sell based] on value," said Sparks. "Value changes the entire game for a VAR. There are so many out there that think their value is the fact that they walked up to your door. That's not value."
According to Jodoin, "A CIO can sit down on a couple calls and realize whether they're dealing with an educated, experienced team, and you go from there. The initial meeting is where you build that trust and competence. It's all competence building when you get right down to it."
"You protect and grow margins by helping after your first transaction. The opportunities present themselves at that point to build trust. … That to me is how you grow margins at the end of the day. It's not through new widgets and things like that. Once customers give you their trust, you take advantage of it," Court said.
This was first published in July 2013