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How VARs can adapt to IT's changing marketplace

VARs are reinventing themselves and bundling more hardware, software and services into their solutions to stay ahead of ever-changing IT customer needs.

Customer needs are moving targets, so VARs that want to stay in the game are making some marketing moves of their own. The challenge is staying on top of what their customers will want next.

In the past, IT customers typically wanted to buy only hardware and software products that they could deploy on their own to solve their business problems. Today, they want to buy solution -- or ready-made bundles that include everything from hardware to software to services designed to solve those same problems with a phone call to a trusted VAR.

For many VARs, this bundled approach represents a lucrative and steady business as they combine their custom services with products from key IT vendor partners. Those vendors pay VARs only for the hardware and software they sell on their behalf -- not for providing extra customer services.

The upside to this arrangement for VARs is they can keep a steady stream of customers in this tough economy. The downside is that VARs are constantly reinventing themselves to attract new business and maintain existing prospects.

Partnership programs help VARs prosper

John Convery, a vendor relations and marketing vice president with Denali Advanced Integration, a VAR in Redmond, Wash., said his company has been an active participant in Hewlett-Packard Co.'s partner programs for years and continues to thrive because of that relationship.

About 30% of Denali's annual revenue today is related to services, and that percentage is growing, Convery said. Over the last few years, it's become clear that the future in its business will be helping its customers solve problems by bringing together turnkey solutions from vendors like HP, Microsoft and others.

HP gets this idea, Convery said. "It's not just about boxes anymore. You really have to walk the walk, and you have to produce for your customers. Typically, you really have to do that with a services model," he said.

In many cases today, hardware sales just follow along with those needed services, Convery said. "It becomes secondary. The hardware comes in after the services are established."

VARs that want to stay ahead in the marketplace also need to take the lead on IT initiatives that can generate new business, Convery said. Denali has been working with Edmonds Community College in Lynnwood, Wash., on a power management initiative that has become a model pilot project for 33 other small colleges.

Denali and several partners conducted an IT assessment and helped get grants to fund the project. "Those are the kinds of things that VARs are doing today," Convery said. "It's a game-changing solution."

Vendors still want to sell boxes -- even with their razor-thin margins -- but they're really focused on selling solutions in a down economy," Convery said. "We see it changing more toward services," he said, adding that hardware and software are still included.

From reseller to solution provider

Larry Hedin, a vice president of sales and marketing for Heartland Technology Solutions, a VAR in Harlan, Iowa, said his company has been transitioning itself as a solution provider in the past few years after many years of marketing itself as a hardware and software reseller. Today, about 60% of Heartland's revenue is from hardware and software, compared to about 40% for services."It's a client-driven business," he said. "That's what they need."

Most Heartland Technology clients are smaller businesses in non-metro areas throughout the Midwest, said Hedin, and most of them look at Heartland as their total solution provider. "If we were just selling hardware, I'm not sure how much of a solution provider we could consider ourselves to be," he said.

Heartland's two major vendor partners are HP and Microsoft, which it sells across all of its product portfolios. That means the company spends heavily on training and other programs with those vendors.

"I do see the marketplace changing," he said. "I think you'll see successful VARs that are moving into what's really considered a solution provider to their clients because of the investments that they have to make with vendors."

Products drive services

In the end, the products that sell to customers drive the services a company provides, said Greg Starr, partner and chief operating officer of I.T. Works, a Houston-based network integration VAR that deals heavily in Cisco Systems products.

"They're inter-related," Starr said. "Customers need the hardware, but it's the services on the back end that bring it all together. One needs the other."

About 60% of the company's revenue comes from selling IT solutions to customers, with about 10% from hardware sales and the rest from managed services and repair services, he said.

"What [the vendors] say is 'sell our product,'" Starr said. "Our customers want us to sell the product and make it work for them. But our job is not to just sell a product. We design a solution that's going to solve their needs."

Starr said he's not bothered that vendors usually provide direct compensation to VARs only for the products that are sold and not for the extra services.

"The only shift I've seen is that some vendors are cutting out middlemen like us and are going to the cloud and straight to customers. It's going to be a problem if people aren't on board and understanding how to deal with that situation," Starr said. "They want us to sell their products and then they're cutting us out on the side."

The prevailing fear is that vendor-hosted clouds will shift the account ownership from the local VAR or integrator to the vendor itself.

The reality of the marketplace

Carl Mazzanti, vice president of network strategies for eMazzanti Technologies, a Hoboken, N.J.-based VAR, said his company made 60% to 70% of its revenue from hardware and software as recently as 2006. Today, hardware and software make up about 25% of the company's revenue, with the rest coming from top-to-bottom IT solutions to customers. That's not something to lament, he said, but it is a reality of the changing face of the marketplace.

"The hardware and software are still a great sales lead source," Mazzanti said. "There are still parts to be sold and work to be done."

About 90% of eMazzanti's business is made up of packaged solutions or ways of solving customer needs, he said, with the remaining 10% made up of customers that just want hardware alone.

Often, great solutions sales leads can come from customers that start out buying only hardware, he said. "A school district was buying products from us for four or five years. They saw a story about how we were helping another school district with a problem, and they called us for more things."

Smart solution providers view every point-product sale into a company as an excuse to talk about added product sales and services. A common mantra is that any new product intro is a reason to revisit customers and talk about new needs and opportunities.

As a VAR, eMazzanti works with five main vendors, including Cisco and Microsoft. The company's product discounts increase from its vendor partners as sales of a vendor's products increase, he said.

Microsoft has defined the game for everyone and has for a long time with its partner programs, Mazzanti and other partners say. Microsoft has VAR rebates and other incentive programs that are more lucrative for VARs when they stack them together with incentive programs available from other vendors such as HP, he said.

In the scheme of things, the money that customers spend on hardware and software is still lucrative for VARs, even if the direct margins on those sales aren't very big because it leads to more customer needs and more spending, said Mazzanti.

"For every $1 a customer spends on Microsoft products, there's another $16 that will be spent for services and hardware," he said. "The mix might be $1 for Microsoft, $6 for the VAR and $10 for everybody else."

About the author
Todd R. Weiss is an award-winning technology journalist and freelance writer who worked as a staff reporter for Computerworld.com from 2000 to 2008. He spends his spare time working on a book about an unheralded member of the 1957 Milwaukee Braves and watching classic Humphrey Bogart movies. Follow him on Twitter@TechManTalking.

Let us know what you think about the story; email Barbara Darrow, Senior News Director at bdarrow@techtarget.com, or follow us on twitter.

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