Selling Services

More and more IT vendors and their value-added distributors are convinced that services is the way for the channel to make really meaty margins.

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By  Stuart Wilson Published  June 5, 2006

Profit path|~|seseats200.jpg|~|Ilyas Mohammed (left) and Jed Isbell (right), ATS|~|Ask any vendor, distributor or reseller how they plan to improve their margins during the next 12 months and you can pretty much guarantee what the answer will be. 'We're going to focus on value-add and develop our services proposition," the vast majority will cry in unison. This is often easier said than done... The terms ‘services’ and ‘value-add’ are already overused in the Middle East IT channel despite the fact that in some cases the delivery models are still at an embryonic level. To truly understand services — especially in the context of value-added distributors (VADs) — it is vital to understand the different levels of expertise that can and do exist in the market. No two VADs are the same and it is something that the management team at Advanced Technology Services (ATS) — the independent IT services arm of Aptec Group — has considered in detail. Ilyas Mohammed, business development manager at ATS, explained: “It is important to understand that there are different levels of value-add in the market. All distributors should provide some basic value add functions to their resellers: product distribution, logistics services, finance services and RMA.” “Beyond that, an enhanced VAD would provide channel development and management, pre-sales services, extended services and focused marketing. A premium VAD would be in a position to offer post-sales services, support services, solution enablement, hotline services, training services and even a demonstration centre,” he added. These are important distinctions and ones resellers would do well to take note of. There is a clear consensus in the Middle East that the proportion of end-user spend on services is rising rapidly. Resellers — working alongside VADs or vendors — need to position themselves in the best way possible to take advantage of this if they are serious about maximising their overall margin potential. Even in the world of hardware sales, there is significant opportunity for the channel to sell services if they invest in developing the correct skill sets. Venu Menon, divisional director at networking VAD Online Distribution, outlined the opportunity that exists in the Middle East channel: “One of our main areas of focus is the sale of services through channel partners. This could involve encouraging them to sell extended warranties with hardware products. Most vendors are catching on and trying to develop this activity in the Middle East channel.” While this sort of service selling has been common practice for several years in Western Europe and the US, the unique challenges of the Middle East market have acted as a brake on the regional channel’s ability to follow suit. In the past, faulty products frequently had to be returned to the US or Europe meaning lengthy lead times for replacement units. Coupled with a dearth of authorised service centres within the region, the channel was unable to sell service packs that articulated a clear set of benefits for the customers.||**||Service packs|~|sesepeich200.jpg|~|Patrick Eichstädt, general manager for Magirus’ Middle East operations|~|As the Middle East market expands, vendors invest more within the region and the channel skills base rises, the ability to sell service packs has increased. Now it is a matter of understanding the margin potential that exists for the channel and communicating the benefits to customers that have become accustomed to paying only for product and not for services. “By selling extended warranty service packs resellers can double or triple the margin that they make on the hardware itself,” added Menon. “The bottleneck at the moment is the customers’ ability to understand the benefits and appreciate why they should pay for these services.” In the past, many large solution providers and resellers attempted to engage with customers for post-sales services on an independent basis — as opposed to working with the product vendors or authorised VADs. “In the short-term it is difficult to move resellers towards selling services but as more and more are converted it will become easier,” continued Menon. “Eight months ago the channel was converting 10% of the service sales opportunity. Today that figure is nearer 40%.” The Middle East is not short of companies claiming to be VADs but the quality players are few and far between. Resellers need to identify the VADs that are genuinely committed to helping the second-tier channel enhance their ability to deliver complementary services to end-users within the region. Magirus has carved out an impressive VAD reputation in Europe and the company has worked hard in recent years to emulate this position in the Middle East. Sitting squarely between the vendors and the second-tier solutions providers, the mark of a quality VAD is an ability to keep both suppliers and customers happy while simultaneously carving out a decent margin. Patrick Eichstädt, general manager for Magirus’ Middle East operations, commented: “VADs like Magirus — that take their value-add seriously — will offer a broad range of services on their own whether it is training, consultancy, integration, installation or project rollout management. Partnering with selected service partners can also help us make small, mid-sized and niche resellers more successful with their customer base.” “If the reseller understands that this is an opportunity to access more business, clothe his offering and ultimately generate more revenue and profit, then they will definitely take the opportunity,” he added. “Selling only hardware or software without a service offering or value-add leaves you fighting for rebates. That is not a sustainable business model and will ultimately kill the business.”||**||Managed services|~|sesebjarneca200.jpg|~|Bjarne Rasmussen, CA’s regional vice president of technology services|~|For Magirus, the development of the services channel is based around three key points: it needs to add value and be accepted by the customer; it needs to be repeatable with a controllable and reasonable cost, and the services itself must create opportunities for additional follow on services to minimise the risk of it eventually becoming a non-chargeable commodity. Middle East customers are slowly waking up to the fact that free service does not equate to quality service — especially when it comes to enterprise implementations. It is a trend that enterprise software vendor CA has already identified in the market. “Customer demand and expectations are very high and competition is getting tougher every day,” said Bjarne Rasmussen, CA’s regional vice president of technology services. “The result is that some vendors and integrators are offering free services in order to penetrate certain accounts. However, this will vanish soon when customers realise that free services does not necessarily equal quality services.” “In fact, I can tell you that I can see a major shift over the last six months whereby many customers are recognising the importance of services to deploy and solution and are more prepared to spend a decent amount on services,” he added. For Rasmussen, the logic underpinning any channel player’s decision to devote more resources to the development of its services offering is compelling. “It helps the channel make more money and it creates a differentiator that helps better position the partner to win more sales,” he said While the Middle East channel has made some progress in its adoption of a services-led sales model there remains a long way to go. Extended warranties and basic post-sales support represent the tip of the services iceberg. Moving up the value-add ladder, forward thinking Middle East channel players understand that delivering managed services and outsourcing — through from basic IT functions to full business processes — offers even greater long-term potential. Specialist Middle East distributors such as Fusion have been trailblazing the channel path towards managed services. Working with e-mail scanning and security vendor MessageLabs, Fusion has already established a network of resellers actively selling a managed services offering in the region. “Vendors and the VAD must help develop the appropriate skill sets required within the channel to enable them to effectively position services with their customers,” said Lee Reynolds, marketing director at Fusion. “Provided these skills are established and the service provider can offer strong SLAs there is no limit to the range of services that can be sold through the channel.” Fusion is not the only VAD attempting to develop a channel capable of selling e-mail security solutions as a managed service. Tech Access teamed up with BlackSpider last year and has also set about establishing a base of security-focused resellers with the skills required to sell this solution. Dipankar Bhattacharjee, software sales manager Gulf at Tech Access, said: “We have tried to recruit resellers that understand how to sell a security solution and position the product. We have already recruited eight partners in the GCC excluding Saudi Arabia. Phase two of the plan will be to start recruiting partners capable of selling the BlackSpider managed service in Saudi Arabia and this is scheduled to happen in July.”||**||Recurring revenue|~|seseleefus200.jpg|~|Lee Reynolds, marketing director at Fusion|~|One of the main attractions of the managed services delivery model is the impact on channel revenue streams. For resellers the real lure is recurring revenues that roll in each time a customer renews his contract. “We have an annuity renewal rate of over 99% on MessageLabs,” added Reynolds at Fusion. “So our channel realises at worst the same margin year-on-year. In most cases however, organisations in the region have increased their employee numbers, which has in turn resulted in increased margin potential.” Bhattacharjee agreed that the revenue and delivery model is particularly appealing to potential partners in the market. “When I open up the revenue model and show them that there is no hassle, no maintenance and no licensing support requirement, they start to appreciate the benefits. The resellers are excited by the annuity model, the strong market demand and the profitability potential derived from recurring revenues.” According to Bhattacharjee, resellers can make a cool 20% to 25% margin selling BlackSpider solutions in the Middle East. With Tech Access itself playing a major role in generating leads for its resellers, more resellers are expected to sign up soon. Some 15 customers representing approximately 3,000 individual e-mail accounts are already using the service in the Middle East. While vendors are keen to push their own services offering in the market and many VADs will also prioritise the services of the vendors that they represent, there are some companies operating in the Middle East market that believe this does not mean that customers are receiving the best possible solutions. Independent service providers and vendor-neutral systems integrators are keen to point out that a packaged service constructed and delivered by a vendor in tandem with its authorised channel partners is not always the best option for a customer. Jocelyn Al Adwani, deputy CEO at storage integrator STME, explained: “Vendors frequently have a negative effect on the service channel as they are limited to the promotion of their vendor specific services. They are also resistant to the idea of their ‘partners’ selling services from other vendors.” “As vendors move into the region they also have targets for their professional services revenue so will try to force customers to purchase additional services for implementation as part of the initial solution impacting the potential for resellers and integrators in the region,” she added.||**||Sharing the pie|~|sesestme200.jpg|~|Jocelyn Al Adwani, deputy CEO at storage integrator STME|~|According to Al Adwani, channel partners moving into the services arena should be worried about eventual disintermediation as vendors eventually try to claim a greater proportion of the available revenue. “Yes they should be worried about disintermediation. A small number of the less scrupulous vendors have gone down this path to the detriment of both the partner relationship and also customer satisfaction levels,” she added. With vendors, VADs, resellers, systems integrators, solution providers, IT consultancies, outsourcers and independent service providers all fighting for a share of the available services revenue, the channel delivery models will take time to develop in the Middle East. The probable outcome is the formation of ecosystems whereby best-of-breed suppliers take control of various parts of the service delivery. For players such as IT services outfit Injazat, this has already become a reality in the Middle East. “From a channel point of view we are delivering managed services directly to clients,” explained Edward Cunningham, sales and marketing director at Injazat. “There are areas of activity where we outsource to a third party such as hardware break-fix and maintenance. In the application implementation space, we may well supplement our own resources with local market expertise as well.” For Injazat, vendor independence and the economies of scale created by the delivery of a range of IT services to multiple clients are key selling points. “We have many technology alliances in place but we are ultimately vendor independent,” continued Cunningham. “We believe we can help the clients choose the best solution and we can help them ensure that they get the best price. Because we have multiple customers we are a more structured buyer of technology solutions and this allows us to crack better deals with the vendors.” Injazat’s go-to-market model appears to be reaping the rewards already. In its first year of operations the company booked more than US$190m of sales and is confident that this total will be surpassed this year. For Jed Isbell, general manager at ATS, building the correct delivery mechanism is the most vital factor in determining the business unit’s success. ATS has worked closely with Aptec Distribution to come up with a complementary system where the value-added distribution offering available from the distributor sits comfortably alongside ATS’ value-added services offering. “It is all about how the two companies can deliver more combined value-add to the market,” remarked Isbell. “The approach is simple: Aptec focuses on the distribution services and we focus on the technology services. There is no reason why ATS cannot provide a similar set of services to other distributors or even on behalf of vendors.” Selling services is not something that the Middle East channel should enter into half-heartedly. To be successful in the services arena a fundamental rethink of the overall business structure and sales approach is required. Service delivery models do drive the channel to the next level of complexity. While making the transition towards selling services can involve short-term pain, the opportunities are growing fast in the Middle East and vendors and VADs are offering a range of benefits to resellers that are prepared to make the leap. Services is not for everyone but this is the way the market is heading and those companies not willing to change will face a tough time as the rest of the channel evolves around them.||**||

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