VARs Make Transition to Managed ServicesBy Pedro Pereira | Posted 2005-04-06 Email Print
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With product margins tightening and direct-selling vendor competition stiffening, VARS are finding new profit opportunities with the managed-services model.VARs and small integrators keep a constant lookout for steady sources of revenue, as product margins shrink and competition from online retailers and direct-selling vendors intensifies.
For many, the opportunity for a recurring revenue stream comes in the form of managed services. Increasingly, VARs and small integrators are shifting at least a small portion of their business focus to the MSP [managed-service provider] model, in what for some is not only a new opportunity but also a potential business lifesaver.
In moving to the MSP model, they are using the latest remote-monitoring and network-management technology to take over IT functions at client sites, ranging from one or two applications to mission-critical systems.
Revenue comes in the form of monthly payments, akin to a cable or phone bill for the client, that range from hundreds to thousands of dollars.
"If traditional VARs are not going to make this type of evolution, they're going to have some problems," said Tony Williams, vice president and chief technology officer of Riata Technologies, in Austin, Texas.
Too much reliance on product margins and bidding for projects cuts into VAR profits and may ultimately lead to failure, Williams said. Four years ago his company decided to start offering managed services because project-based revenue was too unsteady.
Like most traditional VARs and small integrators, Riata had to fight for every penny as it bid for projects against competitors that were under as much profit pressure. At times revenue would dry up when Riata caught up with all of its projects and found itself with no projects for which to bid, Williams said.
"It's a highly volatile environment to do business in," Williams said.
Feeling similar market pressures, Heartland Technology Solutions of Joplin, Mo., has started evaluating several software platforms that will enable the company to provide managed services to customers, Heartland partner Jane Cage said.
"We hope to have a decision within the next 60 days on software to use for monitoring and for help desk," Cage said. Heartland is testing technology from Kaseya and Level Platforms Inc.
Distributor Ingram Micro Inc., of Santa Ana, Calif., is building a portfolio of services for VARs like Heartland that are trying to figure out how to gain entrance into the managed-services space.
The distributor is partnering with providers of services and technology that VARs can resell to end-user customers, said Justin Crotty, vice president of channel market at Ingram Micro North America. Already signed are N-Able Technologies Inc., Etilize Inc., LTW LLC's Reality Check, Dealtree Inc. and Intechra LLC.
VARs source the technology from the distributor, just as they do with product, but instead of making one-time profits as they would with product sales, they open up sources of revenue that can last for years.
"A lot of our VARs are very interested in recurring revenue streams and providing services that can be billed in that manner," Crotty said.
The switch to a recurring-fee model, however, is often difficult for VARs because they are so focused on project work. It is important to understand the model's profitability, true costs and the number of client seats for which a VAR is providing managed services, he said.
Ingram Micro is helping to educate VARs through seminars and presentations at customer events, he said.
Aside from adapting to the switch within their own organizations, VARs also have to sell the concept of managed services to customers. Heartland's Cage views that as a challenge she hopes her company will surmount as customers learn more about the underlying technology that facilitates managed services.
"I'm not certain that customers realize the kind of technology that is available today," she said. "I think, though, in our rural settings, it will be well received, because we can provide more rapid response. Too often we drive an hour both ways to solve a one-half-hour problem."
Williams said managed services were a tough sell at first. But customers who make the transition quickly find they enjoy the predictability of the monthly fees, the reduction of IT staff costs and the availability of 24/7 support service that Riata provides. In four years, Riata has signed managed-services contracts with about 100 customers, each generating anywhere from $400 to $10,000 in revenue monthly, Williams said.
Though Riata is deemphasizing project work, it is not abandoning it all together. The difference is that now managed-services clients contract Riata for the one-time projects without having to go through the bidding process. "We don't compete for projects anymore, we just get them," Williams said.
The company developed a menu of managed services for clients after making a heavy investment in N-Able monitoring technology. "We really don't try to shoehorn a solution for those companies. We realize one solution may be right for one company, but not for another," Williams said.
As technology becomes better and more reliable, customers become more comfortable with the idea of managed services, said Tyler Roye, CEO of Commack, N.Y.-based services provider Invision.com Inc.
"A few years ago the notion of a data-center-hosted accounting or ERP system was a much harder sell than it is today," he said. But as network infrastructures grow more robust and applications become more reliable and network friendly, the total cost-of-ownership argument for managed services becomes more compelling, he said.
"Essential IT service revenue is up for grabs, and it's going to be redistributed over these new revenue models," Roye said. "The more we can do as a service the more value we can provide to the customer."