Proven Profitability Formulas

/**/ /**/

John DeRocker says he saw the light 18 months ago. That’s when the senior vice president of sales and marketing at Nexus Information Systems, a $30 million solution provider in Plymouth, Minn., started rethinking how he viewed his storage business, traditionally one of his hottest product categories. With focused attention, he knew his company could unleash more profit for this practice.

\

\

“The issue that people run into is that they tend to be too myopic in what they classify as storage,” DeRocker said. “If you are talking about traditional SAN or NAS, in the past that has yielded anywhere from 5 points to 30 points of margin. But if you go outside the box and not view storage as a general term but think of it as enterprise backup, disaster recovery or e-mail archiving, now the margins are out of this world.”

\

\

In fact, much of what DeRocker counts as storage sales is

data

management and security consulting that doesn’t even include storage hardware. “In some cases, a SAN isn’t even part of it because now what we classify as storage often has nothing to do with disks,” he said.

\

\

DeRocker is at the vanguard of a new breed of solution providers that have transformed their business from a reseller mind-set to one that focuses exclusively on solutions and related services and that, in turn, have profoundly transformed their profitability proposition.

\

\

With his storage practice now his star performer, DeRocker’s solutions and services worldview is paying off handsomely. “If you take any given month, and all product [sales] are equal, on every $100,000 of sales, my storage business is three times the margin of any other product that I have,” he said. “Everything is 20 points to 40 points of margin.”

\

\

Likewise, Rick Chernick, CEO of Camera Corner Connecting Point, a solution provider in Green Bay, Wis., has rethought how services and solutions can drive his overall profits and now focuses on those that produce annuity revenue streams. Chernick points out that not only does his company receive the initial product and consulting fee for a technology solution, it now can claim an ongoing annuity from licensing and other fees that are extremely profitable. “We are looking for more of a residual year after year,” he said.

\

\

Chernick, for example, has started to sell security software from Lightspeed Systems, Bakersfield, Calif., into the K-12 market. The product monitors a school’s network and blocks students from using applications such as

instant messaging

or accessing unauthorized sites on school systems. In addition, the product performs

virus

scans, offers

vulnerability

assessments and blocks network intrusions.

\

\

“It’s sold per-seat and it’s affordable and brings a lot of multiple solutions into one product,” he said. “And it’s an annuity stream. The school buys it one time now and then year after year pays a licensing fee and we get a kick of that.”

\

\

Chernick has built similar annuity revenue streams around LiveVault data management software from Iron Mountain Digital, Marlborough, Mass., and

document

management software from Laserfiche, Long Beach, Calif.

\

\

“With LiveVault, we go to the customer and find out how much data is static vs. dynamic, and then come back with a price so he can back it up affordably,” he said. “Laserfiche is another product we’ve been marketing, and it’s starting to take off. Businesses are starting to understand that they are in a paper nightmare, and they don’t want to store it in a warehouse.”

\

\

Like Chernick, DeRocker said one key factor in his services profitability is how he structures his alliances with dozens of new vendors. As he takes on additional vendors, many of those partnerships are being handled direct with the vendor rather than through traditional distribution channels.

\

\

“I would say that out of my 30-plus storage vendors, probably five to 10 are distribution-based,” he said. “The other 20 are private-based software or hardware vendors that are direct, and we don’t deal with distribution at all.”

\

\

He cited Waltham, Mass.-based XOsoft and CommVault, Oceanport, N.J., as two examples.

\

\

DeRocker said that this trend toward forging direct relationships with small vendors also contributes to growing profitability.

\

\

“I don’t have the insider load that I have when I go through distributors,” he said. “And I have direct contact with the manufacturers, so if I have to play with pricing or manipulate billing to do the deal, I can get it done immediately.”

/**/ /**/
/**/ /**/
/**/ /**/

He said that his distribution partners do a great job with

NAS

and SAN hardware. “But on the extra stuff, where it’s all high-margin, software-based stuff that ends up making the deal, distribution would not be beneficial in that space simply because they can’t be experts at all things,” he said.

\

\

John Marks, CEO of JDM Infrastructure, a solution provider in Chicago, said he, too, is seeing greater margins by striking alliances with smaller vendors that have made a commitment to working with the indirect channel. “Lots of profitability comes from the second-tier manufacturers, the niche guys,” he said. “Their technology tends to be proprietary and if you sell the customer on their technology and what it does, these guys have said that the channel deserves to make money. They are dying to partner with you. And they are channel-only, and they are friendly. And they allow you to make 30 percent on a solution.”

\

\

Marks cited companies such as Astaro, a

firewall

and network management and security software vendor in Boston; Xirrus, an enterprise

wireless LAN

vendor in Westlake Village, Calif.; and IronPort Systems, a Web security software vendor in San Bruno, Calif.

\

\

“These guys go direct [to solution providers] and a lot of these second-tier vendors are really good channel partners,” Marks said.

\

\

Some solution providers say managed services, specifically those scaled to address

SMB

customers, has emerged as a robust profit engine over the past 12 months.

\

\

“We really didn’t have hosted services a year ago,” said Pete Busam, executive vice president and COO of Decisive Business Systems, a solution provider in Pennsauken, N.J. “Now we have five major products that we’ve wrapped and rolled out in our co-location facility. We host them all in our facility and just charge a monthly fee. The new managed services include hosted Citrix, hosted Exchange, hosted network management, managed firewall services and co-location of custom applications. Busam said that in just one year, managed services vaulted from virtually nothing to become Decisive Business Systems’ highest-margin business behind

IP

telephony solutions.

\

\

Chernick, too, said that he has revamped his managed services offerings to address even the smallest businesses in his customer

database

and prospecting area.

\

\

“We’ve retooled as far as our thinking goes to help those people who don’t have the wherewithal to have a full-time IT staff,” he said. “We’ve added the necessary equipment and software to do an

ASP

model for very small businesses.”

\

\

He said small businesses can buy a couple of desktops. Meanwhile, Camera Corner Connecting Point can manage the

server

and the data in its hosting center, and the customer can go to the Internet to access their data.

\

\

“It’s just a

click

on an

icon

and away they go,” Chernick said. “I have one small homebuilder who uses two laptops and who doesn’t even have an office. Now we can say to small businesses, ‘Do you want to buy a server and manage it yourself, or for a setup fee and a small monthly fee, do you want us to manage it?’ ”

\

\

By the way, solution providers whose bread-and-butter market is in SMB accounts say hardware margins on servers and storage remain steady and continue to be a strong contributor to the bottom line, with signs that 2006 will be a strong year for these technologies. In its recent earnings report, IBM, for example, said while overall server sales were soft in the first quarter, sales at the lower-end of its server lines was strong.

\

\

Both IBM, Armonk, N.Y., and Hewlett-Packard, Palo Alto, Calif., are seeking to capitalize on this trend by focusing on the profitability equation that they can offer channel partners through ongoing program revisions.

\

\

\

\

\

IBM Business Partners said the shift toward lower-end servers bodes well for their SMB customers. “We had an exceptional first quarter; our server business was up year over year about 17 percent,” said Joe Mertens, executive vice president of San Antonio-based Sirius Computer Solutions, one of IBM’s largest U.S. business partners. “The xSeries business was exceptionally strong for us, up over 100 percent.”

\

\

HP solution providers, too, say HP’s rebate and pricing models are starting to boost their overall profitability picture.

\

\

Don Richie, president of Sequel Data Systems, an HP-only solution provider in Austin, Texas, said his overall gross profit margins are running 2.5 points higher this year than last year. “We’ve seen our high-end storage margins increase in large part because of the new [pricing and rebate] models that HP’s come up with,” Richie said.

\

\

Last year, HP introduced a new channel-pricing model focused on Big Deal enterprise accounts that rewarded solution providers based on profitability rather than a fixed percent of list price. Richie said that strategy helped boost high-end storage margins by more than 2 points.

\

\

“We are also seeing our HP back-end dollars grow significantly,” he added, noting that he expects his gross margins to increase even more because of HP’s new Attach Plus rebate that went into effect May 1. Attach Plus rewards solution providers with increased rebate money for attaching more HP products and services into a single solution.

\

\

While it’s too early to say how successful Attach Plus will be at improving solution providers’ balance sheets, the new program provides just one more piece of evidence that as solution providers rethink their profitability propositions, they won’t be going it alone—the vendors, large and small, that they choose to represent will play a critical role in reshaping the bottom line.

/**/ /**/
/**/ /**/
/**/ /**/

The Big Picture In Profitability

Average of numbers reported by 40 to 120 solution providers, depending on category

Network Security

Top-Line Sales Growth

\

Past 12 Month

16.5%
Gross Profit Margin 19.5%
Client/Desktop Security

Top-Line Sales Growth

\

Past 12 Month

15%
Gross Profit Margin 19.6%
Network Infrastructure

Top-Line Sales Growth

\

Past 12 Month

15.8%
Gross Profit Margin 21.8%
VoIP

Top-Line Sales Growth

\

Past 12 Month

18%
Gross Profit Margin 20.4%
Networked Storage Infrastructure

Top-Line Sales Growth

\

Past 12 Month

14.1%
Gross Profit Margin 21.2%
Storage Management

Top-Line Sales Growth

\

Past 12 Month

13.2%
Gross Profit Margin 20.1%
Mobile Technology

Top-Line Sales Growth

\

Past 12 Month

16.7%
Gross Profit Margin 17.3%
Custom Systems

Top-Line Sales Growth

\

Past 12 Month

14.9%
Gross Profit Margin 22.2%
Database Management

Top-Line Sales Growth

\

Past 12 Month

14.9%
Gross Profit Margin 22.3%
E-Mail Collaboration Software

Top-Line Sales Growth

\

Past 12 Month

11.3%
Gross Profit Margin 21.4%
Back-Office Software

Top-Line Sales Growth

\

Past 12 Month

12.2%
Gross Profit Margin 21.5%
Printing/Imaging

Top-Line Sales Growth

\

Past 12 Month

10.4%
Gross Profit Margin 14.2%
Digital Display/Signage

Top-Line Sales Growth

\

Past 12 Month

12.4%
Gross Profit Margin 13.2%

Source: 2006

CRN

Profitability Survey

/**/ /**/

The Big Picture In Profitability

Average of numbers reported by 40 to 120 solution providers, depending on category

Network Security

Top-Line Sales Growth

\

Past 12 Month

16.5%
Gross Profit Margin
19.5%
Client/Desktop Security

Top-Line Sales Growth

\

Past 12 Month

15%
Gross Profit Margin
19.6%
Network Infrastructure

Top-Line Sales Growth

\

Past 12 Month

15.8%
Gross Profit Margin
21.8%
VoIP

Top-Line Sales Growth

\

Past 12 Month

18%
Gross Profit Margin
20.4%
Networked Storage Infrastructure

Top-Line Sales Growth

\

Past 12 Month

14.1%
Gross Profit Margin
21.2%
Storage Management

Top-Line Sales Growth

\

Past 12 Month

13.2%
Gross Profit Margin
20.1%
Mobile Technology

Top-Line Sales Growth

\

Past 12 Month

16.7%
Gross Profit Margin
17.3%
Custom Systems

Top-Line Sales Growth

\

Past 12 Month

14.9%
Gross Profit Margin
22.2%
Database Management

Top-Line Sales Growth

\

Past 12 Month

14.9%
Gross Profit Margin
22.3%
E-Mail Collaboration Software

Top-Line Sales Growth

\

Past 12 Month

11.3%
Gross Profit Margin
21.4%
Back-Office Software

Top-Line Sales Growth

\

Past 12 Month

12.2%
Gross Profit Margin
21.5%
Printing/Imaging

Top-Line Sales Growth

\

Past 12 Month

10.4%
Gross Profit Margin
14.2%
Digital Display/Signage

Top-Line Sales Growth

\

Past 12 Month

12.4%
Gross Profit Margin
13.2%

Source: 2006

CRN

Profitability Survey

/**/ /**/

The Big Picture In Profitability

Average of numbers reported by 40 to 120 solution providers, depending on category

Network Security

Top-Line Sales Growth

\

Past 12 Month

16.5%
Gross Profit Margin
19.5%
Client/Desktop Security

Top-Line Sales Growth

\

Past 12 Month

15%
Gross Profit Margin
19.6%
Network Infrastructure

Top-Line Sales Growth

\

Past 12 Month

15.8%
Gross Profit Margin
21.8%
VoIP

Top-Line Sales Growth

\

Past 12 Month

18%
Gross Profit Margin
20.4%
Networked Storage Infrastructure

Top-Line Sales Growth

\

Past 12 Month

14.1%
Gross Profit Margin
21.2%
Storage Management

Top-Line Sales Growth

\

Past 12 Month

13.2%
Gross Profit Margin
20.1%
Mobile Technology

Top-Line Sales Growth

\

Past 12 Month

16.7%
Gross Profit Margin
17.3%
Custom Systems

Top-Line Sales Growth

\

Past 12 Month

14.9%
Gross Profit Margin
22.2%
Database Management

Top-Line Sales Growth

\

Past 12 Month

14.9%
Gross Profit Margin
22.3%
E-Mail Collaboration Software

Top-Line Sales Growth

\

Past 12 Month

11.3%
Gross Profit Margin
21.4%
Back-Office Software

Top-Line Sales Growth

\

Past 12 Month

12.2%
Gross Profit Margin
21.5%
Printing/Imaging

Top-Line Sales Growth

\

Past 12 Month

10.4%
Gross Profit Margin
14.2%
Digital Display/Signage

Top-Line Sales Growth

\

Past 12 Month

12.4%
Gross Profit Margin
13.2%

Source: 2006

CRN

Profitability Survey

id
unit-1659132512259
type
Sponsored post