Proven Profitability Formulas

Transforming a solutions worldview into a better balance sheet has become a daily routine for these solution providers, who share their bona fide best practices

CRN logo By Craig Zarley, ChannelWeb
3:00 PM EDT Fri. May. 12, 2006
From the May 15, 2006 issue of CRN
Page 1 of 3
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.”

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