Roadblocks To Recurring Revenue (And How VARs Are Overcoming Them)

For many solution providers, the shift to recurring revenue models can mean recurring headaches.

While service-based annuity streams represent the Holy Grail for many VARs, there are plenty of obstacles besides developing a new sales model. And each region, vertical industry and market segment presents its own unique challenges. Depending on the area, for example, a solution provider could struggle with finding enough customers that want to invest in managed services, or they could struggle with meeting the overwhelming demand for those same services.

CRN talked with three solution providers in various stages of transition to recurring revenue models to see what obstacles they faced and how they were overcoming them. Here's what they had to say.

AHEAD OF THE CURVE

Open Road Technologies saw the potential for service-based recurring revenue streams and jumped on the opportunity with zeal. The Memphis, Tenn.-based solution provider developed a managed services business nearly seven years ago called Managed Workplace, which includes remote network monitoring, security services, and virtualized desktop and server support. Open Road also added a managed print services practice to its portfolio.

Gary Bellanti, president of Open Road, said the switch to a recurring revenue model was surprisingly easy -- but the demand from both commercial and public sector clients in the region wasn't there. In fact, he said, many businesses were reluctant to sign up for long-term service contracts and preferred making capital expenditures, which left Open Road feeling like it made the jump to a recurring revenue model too soon.

"It was a hard sell sometimes," Bellanti said. "Customers just didn't see the vision behind investing in a monthly service." As a result, Open Road was forced to spend a lot of time and effort evangelizing and communicating that vision to existing and prospective clients. The message from the solution provider was fairly simple: Managed Workplace services allows us to better meet your needs.

"Offering managed services puts you and your customer in better alignment," Bellanti said. "There's obviously more exposure for us as a company with managed services. It's a win-win for us because it gives us a revenue platform to build off of, and it gives us a better sense of what the customer really wants, too."

Luckily, Open Road didn't overinvest in its new managed services model and was healthy enough financially to wait for the services market in the Memphis area to develop. Now things are starting to pick up for Open Road's services business, and the company's investment -- and patience -- is beginning to pay off.

"The Memphis area has been a slow adopter of managed services and cloud services," Bellanti said, "but that's starting to change now."

BRANDING THE SERVICE

For Compkraft, all the company has ever known was selling hardware. The company, based in Indian Trail, N.C., launched in 2006 as a pure reseller of hardware products and parts for top vendors such as Hewlett-Packard and Lenovo. But seeing the writing on the wall, Compkraft President Allen Williams decided to start transforming his business to a more service-focused solution provider.

"We've been a parts and product depot since we started, but now we're trying to become a full solution provider and build up our services," Williams said.

The good news is Compkraft has received a lot of assistance from its top vendors. Williams said HP and Lenovo have been particularly helpful by giving his company best practices for transforming the company into more of a service-focused solution provider. But there's one area where vendors can't really help Compkraft: branding.

"The biggest challenges for us right now are around sales," Williams said. "We always sold hardware, and we relied on having the best prices to make the sale. But now everyone has great prices so you have to find a way to distinguish and brand your service." That's been a work in progress for Compkraft. Currently the company offers presales integration support for servers and networking equipment, and Williams said he plans to add more services offerings this year. But Compkraft is still looking for the right mix of services to distinguish the company beyond just attractive pricing.

"We've already started calling out to end-user clients to drive interest in our services," Williams said. "The challenge is finding the right businesses that we can offer services to along with the hardware."

CompKraft is continuing to work with HP and Lenovo to change its business, but the company has also started working with distributor partner Synnex and its Varnex community members to get up to speed on branding and selling its own services. The trick, Williams said, is balancing the investments in the new business without sacrificing too much of the old business.

"The hard part is, we don't want to lose our existing business," Williams said. "But we need to devote time, money and resources to develop the news business. And since we're a small business, it's a fine line to walk."

NEXT: Partner To Partner

PARTNER TO PARTNER

LANStatus has moved all-in on recurring revenue; the business of long-term service contracts is so lucrative for the Trumbull, Conn.-based company that it often partners with other solution providers to generate more business. For example, LANStatus recently teamed up with another solution provider on a Fortune 500 client deal to deliver and manage approximately 8,000 desktops, with the potential for a total of 20,000 desktops.

"The other VAR was already working with the customer, but they didn't do virtualized desktops, so we teamed up," said Robert Charlton, director of vendor relations and sales operations at LANStatus. "It's $70 a month to manage each desktop, and we'll split that with the other VAR. That's big money." To bolster that kind of business, LANStatus formed the Systems Integrator Partner (SIP) Program last fall; the program currently has more than 50 solution providers.

"What we're trying to do with our SIP Program is work with other solution providers to deliver the best possible solution," said Charlton, who runs the SIP Program. "The goal today is to not only win the customer account but also grow the annuity stream within the account."

Unfortunately, Charlton said, it's been hard to find solution providers that have built strong recurring revenue models from their services offerings. "Most partners we work with or talk to about SIP don't have that recurring revenue stream," he said. "They say they're selling managed services, but they don't really have the model. A lot of guys will sell software and bill the client on a monthly basis and offer support, but that's not managed services."

That trend has pushed LANStatus into an adviser role for the SIP Program; Charlton said the company is currently working with several VARs that have little-to-no recurring revenue, coaching them on how to build service-based annuity streams. For example, LANStatus recently met with one VAR prospect that had virtually no services annuity streams but realized it could nearly double the business by adopting a recurring revenue model. "They're learning more about recurring revenue by working with us in the program," Charlton said. "The hope is we'll do more repeat business with existing SIP members and bring in even more members this year."

This article originally ran an as an exclusive on the CRN Tech News App for tablet.