VAR Roundtable: Services Versus Hardware, What's Your Percentage?

While solution providers have talked about their changing business models for years as they embrace more and more services over hardware, the numbers are officially in.

At a recent VAR roundtable event at D&H Distributing's New England Technology Show in Quincy, Mass., solution providers shared their percentages of business driven by hardware reselling and services, and they are a complete flip-flop of their business models 10 years ago.

"I think everyone at this table will agree that the hardware price has gone down. The real revenue is to make money in the services. Keeping up with the service is very critical," Jay Shah, vice president at Wethersfield, Conn.-based Compu-Tech, said at the roundtable. "We were a very hardware-oriented company years ago, and we had to change that model."

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For his part, Shah said that his business currently does roughly 40 percent hardware and 60 percent in services revenue. That is a huge drop from the 80 percent of hardware revenue that he said he did 10 years ago.

"Hardware is a hunk of iron," Shah said of the importance of services. "Really, you have to get it working."

Despite his push into services, Shah said that he was a bit of a "laggard" when it came to cloud, but is looking into a hybrid cloud strategy.

Dave Hodgdon, owner of Portsmouth, N.H.-based Portsmouth Computer Group, said that he is currently getting 60 percent of his revenue from services, with the remaining 40 percent from hardware. He said that half of the services revenue is recurring. Ten years ago, he said the percentages were reversed.

Meanwhile, Sue Trahant, co-owner of Land Computer Systems in Peabody, Mass., said that her business is doing 50-50 in hardware and services right now. Richard Trahant, also an owner of Land Computer Systems, said it was 70 percent hardware to 30 percent services five years ago.

Having the long background in services has been a big boost for their business, Sue Trahant said, and has helped keep clients around for the long haul.

"It's a lot more than just selling hardware. We are the IT department for most of our customers. We don't do retail; we do the business-to-business side of it. We have a high retention rate for our customers," she said.

Despite pushing more into services, Richard Trahant said that the company has managed to keep higher hardware margins by focusing on higher-end hardware solutions. For example, he said Land Computer Systems has seen particular growth in communications and telecom, especially as mobile devices and cloud technologies take off. He said that Cisco Meraki is a great example of a higher-end solution that can still drive margins for hardware.

"For the people that don't think they can make the margin on this type of equipment and products, it's really not the case. You just need to be more focused on what brands or vendors that you're dealing with and that these products are not available on the common market. You will never win," he said.

"I can tell you we've had a lot of success with that model," Richard Trahant said. "Don't give up on the hardware, believe me."

Janette Movsesian, owner of York, Maine-based Microcosm, said that when her company first opened, 95 percent of the business was hardware-based. Ten years ago, she said the balance was more 80 percent hardware revenue and 20 percent services. Today, she said it is probably around 60 percent hardware and 40 percent services.

Larry Gold, owner of Computer EZ, said that when he first started his business 15 years ago, he took the "value" in value-added reseller very seriously. He said hardware represented only 40 percent of his business, with 60 percent in services. The business model continues to be a good one, he said, as he focuses on small-business clients in the Rutland, Vt., area.

"Luckily, I'm looking back now, my business model of just being myself and one or two techs in the shop has continued to be a sound one, and it allows me the time I'd like to spend with my family and at the same time be able to run what most people would consider a successful business," Gold said.

PUBLISHED AUG. 22, 2014