The Ever-Changing VAR Model

"Most of the technology that we are going to use over the next three years is already sitting here, so it's a matter of which technology companies can productize their innovation to allow people to implement it in a step-by-step process," says Nassaur, former IT manager and CIO for companies like eTrade and BellSouth. "A new skill set will be required to do that, so smart integrators will... play more of that [training role."

Nassaur is not alone in his thinking. According to VARBusiness' 2003 State of the Market survey, 42 percent of a solution provider's revenue today comes from services and consulting work, making it the No. 1 cash generator. What's more, it also accounted for 48 percent of solution-provider profits.

Yes, there's clearly money to be made for solution providers who have built their businesses on services-led solutions. But does that mean solution providers are completely giving up on products? Certainly not. According to the survey, software sales accounted for more than 24 percent of solution-provider revenue, while systems (including peripherals, accessories and storage) made up more than 18 percent, and network hardware made up 16 percent. The key to success, therefore, is finding the perfect mix between products and services.

While True North resells products, including software from partners such as BEA Systems, Oracle and Sun, its primary money-making activity is up-front consulting and training designed to help clients take their businesses to the next level.

"We see today's solution provider as a product of evolution," Nassaur says, comparing it to the difference between being an auto-parts checkout clerk and an experienced mechanic. "The solution provider can no longer simply hand parts over the counter to a customer who wants to tune up his car. Things have gotten too complex for that, and the level of differentiation in the marketplace between one vendor and another is not clear. They realize that they are not going to go to Oracle, PeopleSoft, SAP or wherever and buy nirvana. They've got that joke now and know they've got to make steps toward business integration, communication and collaboration."

That's why True North leads every IT implementation with training classes for client executives on specific technologies. As part of that process, the company brings clients in for two-day training classes where they can learn about the differences in technologies,say, J2EE vs. .Net, or the particular uses for Web servers vs. application servers. Then it will move into consulting and business-planning work before the actual sale of any software.

Nassaur also sees a great opportunity for support and maintenance because today's environment has gotten so complex that clients know they can't rely on a single vendor's services anymore.

AMS' New Direction

The combination of services and products is what intrigued Alfred Mockett when he stepped in as chairman and CEO of Fairfax, Va.-based American Management Systems (AMS) last December and decided to embrace what he considered the company's "hybrid" model, instituting a number of new initiatives to spur growth. Earlier this month, having marked his one-year anniversary at the $1.2 billion IT solution provider, ranked 50 on the 2002 VARBusiness 500, he got a chance to sit back and re-evaluate the progress AMS has made in the past 12 months and redefine what the term "IT solution provider" actually means today.

"It's been a year of midflight refueling," Mockett says.

One of the most important things AMS did during the past 12 months was narrow its focus around three areas: geography, vertical expertise and service lines. So the company scaled back its physical footprint, focusing on the United States, Canada and eight European markets, and narrowing its vertical focus around public sector, financial services, and communication, media and entertainment clients. "It was about looking at where we were at critical mass, and where we had a sustainable source of competitive advantage," Mockett says.

Meanwhile, the rest of the businesses were brought together under a new incubator model, which was charged with turning new businesses into viable revenue generators. (The ones that don't make the cut are quickly dropped, as evidenced by AMS' recent decision to divest its global energy business.)

As far as service lines go, Mockett set out to find the sweet spot where AMS' strong vertical experience intersects with horizontal business functions. So he made the decision to focus on three areas: enterprise integration, managed services, and innovation and transformation.

And, unlike some other solution providers who have traditionally focused on product sales or gone to the other extreme and adopted a services-only model, AMS has embraced the fact that it is a hybrid between technology products and services. Today, some 10 percent of AMS' revenue comes from product sales. "But what makes this business model work is that for every $1 of product revenue, I get about $5 to $6 of drag-along systems-integration revenue," Mockett says. "That really is where we add value."

The hybrid model perplexed some analysts, who told Mockett when he became CEO that the company needed to decide whether it wanted to be a product shop or a systems integrator. Rather than answer to Wall Street, Mockett took that same question out to AMS' client base, meeting with dozens of companies to hear their opinions. "The customers said the beauty of AMS was that we are neither and both at the same time," he explains. "We have our custom proprietary unique solutions that add value for the customer, and we can also mix and match with commercial, off-the-shelf software from other major software vendors. Then we can put a systems integration shrink-wrap on top of it to make it completely custom for the particular customer. They came back and said, 'You are a hybrid and should be proud of it.'"

Like other large solution providers, AMS is banking on outsourcing and managed services to drive revenue, hoping to underpin the company's financial performance with multiyear, annuity revenue streams. While large players like IBM Global Services and EDS have focused on data-center outsourcing, infrastructure and PC migrations, AMS is looking to dominate the business-process-outsourcing and application-outsourcing space.

"The traditional hardware-outsourcing business has probably topped out," Mockett says. "Where we still see healthy growth,as much as 20 percent a year,is in business-process outsourcing and application outsourcing, so I made a conscious decision to move AMS in that direction."

To that end, the company recently signed the largest outsourcing contract in its 30-year history: a $156 million, seven-year deal with the New York City Department of Finance to operate and maintain its parking violations data-processing system.

The Ever-Changing Sales Force

Historically, AMS has won the bulk of its new projects from existing clients, which Mockett says accounts for 80 percent to 85 percent of its business. Still, Mockett decided to make a major change in the company's sales operations, building a more proactive sales and marketing organization to complement the existing business-development activities. "We had long been very good at the relationship sell, but in tough market conditions, it takes a much more proactive approach," he says.

So the company created a commissioned sales force of some 100 people charged only with new business development. The unit was designed to have a highly leveraged, open-ended compensation plan to motivate its reps to make the big deals. "While our existing relationship managers and business developers took care of the customer base, we signed up 66 new accounts in the year in what has been a down market," Mockett says.

Nassaur went in the opposite direction when it came to his company's sales processes. He has put much less emphasis on building a traditional sales team and has instead focused on giving his technologists more power to sell solutions.

The bulk of True North's internal training dollars goes toward helping its project-management and technology teams polish their sales techniques. "Most of the projects popping up today are not, 'Hey, we're going to put in a new HR or data warehouse solution.' It's more like, 'Hey, we already put one in, and we also put in another ERP system, and now the two don't talk to each other,'" Nassaur says.

Selling today is totally different from just a few years ago, he adds. "The average CIO or IT professional isn't going to let the sales guy in every week just to meet," Nassaur says. "Opportunities are going to come from farming and the execution of a step program. If the person in front of them is one of the senior, functional or technical people on their project, it's going to give the client a better feeling than if it's a salesperson."