It's All About Your Influence

How did AlphaNet pull off such a sleight of hand? Simple: It convinced the likes of Microsoft and Cisco that the company deserves recognition for the work it does influencing customer-purchasing decisions. Although AlphaNet no longer completes a lot of product transactions, it's certainly responsible for initiating many of them. And it isn't alone.

Today, many IT solutions companies are restructuring their businesses--shifting to product-influencing from product-reselling. The reasons for doing so are many. Chief among them: Product-influencing is more profitable than product-reselling. At 18-year-old AlphaNet, a Microsoft Gold Certified Partner, gross margins climbed to 32 percent in the third quarter of 2002, compared with 25.4 percent in the same period one year ago. In those same periods, product sales dropped to $300,000 from $2.5 million. As it stands today, AlphaNet doesn't rely on the sales of software licenses, routers or switches to achieve its financial goals; it relies on its cunning, which it markets in the form of professional services.

"It's not rocket science," says Anthony Ferrigno, CTO and vice president of business development at AlphaNet, which is building a business based on influencing product sales, but not transacting them.

Until recently, transforming a company such as AlphaNet had not been easy. Vendor partners, for example, haven't exactly rushed to reward those who sell fewer products than they once did, and local and vertical market financiers have been cool to the idea of giving more capital to those with shrinking top-line sales.

But things are starting to change. Citrix, Computer Associates, Hewlett-Packard and Microsoft are just a few major vendors that have reconfigured their partner programs to accommodate solution providers that prefer to influence product sales rather than complete them (see "The Agent Factor"). They now recognize their value.

"We have a growing number of certified partners that don't sell product. We're getting more and more certified partners, but fewer and fewer care about reselling software," says Allison Watson, vice president of worldwide partner sales and marketing at Microsoft.

As encouraging as these developments are, some basic issues remained unresolved: Can partners really make money shifting their businesses in this way? Will sufficient numbers of vendors change their long-held tenets of what valuable partners are truly all about? In the pages that follow, VARBusiness explores whether influencing product sales and relying on consulting services is for real, or merely another IT industry fad.

White-Glove Services

Almost as long as there have been computers, there have been IT consultants who get paid to tell customers how to make better use of technology. In traditional consulting, however, individual operators have tended to remain product- and vendor-neutral so as not to compromise their objectivity. In recent years, however, the wave of companies that specializes in particular products or vendor technologies has almost washed away its vendor-neutral counterparts. Now, another wave of consultants,known as influencers,is sweeping over the landscape, particularly in the SMB customer community. Many of these companies are considered "white-glove services" operations because they don't touch products. That's a misnomer, however. While many consultants refrain from selling and integrating vendor products, they, nonetheless, have a significant impact on technology sales. Take Alvaka Networks of Huntington Beach, Calif., for example. Once a successful reseller of IT goods, Alvaka has completely transformed its business. Revenue last year was almost entirely generated by professional services and remote managed services, while product sales shrunk as low as 5 percent.

"I kissed most of my vendors goodbye long ago. We lead with our own professional services and managed services," says CEO and founder Oli Thordarson. "The vendors are coming at this all wrong, because they still want me to act as a sales rep for their product. That's so 90s."

Like many, Alvaka makes product recommendations or endorsements during a services or consulting engagement. Its clients then buy the technology from another, more cost-effective source, such as a dot-com reseller or mail-order firm. So long as he gets compensated,via a vendor agent program, a commission, etc.,Thordarson will work with a third party to fulfill the sales. That's because his services business is soaring. Last year, his services sales increased more than 60 percent from the year before.

In addition to helping him keep focused on his services business, the influencer model provides him another benefit: It allows Alvaka and other companies like it to take advantage of the increased appetite among customers to optimize the gear they already have in-house. Thordarson says his company had a client last quarter who had half a million dollars worth of SAN equipment sitting on the shelves for more than nine months before it finally hired Alvaka to implement the technology. Had Alvaka walked in trying to sell the customer new gear, it would have been shown the door.

Return To Consulting

For many companies, shifting their businesses from reselling to influencing is a return to form. That's because a number of solution providers that began as consulting companies years ago drifted into product reselling at the height of the dot-com boom when orders phoned themselves in. Now that that era is over, many are returning to what they do best, albeit with a newfound ability to recommend technology. Melillo Consulting in Somerset, N.J., which started 15 years ago as a business-consulting operation, eventually morphed into a technology reseller during the late 1990s. But when the market became saturated with price-pushers, Melillo Consulting began emphasizing services over products, according to Matt Jacobsen, general manager of Melillo's enterprise solutions. "We're trying to lead less with technology and more with integration and consulting services," Jacobsen says. "The reason is because we're continuing to see a lot of 'cleanup' issues, where the products have already been purchased but are either not working correctly or just sitting on the shelf."

Many, including BKD of Springfield, Mo., are doing the same. Founded as a CPA firm in 1923, BKD morphed into IT consulting 70 years after its founding. A few years ago, BKD specialized in accounting software and ERP solutions and was an aggressive hardware reseller, according to Mike Burlew, partner in charge of BKD Technologies Division. But Burlew says his business today is almost entirely geared around IT consulting, not product sales.

So, what's changed? The economy, for one. "Hardware reselling especially is a fierce market, and we just couldn't afford the low margins as a small shop," Burlew says. "You have to be a big shop that handles high volume to be able to live off those tiny margins."

Product sales still make up a small portion of BKD's business, and the company has reseller agreements with Best and Microsoft Great Plains. But BKD now offers a host of white-glove services, such as network and wireless LAN, security and e-business consulting services. "Software is still a piece of the pie, but consulting services is so much bigger. We lead with consulting," Burlew says.

Juicy profit margins as high as 50 percent helped fuel growth for many IT consultants in a poor IT spending environment. In 1999, for example, during the height of the dot-com heyday and Internet bubble, BKD passed the $100 million annual revenue mark. Amazingly, BKD recorded $200 million in revenue in 2001, nearly a 67 percent jump from the previous year. While not all of that revenue increase can be attributed to IT consulting,BKD still has a large CPA business,Burlew says it was an important driver.

Ultimately, many solution providers have decided that it pays better to work as advisers to customers rather than as suppliers. That includes those who specialize in small to midsize customers that traditionally have bought services from the same companies that sold them products. Now, even consultants who focus on SMB accounts are thriving as influencers. That includes Tribridge, a Tampa, Fla.-based solution provider formed in 1998 by a handful of ex-Big Five Consulting veterans. Tribridge specializes in SMB accounts and leads with strategic consulting services. It makes product recommendations but stays away from actually reselling products. Steve Terp, director of business development at Tribridge, says his clients prefer it that way.

"At the end of the day, people like that we're independent," Terp says. "People are looking to get more out of what they already have. We'll even talk customers out of spending money on technology."

Tribridge has done so in the past. The solution provider had a client in the time-share business that wanted to invest $300,000 in a new IT infrastructure to run its financial systems. Although it wanted the revenue, Tribridge determined that the client didn't need a new system and instead reconfigured its existing equipment for significantly less money. That kind of honesty and objectiveness is finding plenty of acceptance with customers in today's weak IT spending environment.

The Services Trap

Although the bulk of IT spending today now goes to services, the influencer approach has its risks and drawbacks. First, only a few major vendors are willing to award partners for merely influencing a sale, which sometimes leads to IT consultants being treated like second-class solution providers.

Second, despite the larger amount of money spent on IT services, selling services without them being wrapped around products isn't easy. IT consultants are by no means immune to the poor economy, either. Sapient, an e-business consultancy based in Cambridge, Mass., saw its quarterly revenue fall more than 50 percent earlier this year after several large contracts were postponed. Like AlphaNet, however, Sapient has also seen its services revenue grow recently. Sapient's consolidated services revenue in the third quarter, for example, was $43.6 million, an 8 percent increase from the previous quarter this year. That growth helped the company beat its overall revenue expectations for the quarter.

With its new model, Sapient CTO Benoit Gaucherin says smaller contracts and shorter projects are more common, as are customers looking for IT services wrapped around technology they've already purchased. Sapient is banking on its rising services revenue outweighing the hits it took to reduced product revenue, which have led to layoffs, operational

losses and restructuring.

"We've never followed the VAR model. The overall IT spending environment has been much kinder to consulting than product reselling," Gaucherin says. "There's pressure, especially from the vendors, to start selling product, but we believe in the consulting model."

The trick is balancing the large investments with offering IT services, experts agree. That includes Ken Wasmer, founder of Wasmer Consulting of Alexandria, La. Of late, Wasmer has advised a number of clients on transitioning from product-oriented sales to a professional services model, a move that may appear easier than it seems but is much more dangerous than many think. Wasmer argues that solution providers don't fully understand how expensive selling services can be. Unfortunately, he says, too many become enamored with the idea of hefty, 35 percent margins.

"VARs are less profitable today because of the way they sell services," Wasmer says. "We're consistently seeing customers that are losing their shirts selling services because they're not anticipating a lot of the costs, such as certifications, training, education and engineers' salaries."

That said, Wasmer firmly believes that "the professional services model is the way of the future for this industry." How to get there properly is the magic trick, of course.

Thankfully, a growing number of vendors is beginning to change its partner programs to accommodate non-reseller solution providers. Citrix, for one, is currently readying a new partner category that will recognize IT consultants for influenced sales. Ironically, the new initiative comes after the company almost tossed out a number of allies it thought were deadbeats in its partner database. Only after it did some research did it realize these companies were assets.

"We found a number of guys who said, 'You got me. I don't really sell product.' They just partnered with Citrix to get technical support," says Ross Brown, vice president of business planning at Citrix. "They weren't really resellers anymore. They influenced software sales and sort of disguised themselves as a typical VAR and hid out in our Silver Program."

AlphaNet's Ferrigno believes many more VARs would adopt the influence business model if only more companies thought like Citrix.

The reality, of course, is that the vendor community still has a long way to go. Even leading-edge companies such as Citrix and Microsoft don't have the influencer-compensation model down to a science. But as the number of influencers grows, the greater the pressure will be on vendors to get with the times.

"What's going to drive this trend is companies like us telling their vendors they want to be certified partners that are recognized by generated customer revenue, not product sales," Ferrigno says. "The vendors that understand that will get our business. The ones that don't will wait until it hurts them,or until they're dead."