Custom Systems

After all, he used his retirement savings last year to buy a small system builder business, thrusting himself head-first into one of the most competitive technology markets around. But Lowe couldn't be happier.

Although margins were flat during his first couple of quarters, the president of TD Computer Technologies in Fort Myers, Fla., is not worried. Lowe is transitioning the company to build entire solutions around disaster recovery and security, with services wrapped around his hardware sales. In other words, he's finding new ways to be profitable within a traditional business model.

"Two years ago, with all the hurricanes we had, people were caught unaware. It took a hit on the business climate here. People now are recovering from that. There's a lot of services around disaster recovery, remote network monitoring," Lowe said. "I wouldn't have bought a system builder just to be a system builder."

It's a lesson other custom-system builders are learning, too: To increase profitability, you have to find a new way to create business.

For John Gouker, CEO of Workhorse PC, a McKinney, Texas-based system builder, the custom-system solution approach means bringing an ultrasmall-form-factor desktop to market. For Brian Piatt, manager of Startec Computer, Sterling Heights, Mich., it means finding more cost-effective components to sell into an economically depressed regional market.

According to the 2007 CRN Profitability Study, it should have been a tough year for system builders. The average increase in top-line sales of custom systems was 8.4 percent, the second lowest increase among the 13 technology solutions areas surveyed.

Next: Gauging the profitability numbers for custom systems

But gross profit was 23.4 percent, the second highest among the surveyed technology solution areas. Lowe, Gouker and Piatt said their ability to adapt in a very competitive environment has led to their success. In all three cases, the system builders have been able to maintain and even increase profitability in a world in which Dell's aggressive price tactics have been equaled by Hewlett-Packard and Acer, among others.

"Our ultrasmall [PCs] are 11 x 11 x 3 1/2. They're quieter, they take up less desk room. Schools like them. Government [agencies] with cubicles like them. People at home like them," Gouker said.

Workhorse PC earns about 25 percent margins with the ultrasmall models, compared with about 15 percent associated with more traditional system form factors, he said. "Mainly because nobody else really is doing it. For us, it's going after the niche markets and having products that are a little more unique as opposed to the same thing that everybody else is putting out there," Gouker said.

Meanwhile, Piatt said he has switched to more cost-effective components, which has lowered his own costs and allowed him to reduce the cost of his systems by about $50 each. That's been helpful in Startec's local market and allowed his company to make more money, Piatt said.

"Michigan's economics are one of the worst in the country. We have to be very versatile; Dell is very difficult to be cost-effective against. You need a superior product for an adequate price," Piatt said.

Startec's no-questions-asked warranty policy has also been a differentiator, he said. "If a customer brings it in within the warranty period, we'll exchange it. That's important to a lot of people," Piatt said.

Given the efforts of these custom builders, it's little wonder that this practice area boasted the highest ratio of services attached to product in the 2007 CRN Profitability Study—$3.50 of services per $1 of product included in the solution. Custom systems was also No. 1 in this area last year, although the ratio slipped from $5 to $1 in 2006.

Lowe feels that slip was not a case of services revenue declining, but of product revenue being stronger. There were still some lingering effects of the product refresh cycle after the Y2K bubble, he said. "We refreshed a lot of obsolete product. Product sales caught up with services sales. And now we're selling hardware that people know will be Vista-capable. People are thinking of hardware for a change vs. services and software," he said.

And, slowly, Lowe is convincing people he's not as crazy as they thought.