Strong Demand Reaps Healthy Margins
The survey data showed that channel revenue is spread across a broad range of technologies. When researchers weighted the average percentage of revenue from a technology by percentage of VARs in that technology, desktops, notebooks and entry-level servers were ranked first, with about 14 percent of revenue. Next came custom systems (10 percent), followed by wired networking infrastructure (6 percent), custom applications developed for proprietary solutions (6 percent), backup and recovery solutions (5 percent), printing and imaging (5 percent), small and medium business software suites (5 percent), basic security (5 percent), and wireless networking infrastructure (4 percent).
All but one of the technology categoriesand#8212;printing and imagingand#8212;are increasing revenue faster than U.S. gross domestic product (GDP), which grew about 5 percent in current dollars from 2006 to 2007. This indicates that solution providers, on the whole, are doing better than the national economy.
Don't Scrimp On Applications
Even in sluggish times, business customers need upgrades and maintenance on their existing systems. Some are also looking for ways to cut costs through technology initiatives. By that token, many solution providers who meet their needs are seeing increased business and better bottom lines.
"We see no slowing of new business applications and relevant technologies deployment today, regardless of what the doomsayers are prattling about," said Robert Swanson, president of Delta Max, a provider of technology solutions, services and consulting in Newport Beach, Calif. "Things are accelerating for us, not cutting back," he added.
Revenue is growing most quickly in the areas of virtualization, midrange servers and unified communications, according to the survey and other market indicators. Solution providers, on average, say total sales revenue for virtualization products and services increased 16 percent in 2007 compared with 2006.
Swanson said Delta Max's virtualization practice has grown at least 200 percent over the past year. "Our unified communications areas are growing also, but mainly as part of the overall effects of our main professional services practices," he said.
Revenue from sales of midrange servers and unified communications solutions rose 10 percent from 2006 to 2007, the survey showed. Other fast-growing technology practices include custom applications developed for proprietary solutions, business-class communications and connectivity services, and Linux-based solutions. In general, technologies that are more customized or newer are more likely to bring higher margins. For example, custom applications deliver higher margins than basic security.
The more complex applications, such as enterprise software suites and business intelligence (BI) deliver higher margins than commodity software products that are relatively easy to install. Newer technologies, such as Voice over IP (VoIP), virtualization and unified communications, also tend to carry higher margins.
Next: Custom-Made
Custom-Made
At the top of the list in average gross profit margin on sales in 2007 are custom applications developed for proprietary solutions, at 27 percent. Next are Web management, 19 percent, enterprise business software suites, 18 percent, and small and medium business software suites, BI, and business-class communications and connectivity services, all at 17.
Tallgrass Technologies Corp., a solution provider in Lenexa, Kan., develops customized content-management solutions based on applications created by Stellent (acquired by Oracle in 2006). "This allows us to make better margins and helps us offer a unique solution to our customers," said Chris Jones, account executive at Tallgrass.
TIME TO PAYOFFTypically, Lower-margin technologies are easier and quicker to sell, while newer, more custom types of technology have a bigger payoff but take longer.
and virtualization have middle-of-the road sales cycles, at 3 months.
Jones said the customized content-management solutions bring in twice the margins that an out-of-the-box, content- management solution sale would. He said there has been increased demand for customized content-management technology. Customers are creating digital archives for their records rather than keeping everything on paper, Jones explained.
The higher the margin on a technology, the longer to recoup the training investment for that technology, the survey showed. Solution providers take an average 6.2 months to recoup their training investment in BI, compared with 5.6 months for virtualization and unified communications, and 5.4 months for midrange servers and enterprise management software.
Recouping investments on training for desktops, notebooks and entry-level servers, on the other hand, takes only two months on average. Typically, those technologies with lower margins are easier to sell more quickly, according to the survey. The more specialized, newer and customized solutions offer a bigger payoff for solution providers, but they take longer to sell.
Gal Shpantzer, vice president, partnerships and strategic alliances at iQwest Technologies Inc., Valencia, Calif., said iQwest tends to shy away from big commodities in the security and compliance market, preferring value-added solutions that might take longer to sell but deliver higher margins.
"We don't get much revenue from antivirus software, for example, since this is something most of our customersand#8212;which tend to be early adoptersand#8212;already have implemented," Shpantzer said. "What we do is make sure that we help our clients wring the most benefit from what they already have, through integrations between their existing deployments and incremental additions to their security strategy that ties things together."
After implementations, the company works with clients to make sure that they're recognized as successful, early adopters of such technology. "Then the subsequent cycles are shorter due to momentum in the market and the buzz it generates," he said.
Next: In the Long Run
In the Long Run
According to the profitability study, unified communications solutions have the longest average sales cycle of the technologies offered, at four-and-one-half months. BI, custom applications developed for proprietary solutions and enterprise business software suites all have average sales cycles of four months. At the other end of the spectrum, basic security has an average sales cycle of one month, and printing and imaging one-and-one-half months. Virtualization and VoIP continue to be in high demand, which speeds up their sales cycle, three months on average. Margins are high because they are relatively new and complex technologies. Also, there's less competition among solution providers.
As is usually the case, services are driving up profitability for VARs. There are two basic ways solution providers can attach services to their technology offerings. One is to sell products that require a heavy services component. The other is to turn traditionally low-service items, such as remote network monitoring and maintenance, into managed-services offerings.
On average, solution providers take in $3 of services revenue for every dollar of product sold in BI and Web management, two of the highest-ranked technology areas for service revenue in the Profitability study. Several other technology areas, such as unified communications, by comparison, provide about $2 of services revenue for every dollar of product sold, the survey showed.
PC Universe, Boca Raton, Fla., offers network management services and VoIP expertise along with network hardware deployments. It also provides IT security solutions and services.
"As corporate purse strings get tightened, and#91;businessesand#93; try to figure how to save money," and IP telephony is one area where they see potential savings, said Gary Stern, CEO of PC Universe. Security services are also in demand, Stern said.
Some technology practice areas are growing much faster than others. For example, the customer base for virtualization grew an average 18 percent from the end of 2006 to the end of 2007. That was easily the fastest growth rate for any technology. Next highest were BI (14 percent), midrange servers (11 percent), digital display/signage (10 percent) and VoIP (10 percent). At the bottom of the list for growing customer bases are custom systems (6 percent) and printing and imaging (5 percent).
Also, at the top of the list for average deal size are enterprise business software suites, at $83,318. Following those products are custom applications developed for proprietary solutions ($65,510), BI ($47,922) and enterprise management software ($47,239). The smallest-size deals, on average, are for basic security ($4,000) and wireless networking infrastructure ($6,600).
The New England Computer Group Inc., Danbury, Conn., offers accounting packages to small and midsize business customers. "These deals definitely result in larger-size projects," said Frank Ballatore, president of New England Computer Group.
The sales cycle is also much longerand#8212;typically six to nine months, Ballatore said. Solution providers report the highest level of customer interest in custom applications developed for proprietary solutions, Web management, basic security, BI and custom systems.
"As far as custom systems, we are seeing an increase in demand from most second- and third-time PC buyers," said Mike Stiles, senior engineer and service manager at Skyway Computer Solutions in Murphy, N.C.