VARBusiness 500 Panel Discusses What's Behind Eroding Profit Margins

In an executive panel kicking off the 2006 VARBusiness 500 event in New York today, four of the top solution providers in the game shared secrets to their successes along with offering up some tough talk on the challenges and opportunities in today's market.

Jim Corgel, general manager for small and medium businesses at IBM Global Services (No. 1 on the VARBusiness 500 list this year with $47 billion in sales), joined by Bob Venero, president and CEO of Future Tech Enterprises (No. 296), Christopher Pyle, president and CEO of Champion Solutions Group (No. 227), and Mike Cox, president and CEO of Logicalis (No. 83), sat for a wide-ranging discussion that hit at the core of the solution-provider business. One thing is clear: Despite all of their success, staying on top demands constant care, feeding and flexibility.

Overriding issues of the day? Managed services (both as an opportunity and a challenge), the pros and cons of certifications, the ongoing difficulty in hiring and retaining quality sales executives and technical staff, and the importance of peer-to-peer partnering.

But the real thorn in everyone's side is eroding profit margins. In particular, the executives tapped into the negative impact that bean-counting purchasing departments have had as they increasingly become the final arbiter in a customers' IT buying decisions.

"Purchasing has stepped in and taken over where we sold value-added services and started taking it to the commoditization level," says Pyle, whose company did $101 million in sales last year, a 17 percent annual increase. "They've gone to the Wal-Mart school, and they are squeezing every nickel."

It's an alarming trend. Pyle pointed to one deal where the customer brought four solution providers into a room together and dictated what they wanted and at what price. Not much room for differentiation there, and profit margin takes a hit.

One of the real bright spots is managed services. Although companies on this year's VARBusiness 500 list still derive 62 percent of their revenues via product sales (mainly hardware), the services bottom line is growing. And each of today's panelists said managed services will play a big role in their own businesses as customers' increasingly need 24/7 attention in running Web sites and serving markets worldwide.

"This is no longer in the experimental stage for us," Venero said.

When it comes to hiring and retaining the right staff, all shared the pain. One of the ironies comes with certification: You pay to train your engineers on vendor certifications to help drive your own business brand, then find they demand immediate pay raises or begin shopping themselves around in the marketplace.

But even services firms as large as IBM's need certifications for credibility -- as much as they also need to partner with smaller, local VARs to scale their reach into the midmarket, according to Corgel.

"I wish I could walk into a midmarket client in Binghamton, N.Y., and have them say, 'Thank God you're here,'" Corgel quipped. "They don't. They want to know where a local partner is. So we have to prove our certifications as well, and I use certification as a marketing tool to make sure that my brand is important as anyone's in the room."

As far as growth goes, the executives have different approaches: some exclusively organic, some through acquisitions. Logicalis, for example, is acquisition-oriented, Cox says. But all agreed that the direction to move in is providing higher-level business consulting value. It might be the only way around those nagging purchasing department woes.