When the VARBusiness 500 Talks...We Listen

Some of the biggest solution providers in the business are enjoying resurgent sales and increased customer engagements, although profitability remains a persistent challenge, said participants at the VARBusiness 500 Executive Roundtable, an annual gathering in New York of top managers representing companies that charted the VARBusiness 500. Cheap, readily available programming talent overseas continues to put pressure on what solution providers can charge clients, dampening profits, they said. So, too, does persistent competition from direct-marketing resellers and direct-to-end-user manufacturers, such as Dell.

But what thwarted this who's-who of solution providers most, they said, was their inability to accurately forecast and predict a revenue stream, in large measure due to rebate programs that present their own set of challenges. Many of the financial uplifts that Cisco, Sun and others have put in place to try to combat the industrywide problem of margin erosion on basic hardware and services sales come postsales, in some cases several months after a transaction is complete, they said.

Cisco's rebate program, for example, purposely delays paying partners for up to six months in order to keep rebate money from being used to lower street prices. Ongoing monitoring by Cisco of its partners' profitability indicates that this and other programs are having a positive impact and are, indeed, helping partners increase their profits, according to Paul Mountford, senior vice president of partner sales and marketing at Cisco. But executives from VAR500 companies in attendance at our roundtable discussions, including Terri Allen, senior vice president of sales at GTSI, said while the rebates are welcome, they are tough to weave into the financial forecasts of an IT consulting and sales company. "Yes, the attempts by Cisco are a help, but they are [also] a problem in that we cannot count on that money and, thus, have to plan as though it were not readily available," she said.

Another complaint, cited by other VARs, was the additional overhead that ongoing rebate programs require. Several VARs, including Don Richie, president and CEO of Austin, Texas-based Sequel Data Systems, noted that additional administrative overhead in some cases almost nullifies the financial rewards provided by rebates and other back-end financial benefits provided by vendors. "It's so much to manage and keep track of that it requires tons of man-hours and even dedicated resources," he said.

Other drags on profitability include special-deal and bid pricing, which many vendors offer to VARs seeking special terms on products for one-off opportunities. Trouble is, VARs are increasing their reliance on these programs, confounding distributors and vendors alike, in addition to eroding street prices for VARs.

Vinny di Spigno, CEO of Webistix, noted that many solution providers are struggling because they can't get their sales mix right. For example, as they swing to a service-oriented business from a product-sales-oriented one, many fail to secure additional business once they lose influence over product purchase decisions.

Cap Gemini vice president Jim Hunt spoke out about the impact offshore outsourcing is having on street prices. If you don't have an offshore capability, you're going to be at a substantial disadvantage when it comes to winning new business, he said. Keane area vice president Aurora Coya said her company has invested in two distinct offshore capabilities. "We're [better off] with our global, diversified solutions approach," she said.