Survival of The Fittest


At D&H roundtable, solution providers talk about extreme measures to stay alive


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Keystone Computer's retail store used to be the solution provider's crown jewel. The 4,000-square-foot operation, based in DuBois, Pa., was the literal foundation for the company. The store even had a cybercaf, called "Sip 'N Surf," that would rival your local Starbucks.

Yet Keystone recently shut down the computer store because it was losing too much money and no longer generating the kind of traffic and sales it used to years ago. Keystone president William Hook couldn't wait any longer for a miraculous turnaround in business. Thus, he scuttled the retail business. Hook, however, sees a bright side.

"It was a good thing, ultimately, because the store was bleeding money," he says, "and now we're making more money with our consulting and integration services."

With all the rosy forecasts and anecdotal optimism, it's easy to forget that IT spending is still hard to come by these days. While improvements have been made, many resellers have yet to see their businesses truly pick up speed, and that has led to some tough decisions regarding their business models. That may entail closing retail outlets, shutting down a particular technology practice or vertical, or even dropping a longtime vendor that was once a big moneymaker but is now costing revenue.

VARBusiness spoke with a number of solution providers during a roundtable discussion at D&H Distributing's recent conference in Hershey, Pa., about how they keep their businesses in the black. We discovered that several of them, who are all based in Pennsylvania, had closed their respective retail operations just as Keystone had because they were hemorrhaging dollars.

It's not uncommon in rural regions to see SMB-oriented VARs with retail stores. In fact, such operations are often how the solution providers got their start. But since the onslaught of the recession and IT spending drop-off, resellers have been forced to cut off the expenses of leasing and stocking brick-and-mortar storefronts.

For example, Jim Crews, president of Swifteagle, a solution provider based in Harrisburg, Pa., shut down his company's retail store to focus more on consulting services and its software-development business, in which Swifteagle designs specialized language-education programs.

"We realized our profit margins were much better in consulting services," Crews says. "And our software practice has become a great business for us, too."

PC Professional, in Lemoyne, Pa., has been in business for 18 years, but it, too, closed its retail business two years ago amid the downturn. Instead, Tim Boyer, president of PC Professional, decided to put more resources into the company's successful vertical practices, such as health care and hospitality. "That's what has kept us going through the years--being diversified," he says.

Just Say No
Solution providers have had to take other steps to plug holes in their profits. "We've been surviving on our services," says Tim Scheidler, owner of NAS Computer Services. "Being a small-town reseller has been an advantage because there's less competition in these regions and more [SMBs] that have little or no tech expertise."

But there's a catch to such markets, according to Scheidler and other roundtable participants. Because they have few technology skills or experience, small businesses often end up taxing solution providers' IT support, which can lead to resellers' inadvertently giving away free consulting services. Compounding the problem, the roundtable resellers say, is the fact that their vendors' product-support service is, in general, lackluster, which sends even more customers dialing up their local resellers.

"A lot of vendors' call centers are terrible," says Darryl Nicholas, owner of ColorBat, a digital-imaging solution provider based in Millersville, Pa. "You get people on the phone who don't know what they're doing and don't care."

So how do VARs prevent tech-support calls from becoming unpaid consulting work? Unfortunately, solution providers are forced to take a stern approach.
"You have to recognize what's happening right away and cut the cord," Hook says. "We stopped offering tech support over the phone altogether because it was costing us too much."

Even price quotes can be dangerous. Both Crews and Boyer say they no longer offer quotes over the phone because they have been burned by too many small businesses that call about a product and simply take the sale to a retail outlet or the vendor. Instead, the solution providers insist on face-to-face meetings with the prospective customers to go over the product request and solution blueprint before getting into price negotiations. The resellers acknowledge it's a drastic step, and while it may cost them a few business deals, they say the practice keeps them from wasting time on customers that are simply price hunting and have no real intention of buying from them.

Partner Pains
Not surprising, the roundtable participants laud D&H as an ideal partner, not just their preferred distributor. They point to D&H's valued technical support as exemplary and praise the distributor's efforts to promote emerging technologies and educate resellers on new markets.

If only every partner was as stand-up as D&H, they say. Some roundtable members have had to take serious measures with a few of their vendor partners that have been costing them business. But there's no fine line for when to drop a vendor, especially if it provides a lucrative business. So the question is, how much bad vendor behavior should resellers tolerate?

For Crews, all it took was one hurtful and almost unbelievable episode with Dell. Swifteagle had recently begun working with the direct PC maker, and Crews says he and his company were excited about working with Dell and felt a service and support business related to the vendor would be a prized source of revenue. However, the solution provider got burned when Swifteagle teamed up with Dell for a potential deal with the state government of Pennsylvania; the reseller was unexpectedly removed from the contract bid by Dell. Crews demanded an answer, and what he was told by Dell's account manager amazed him.

"They had heard from someone that we were also working with IBM, which wasn't true," Crews says. "So they crossed our name off the list without even asking us about the rumor."

Crews never got an explanation from Dell--and he no longer cares. Swifteagle, he says, will have nothing to do with Dell. And while that may cost the solution provider some sales, Crews believes his business will be healthier in the long run. For Swifteagle, dropping Dell is just another part of a solution provider's constant effort to adapt and adjust to the changing times.

"In order for us to stay in business, we have to reinvent ourselves," Crews says. "We started with services, then had a PC retail store for 15 years, and now we're right back where we started."

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