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There are a number of forces at work pushing solution providers to focus more on services and less on IT product margins. Commoditization has squeezed margins on many hardware products to the point of nonexistence.
The importance of services is evident in statistics from a 2009 survey of North American solution providers conducted by Everything Channel research. Services, including consulting, managed services and break/fix support, accounted for 51.8 percent of the revenue stream for solution providers in 2008, a number VARs expected to grow to 53.7 percent this year.
During that same time frame, hardware sales declined from 26.5 percent of solution provider revenue to an expected 24.3 percent this year. Software is a slightly larger component of VARs’ businesses, inching up from 21.7 percent of their total sales to an anticipated 22.0 percent in 2010.
Imagine how much that has changed since 2000. Solution provider Prolifics is representative of the direction in which the channel has been heading. The New York-based company, a major IBM partner, has always focused more on services, with margins from selling IT hardware and software accounting for a small part of its revenue and profit stream, said Michael Chadwick, executive vice president of business development.
While every deal Prolifics wins generally includes at least three or four IBM software brands, “I don’t go out and try to sell Tivoli,” he said, naming one IBM product. “I never want to try to just sell a product, even though we sell a lot of products.”
IT manufacturers and software developers have been pushing their partners in recent years to add more value through services and their expertise. Chadwick pointed to IBM’s requirement that VAR sales and technical staff be certified in the IBM products they resell. (Unveiled in February 2009, that requirement became effective early this year.) That, Chadwick argued, is indicative of IBM’s desire that channel partners build value-added services around IBM products, not just resell them for the profit margins.
“IBM is shutting those people out unless they can deliver the services,” he said of partners who remain focused on reselling. “I think those partners will fail.”
IBM isn’t alone in asking more from its channel partners. Oracle is offering its partners the opportunity to become certified in specific product and vertical industry “specializations” and so add more value to its products. (The certifications are encouraged, but not required unless a partner wants to achieve Platinum status.) Microsoft is requiring its resellers to become certified in “solution competencies” such as desktop systems, virtualization, and security and identity management.
To make up for reduced hardware profit margins, Pyle said solution providers must be “a master” at navigating ever-shifting prices, margins and rebates offered by vendors and to take advantage of opportunities when they come along.
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