Model Behavior

"Those organizations running successful business models are very focused and very disciplined on what they do," says Bruce Stuart, president of ChannelCorp Management Consultants, Vancouver, and author of 10 books on the channel, including the Reseller Management Handbook.

Models within the VARBusiness 500 vary; our research found that 70 percent of its companies sell total or custom solutions that include hardware and software, while 72 percent provide IT consulting services to their clients. Only 10 percent offer custom systems or servers, and 9 percent build made-to-order storage systems.

"Unless you have a real specialized competency, you're not going to be effective," says Stephen Rohleder, group chief executive of Accenture's VB5 government operating group.

St. Louis, Mo.-based Perficient VB426 for example, has not really changed its business model since it was founded in 1999, says Jack McDonald, chairman and CEO. "To us, the key is focus," he says. "We have focused on e-business infrastructure technologies"principally IBM software. The goal from the beginning was to build a dominant regional e-business solution provider and to grow both organically and through acquisition."

"Our gross margins have run 45 percent on our core services," he adds, noting that cash-flow margins are about 15 percent.

Some resellers find that breadth of inventory is key. CDW's access to such a wide range of products from many of heavyweight vendors is one way in which it differentiates itself, says Harry Harczak Jr., executive vice president of sales at the Vernon Hills, Ill.-based company. CDW, which began in 1984 out of founder Michael Krasny's kitchen, now employs 3,700 people, he says.

"We want to provide each customer with the best tech solution to meet their business needs [so] we carry around 80,000 products to make sure we have the...most appropriate option for each customer," Harczak says.

The White-Box Model Other solution providers have been successful by drilling down on specific hardware, like white-box systems. For its part, Aspect Computer VB218 sells its computers at prices comparable to those offered by Dell, says Richard Liao, vice president of the Somerset, N.J.-based reseller. About 70 percent of the VAR's $96.6 million revenue came from product sales in 2003, according to the VARBusiness 500, with many of those units going to K-12, higher education, other VARs and some state agencies.

"Nowadays, the PC is a commodity. Margins have shrunk"back [in 1991], they were double-digit. Now, they are single-digit," Liao says. "We've been reducing our margin to compete with our competitors. We try to focus on local service [and] we have a dedicated person to handle each account." Aspect sometimes has further cut margins on its products in order to get a foot in the door, Liao says. "If we're not making money this time around, we hope there'll be additional purchases later on," he notes.

Meanwhile, some VARBusiness 500 members offer a combination of software and services, typically focused on one or several vertical or horizontal markets, geographic regions or technology.

A vertical focus can help solution providers boost product margins, industry experts say. "Most software and hardware vendors are looking to two major areas for revenue growth: the SMB market and industry verticals," says Paul Edwards, director of global software partnering and alliances for IDC's Global Software Business Strategies Group, in Toronto. "Partners that have a good toehold in the SMB market or in specific industries are well-positioned to benefit."

The Guts To Say No Although it's tough, some savvy VARs, like Custom Computer Specialists VB280 of Hauppauge, N.Y., which focuses on retail, legal and health care, will turn down a sale that doesn't fit with its business model. This approach helped the vertical VAR and integrator's revenue jump to $65 million last year from $52 million in 2002, says Greg Galdi, president and CEO. The privately held company has a written plan that outlines its decision to eliminate poor customers and concentrate on high-quality clients and employees. Before hiring a new employee"and investing time and money into their position"a person might go through four to six interviews, personality tests and, for some high-level positions, a personal psychological evaluation, Galdi says. "It's very difficult to get on-staff here," he notes. "We have a very low staff turnover rate. We think of ourselves as a factory: We're producing quality hours of services. You can only produce as quality a service as the parts you use."

Service always underpinned its structure, Galdi says. Because of its focus on service, 98 percent of business is repeat, says Greg Slote, marketing manager. And 100 percent of the company's outsourcing business re-signs with the integrator, he says.

"You're looking for a lower cost-per-delivered dollar for your service organization," ChannelCorp's Stuart explains of the outsourcing approach. "Outsourcing is simply a financial strategy to get your cost-per-order dollars down."

Even during the tough economy, Custom Computer continued to invest in itself, Galdi says. "We had the guts to invest in our infrastructure over the past three years, in technology over the past three years," he says. "You have to make sure you weren't hiding in a corner for the last three years. This business changes from month to month. I stopped trying to predict where this channel was headed in 1989."

Custom Computer remains closer to the customer and technological trends than vendors. "We're always looking out to what we feel are the core technologies that will drive our customers needs in the years to come," Galdi says. "One of the biggest challenges is the manufacturers changing. Their go-to-market strategy changes almost quarterly. That's why we try to stay close to the end user."

Although today product sales account for about 25 percent of revenue, with services making up the bulk, Custom Computer has a 12,000-square-foot warehouse and access to a 100,000-square-foot bonded warehouse where it can receive clients' products, Galdi says. This allows the integrator to manage the logistics, set up, maintain and install customers' new technology without taking ownership"or outlaying capital, he notes. "It works to everyone's advantage," says Galdi, since the customer is assured the correct equipment has arrived, and it is ready to go once Custom Computer installs it at the client's office.

Serve It Up Now In addition to depth of product offerings, CDW VB16 leverages its staff of more than 110 factory-trained and A+ certified technicians, plus its 450,000-square-foot distribution and configuration center to speedily deliver products and solutions to its clients, Harczak says. "If you call today and place an order, you'll very likely get it tomorrow if you want it that quickly," he says, "and you can even ask for special configuration"over 150 million available every day from our distribution center." Although its product and speed are two differentiators, CDW doesn't ignore service, eager to develop relationships between account managers and customers, Harczak says. "They're trained extensively before engaging with customers," he notes. "Every day we focus on customer service and we examine our business model in light of that goal."

The Cost of Services It's important to remember that depending heavily on service revenue can be an expensive proposition. Typically, solution providers must invest six months to eight months in a new employee before he or she is productive. And there's always the possibility that the new hire will go to the competition or to a client. Solution providers also must approach the business differently, moving to a model more similar to that of an accounting or legal firm than a retail model, says a vice president at one VAR. "To be in professional services, you have to be able to manage your billable hours differently. There's a lot of risk emblematic in any of these new endeavors," he says. "You have to focus on a different type of employee."

But the good news is there is room for all business models in today's channel. The mix of product sales vs. service dollars is, perhaps, less critical than developing a business model that makes most sense for a particular company's knowledge base and locale, the strength to stick to that model in the face of almost too many opportunities and the knowledge of when to reconsider models and goals.