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The Margins Will Belong To Those At The Top Of The Services Food Chain

I've written multiple columns over the past year about the movement toward demand generation and proactive customer management. There are many reasons I believe it is important that solution providers take this approach to sales and service going forward.

It is also critical for vendors to understand the difference between the old and new spheres of customer influence and to design channel programs that leverage the new model.

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ROBERT FALETRA
Can be reached at (781)839-1202 or via e-mail at rfaletra@cmp.com.

For solution providers, one of the biggest reasons to think about your business in terms of proactive customer management is margin erosion.

We've already seen drastic margin erosion in many hardware categories. This cancer now is rapidly spreading across the software sector. Is there any doubt we will see the same thing occur in services?

In fact, erosion has already happened in the basic services arena. There was a time when the ability to design, install and configure basic networks was a lucrative service.

As savvy solution providers have moved up the services food chain, historically few manufacturers have followed.

But now many manufacturers have begun stalking services revenue, viewing it as a must-have. IBM, for one, sees services as so important that it is trying to branch out beyond technical services and into business consulting. IBM Chairman and CEO Sam Palmisano is driving the company toward a more robust services offering for two reasons, in my opinion. One is because the ability to sell business consulting services opens up a much broader market for the company, which until now has been limited to its technical services capability. In addition, I believe Palmisano foresees a day when even higher-end technical services will no longer command the margins IBM requires to satisfy shareholders.

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'As savvy solution providers have moved up the food chain, historically few manufacturers have followed. But now, many manufacturers have begun stalking services revenue, viewing it as a must-have.'

Let's face it, the one thing manufacturers are really good at is driving down margins. As sure as we breathe, the more vendors chase the services business, the lower the margins will be for all involved. That's why proactive customer management is, to me, the next step and the answer to this problem for the channel.

Solution provider profitability is made up of all the same elements as any other business. Higher margins and lower SG&A costs means more profit. For most solution providers, SG&A is already very tight. So the best way to increase profits is to drive toward higher-margin business.

Under the demand-generation and proactive customer management models, solution providers become not just suppliers but trusted advisers, an important element in their customer's overall business strategy. Getting to that point, though, requires a deep understanding of the customer's business and a willingness on the solution provider's part to go beyond what the customer asks for by helping it see what else can be accomplished with technology.

In order to make the transition, most solution providers will need to concentrate on a handful of vertical markets and perhaps as few as one or two. This may mean leaving some business on the table. But as the model takes hold, the number of customers you can handle should climb because the base of your knowledge in those verticals will rise to the point that assessments of need and deployment will happen much faster.

Certainly, there are plenty of ways to beat the competition in more basic services. It's just that the upper end will offer better margins and an opportunity to retain account control based on value-add, not merely best price. The future will bring more competition in services. You have to decide where you want to play and then structure your business accordingly.

Make something happen. I can be reached at (781) 839-1202 or via e-mail at rfaletra@cmp.com.

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