For several years, vendors and industry analysts have been urging channel partners to focus on services in the face of a relentless decline in margins on products. Resellers have been encouraged to become ‘service providers’ or ‘solution providers’ to exploit the margin opportunity provided by services.
But while everyone accepts that services offer another opportunity to create margin, they are also agreed that services is a very wide-ranging term.
“IT services is a broad term – in general it includes everything other than the hardware product itself,” said Dermot Woodgate, business development manager at the CARA Group. “This ranges from basic hardware maintenance to full outsourced managed service with numerous variations in between.”
David Laird, managing director at Datapac, classifies services “as anything we provide to the customer that includes labour. We don’t just sell you a piece of hardware. There are a whole range of services we provide.”
David Knapp, sales and marketing director at Mentec, claims 75 per cent of its total business “represents what we call services. To us, services is anything that involves people delivering technology: it’s everything from delivering the solution to delivering the infrastructure to run the solution”.
Picking up on the theme, Sally Barton, director of professional services and training at Unipalm said “We class service as anything non-product that you can wrap around a product sale to make it a solution: training courses, consultancy, installation, trouble shooting, software technical support, hardware onsite support, penetration testing, vulnerability scans, managed services.”
Existing technology
One of the simplest ways to provide service is through better product knowledge, according to James Finglas, sales director at MJ Flood. “One element of services is in using existing technology and getting more out of it. Windows Server 2003 and Small Business Server, for instance, have RPC over HTTP built in which makes it easier to give people on-the-road access. Product knowledge is very important.”
Smaller businesses can be quoted €5-6,000 for remote access solutions, but an equivalent solution can be implemented as part of Windows Server 2003 or Small Business Server. “If you can utilise what’s already out there to gain something, it’s a much cheaper solution. And it shows your customers you’re getting the best out of what they’ve got.”
Harry Largey, enterprise and partner group leader, Microsoft Ireland, agrees. “More and more partners are more switched on to what the products can do for their customers.” Greater awareness leads to “a whole new conversation with customers. They’re going deeper into what the products can do and developing a value proposition. That’s great to see.”
Knapp at Mentec said better product knowledge can be an advantage but warns: “The difficulty tends to be people spend pro rata on services what they paid for the product. As a result, they don’t realise the capabilities of the product, they don’t push it to the boundary or run it efficiently.” This is hardly surprising when you think that people who buy a mobile phone today probably only use 20 per cent of its functionality.
He claims that Mentec often starts by getting a small project. As it progresses, the customer starts to see that “there are more things they can do and the project can be extended. Take MOM for example. It will manage your infrastructure – the more you use it, the more you realise how much it can manage.”
Product knowledge
Product knowledge can also come from the channel partner’s use of the product it is providing service on. As Finglas argues: “The more you engage, the more you get out of that. If you’re not using the product yourself, how can you go out and sell it effectively?”
Largey at Microsoft agrees. “We have partners working with us to implement the technology in their organisations where they can see the value themselves. It gives them a real life example in their organisation to show to customers.”
As with any other part of the IT firmament, there are some parts of services which provide better margins than others. Laird said the biggest contributor in terms of revenues to its services business is maintenance. “And it seems to be still growing as the base of computers and the dependence of business on computers grows. We’re getting more and more demand for 24/7 cover. Organisations can’t afford to have their systems down.”
But the maintenance business is also cut-throat. “At any one time, one or two organisations will decide they want to buy market share and they’ll cut prices to a point that’s crazy. We’re involved in one situation where it looks like the competitor wants to take the business at any price.”
Laird’s point is echoed by a number of others. “In the current market conditions we find that basic hardware maintenance services are close to commodity levels,” said CARA’s Woodgate. “We have been very surprised recently at the prices at which contracts are being won. Whether these prices are been subsidised in order to build market share or whether they will simply result in poor service for the unfortunate client only time will tell.”
Finglas agrees. “We’ve seen people playing a lot of silly games in maintenance. We’ve seen people – one or two companies in particular – putting things in at 50 per cent of the value. We’re finding it happening quite a lot.”
Why would a business pursue this course of action? Woodgate said it’s “the oldest trick in the book to go in at an artificially low price to win the contract and then to take out the ‘change control’ book and make your profit on the extras”. Laird concurs. “In the short-term, maintenance business is cashflow positive. Whether you deliver the service afterwards is another issue. The point is you get paid upfront for a year.”
One trick pony
But Woodgate warns “the client only gets caught out by this trick once – CARA does not take this approach as it is primarily interested in building long term business relationships with our clients. We are not interested in winning contracts at a loss as this only leads to grief for everyone down the road.”
If maintenance is feeling the pressure, other areas can do a lot better. “Tailored support agreements designed to guarantee availability of our clients’ business critical systems offer better returns,” Woodgate claims. “These returns are used to design and develop new and innovative services such as our CARA-View suite. IT products are increasingly sophisticated and must operate effectively in the middle of ever more complex IT environments. To do this properly it is vital they are deployed and supported by an organisation which understands the IT systems ‘big picture’. Otherwise it is just like throwing money down the drain.”
Managed services are beginning to gain wider acceptance said Mentec’s Knapp. “Managed services is a big growth area. Managers tend to like them but IT staff can be a bit cautious. They see it as quite threatening. People go for it because the business is expanding and they don’t have the IT resource or because they decide the value the internal IT person should bring is in understanding the application they are the custodian of. We are running the infrastructure and application on behalf of the client and they can concentrate on running the business.”
Woodgate agrees that there is “significant interest in managed services in the Irish market” but adds that the margin they offer “varies widely”. The less specific or tailored the service is, the lower are the margins that can be made. Some managed services have already reached ‘commodity stage’. Our approach is to develop advanced managed services that meet the specific needs of our clients. Because we have a trust relationship with many organisations built up over almost 40 years in business, it is relatively easy for us to move from delivering IT support services to delivering managed services.”
The areas of maintenance and managed services highlight the disparity in margins which exists in the services arena – they also demonstrate the scale of services available to customers. One industry insider argues this is part of the problem. “Services is a highly abused term,” he said. “What do people define as services? It’s too blunt a definition. Customers see the cost of services rather than the value. There’s far too broad a spectrum in services.”
Industry hindered
The industry has also hindered itself by creating a climate where services were traditionally given away, according to Laird. “Historically, in the 80s, PCs provided such good margins that the services were provided free because there was a lot of margin in the hardware. It was only in the 90s that organisations started to charge properly around network services.”
As a result, “some users don’t appreciate the cost of providing services. People see their IT infrastructure as strategic or otherwise. If they don’t, they are often happy to put a band aid over it and do it on the cheap. Where you provide good services on an ongoing basis, sometimes organisations don’t realise they’re getting good services because they haven’t had a bad experience.”
The industry insider agrees. “A lot of early hardware incumbents sacrificed services. Some of the value has been eroded as a result. The problem is in lumping all hardware and technology together. A PC is a very different thing to a router, a server or a SAN. It’s important for companies to recognise that some parts of the infrastructure are more important in terms of the quality of service required.”
He makes the point that companies providing services have to make a substantial amount of investment “but there is also a huge amount of degradation in the investment in people and the organisation. For example, typical day rates have declined very radically over the last two or three years from €850 to €500. If someone puts a high level of focus on services, they have to expect to be able to make a decent return. If they can’t, then you have to expect to end up with inferior services.”
Channel partners sometimes find themselves locked in the same price/value conundrum they battle with on the product side. “Price is not the only criteria,” said the industry source. “The first argument has to be: am I going to get the right services? Are people paying the right amount of money for the services they’re demanding? There’s a general perception of price being too much of the criteria upfront. People quote prices and find it hard to support afterwards. If you’re having to make a strong argument to support the quality of service, you’re having the wrong argument.”
Falling down
In this respect, services are like insurance. “People don’t see the value until something dreadful happens. When it finally falls over, people see the value.”
Knapp at Mentec believes larger businesses “realise the value and cost of mission-critical services. But when you have someone who doesn’t really understand the technology, they tend to be more cautious. There has to be a large element of trust built up over time”.
He argues the nature of IT can make it harder to grasp the value of services. “If something goes wrong with your washing machine, someone can take out the faulty part and show it to you. There’s a degree of comfort. With software, sometimes the process of identifying the problem takes far longer than the resolution. The difference between inferior support and the person who does know what they’re doing can be enormous.”
That said, Mentec claims to have “in excess of 500 customers paying us annual support”.
Eamonn O’Donnell, managing director of Bandwidth Telecommunications said, “People don’t want to pay or want to pay less. Time is a killer so if you can offer them something quicker remotely [they’ll be interested]. It’s about getting the job done rather than how you do it. Speed is of the essence. If you can sell the benefit of remote services upfront, it’s part of the process.”
Remote and managed services highlight another trend, the move to a more proactive approach. “It’s moving to a much more proactive business in the way you deliver support,” said Knapp. “You provide service packs, releases, you might even look for problems you’ve identified in other customer sites.”
Largey at Microsoft argues “providing reactive services to customers is becoming very competitive. The challenge or opportunity for the channel is in looking at how to be more proactive in helping customers. The commodity end of services is increasing and it’s becoming harder and harder to make money from deployment services. The challenge is to make sure you’re having a really clear proactive discussion with the customer about what the customer wants.”
Knapp makes an interesting point about a key difference in delivery of IT services to a customer compared to more traditional areas like construction which can have a dramatic effect. “When we’re delivering services into an organisation we’re very often having to work with the client’s staff.”
Fixed price contracts and deliverables might make the IT industry similar to the construction industry “but in IT whatever you build, you’re building with them. It’s not like they commission you to build a road and then leave you alone until it’s done. In IT, half the resource is not totally within your control. Success or failure can be driven a lot by the people receiving the system.”
In such circumstances, although Knapp doesn’t say it himself, it’s easy to see how the ‘value’ provided by the services company can be wiped away by the incumbent staff.
So what makes a successful services operation? Barton at Unipalm stresses the ability to respond quickly and at short notice “because someone has a fault or needs some technical help to get them out of a muddle – they need it there and then or next day, not one or two weeks later”.
In addition, “you need to do a really good job each time as well to get the recurring revenue and a good name for yourself in the market”.
Woodgate at CARA focuses on “strong management, a commitment to ongoing innovation and above all, a real sense the customer is at the centre of your services business. It’s easy to pay lip service to the ‘customer is king’ concept but in IT services you get a chance to prove (or disprove) it on an almost daily basis”.
So what exactly is MOM?
MOM (Microsoft operations manager) is an event and performance management tool for Windows server system. Microsoft claims MOM improves the manageability of your infrastructure by providing:
Event management
Monitoring and alerting
Reporting and trend analysis
System and application-specific knowledge
End box out
So what’s RPC over HTTP?
You can configure user accounts in Microsoft Office Outlook 2003 to connect to Microsoft Exchange Server 2003 over the Internet without the need to use virtual private network (VPN) connections. This feature — connecting to an exchange account by using remote procedure call (RPC) over HTTP — allows Outlook users to access their Exchange Server accounts from the internet when they are travelling or are working outside their organisation’s firewall.
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