Why Service-based Solutions are Big Business for VARs

By Julie Ritzer Ross — January 27, 2012

Not long ago, the “as-a-service” model took a back seat to the project- and break/fix-oriented foundations on which VARs have traditionally built their businesses. However, a paradigm shift is occurring, with increasing numbers of channel players adopting a hardware-as-a-service (HaaS), software-as-a-service (SaaS), or cloud service stance in an effort to compensate for shrinking margins, as well as to establish a more competitive platform for attracting and maintaining SMB clients.

Research underscores this trend: Of some 600 VARs surveyed in mid-2011 by Techaisle, a San Jose, Calif.-based market research company that tracks the SMB market, 71 percent reported that they play in the as a service arena in one fashion or another, and an additional 12 percent cited plans to follow suit in the next 12 months. Thirty-five percent of VARs queried now tout cloud services. By Techaisle’s current estimates, SMBs will spend a total of $12 billion on some type of managed services in 2015, up from $7 billion in 2011.

“Making the transition to any kind of as-a-service model takes work, but when you look at the enhanced profitability, it is a worthwhile” endeavor, asserts Chris Wiser, founder and CEO of TechSquad (www.techsquadit.com), a Waukesha, Wis.-based VAR and provider of managed services, hosted solutions, virtualization, HaaS, and more.

Michael Hoover, president of ATR Systems (www.atrsys.com), Warminster, Pa., corroborates Wiser’s comments, citing heightened interest among his customers in swapping out software ownership for the SaaS option. “When we first realized that we would be left behind if we didn’t offer SaaS and went ahead with it, only 10 percent of our clients were receptive to the idea,” the VAR asserts. “Today, about 75 percent are onboard.”

Best Practices For Best Results
VARs’ move to the as-a-service model is not surprising given the advantages it affords them compared with traditional hardware/software implementation and repair programs. The potential to reap higher gross margins—by some estimates, up to 70 percent higher—ranks among the most marked benefits, as do the security of generating predictable revenue from recurring contracts and the ability to service accounts outside one’s immediate geographic area. Enhanced utilization of billable resources across multiple clients and closer, stickier relationships with clients—forged and cemented by way of service contracts—also top the list.

However, capitalizing on these gains remains contingent upon the following best practices for migrating to and operating within this new paradigm.

Specifically:

Identify your target. Defining a few strategic markets in which to play, rather than following an across-the-board approach, is key. “Above all else, as-a-service customers are looking for value,” states Jim Hamilton, vice president, member communities at the Computer Technology Industry Association (CompTIA.org). “But that value cannot be provided if a VAR is all over the place in terms of either vertical markets or technologies.”

Some players find that pursuing specific vertical markets works well; for example, TechSquad’s typical customer is a professional business service provider with five to 50 workstations. “These organizations have different network technology and support issues than those in other segments, and concentrating on their needs has allowed us to carve out a viable niche in our area,” Wiser states.
    
Sources also peg vertical markets with an increased dependence on mobile technology—namely, retail (for mobile point of sale), healthcare (for patient information collection and asset tracking), field service and field sales—as ripe for the as-a-service model. Kevin Price, CEO of AccuCode (www.accucode.com) says the majority of opportunities in this market center on “greenfield” implementations of technology as a service as opposed to the replacement of legacy systems with an as-a-service arrangement.
“Certain organizations just can’t bear to retire their legacy systems until they have wrung every last drop out of them,” Price asserts. “Their baby may be ugly, but it’s their baby.”

Other channel players advocate focusing not on any given vertical segment, but instead on a handful of specific applications. ATR is experiencing success with such an approach; limiting its SaaS repertoire to workforce management solutions permits the VAR to promote itself as understanding every nuance of the technology and, as such, better tailor its service delivery to satisfy individual clients’ requirements.

“There is a lot of activity around horizontal applications,” observes Greg Dixon, chief technology officer, ScanSource (www.scansource.com). His hot list includes customer relationship management (CRM), data storage, and “anything that involves Google.”

Dina Moskowitz, CEO and founder of SaaSMAX (www.saasmax.com), an online marketplace that facilitates the resale and purchase of SaaS business applications through VARs and other reseller channels, corroborates Dixon’s comments. She adds that some of SaaSMAX’s customers are flourishing in the as-a-service space by “verticalizing” various software applications. One SaaSMAX member that offers business management tools for contractors has synced up the application with an accounting package.

Get your financial “ducks” in a row. Among the biggest challenges for VARs migrating to the as-a-service model is the transition from receiving large lump-sum payments for project work to collecting smaller monthly residual payments. Service must therefore be priced to ensure a consistent, sufficient cash flow. VARs can employ one of two pricing structures, charging clients by number of users or the volume of transactions performed with a particular solution—typically, whichever is larger.

Once a pricing structure has been set, resellers will need to consider putting into place an attractive incentive plan for sales staff, many of whom may initially be unhappy about sacrificing the more sizeable commissions they receive when signing large deals up front. Incentives for sales staff to continually attempt to generate new business and strive to maintain existing clients. According to Jason Bystrak, director of sales, Ingram Micro Services (www.ingrammicro.com), one common strategy here entails paying sales personnel a monthly commission throughout the life of the contract. Bonus rewards for meeting metrics that support the goal of cultivating customer loyalty may be added; such metrics might include recruitment of reference customers and maintaining low attrition rates

Choose your solutions weapons carefully. “Look at how, for example, various software solutions compare with each other and fulfill particular needs,” Wiser counsels. “Don’t just grab the first option.” Wiser recently joined SaaSMAX to enable him to do so.

Some distributors, among them Ingram Micro, offer programs to assist VARs in this regard. Vendors are developing new programs, too: For example, AccuCode touts a HaaS bundle intended to help VARs defray the cost of featuring infrastructure as a service.

Sell value, not technology. No matter how much resellers promote the benefits to be enjoyed by converting to the as-a-service model—e.g., eliminating sizeable capital IT investments and ongoing expenditures for system upgrades—many existing and prospective customers require extra coaching before signing on the dotted line. “Some view the switch as assuming an additional operating expense, which makes them uncomfortable,” Wiser says. “Others are just so accustomed to the old way of doing things that they don’t see a reason to try anything new, or, they figure that what they’re used to is better than the unknown.”

Breaking this mold necessitates steering away from any talk of products during initial negotiations with customers, as well as going forward. Instead, focus on the value they will receive for their monthly fee. At TechSquad, proposals include, in addition to a breakdown of cost per user, a complete soup-to-nuts list of the services clients receive at an all-inclusive price. Once prospects see the list, they begin to “get it—and they stop talking about ROI, which can be a real roadblock” on the road to conversion, Wiser notes.

Meanwhile, to allay customer fears related to making a commitment to an unknown model, VARs might consider offering a service level agreement (SLA) that addresses typical customer objections. Such an agreement should provide minimum guarantees related to delivery metrics, among them system uptime, performance and scalability. Incorporating reassurances pertaining to the security of clients’ data and how it will be maintained is also a good idea.
Establish a proactive culture. “It’s essential for VARs to remember that to succeed in the as-a-service world, they must go from being reactive to being proactive,” asserts Justin Crotty, senior vice president and general manager, NetEnrich (www.netenrich.com). “They’re not selling product or software or jazzy tools. They’re selling peace of mind—a repeatable and measurable service level that clients are willing to pay for if they see that the VAR’s position truly is proactive.”

Channel players can enlist CRM software to keep close tabs on customers or, if available, harness the built-in monitoring and management capabilities of the software they are delivering. For maximum operational efficiency, there should be seamless integration, from the service desk to the help desk, ticketing, billing, and reporting.

Regular client meetings in which VARs share detailed management reports and logs with clients to document how solutions are being used, how problems were quickly resolved, and how glitches were averted are helpful on this front. In addition to reinforcing the value proposition, these gatherings can open doors for adding to clients’ technology packages.

Moreover, suggests Bill Loss, CEO and founder of SaaShr.com, it behooves resellers to be proactive by providing customers with tools they may use to communicate their needs and problems, thereby preventing them from escalating and reinforcing the value and service proposition. ATS has such an option on its website.

“Transitioning to as-a-service has not been the easiest thing we have done,
but I think it positions us for survival,” Hoover concludes. “If we don’t do it, someone else will.”

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