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Developing a Profitable Services Annuity Business

  Article published in DM Direct Newsletter
February 17, 2006 Issue
  By Shayne Skaff

The competitive landscape for hardware computer products has gone through a dramatic change over the last couple of decades. In the '80s and '90s, companies built businesses around manufacturing and selling computer products. It was an extremely healthy business with double-digit margins.

Times have changed and margins are decreasing. As competition increases, companies are feeling the pressure to focus on price rather than compete on value propositions. In many cases, the products are so similar that the only apparent differentiator to the end client is a lower price. A manufacturer attempts to hold a price point that doesn't give away the farm but is low enough to stay competitive. In today's market, the typical channel partner cannot survive by competing on price alone.

In this age of declining hardware margins, there is only one option for manufacturers and their channel partners. You can only do so much to add physical value to many of the commoditized products that you're selling, but the ability to add significant value to that product by wrapping services around it are endless. So why have so many organizations still not made the appropriate investments to develop a services practice? These additional value-added services can equate to a doubling or tripling of profits.

Maintenance services are one of the most repeatable and the most neglected sales opportunities available. Unlike hardware sales, maintenance margins have remained largely intact. If hardware and software products are already being sold, why aren't organizations consistently selling the maintenance services around those products? And, if maintenance services are typically sold with each product, then why aren't they effectively tracking and selling the renewal maintenance on this same product? Industry numbers show that there are few companies that are successful in this business. In fact, industry averages estimate that 50 percent of original maintenance agreements go unrenewed (IDC, 2004). In an industry that sells more than $40 billion in hardware and software maintenance in the U.S. per year (Gartner, 2005), 50 percent is a tremendous renewal opportunity. If higher margins in an underserved market aren't enough to get excited about selling technology maintenance contracts, there are many other reasons why organizations should be in this business.

Strengthen customer relationships. Some organizations put too much emphasis around winning new customers rather then preserving the customer relationships they already have. It's more expensive to an organization to build a new customer relationship than to keep and grow existing relationships. Be a consultant to clients by learning more about the clients' organization than they know about themselves. Showering your clients with services and value-added solutions that differentiate your organization from the competition is crucial.

Become an indispensable partner. Technology maintenance is an area that has eluded organizations for decades. Often, clients are managing multiple maintenance contracts that exist in multiple databases across a number of locations. They have very little visibility into what maintenance they've purchased and the status of these maintenance agreements. The client also experiences increased risk due to inadequate or missing coverage of critical assets. They might even find they are paying for IT support on assets they have not deployed. Taking a consultative approach and understanding what the client has deployed in their computing environment, and how it is being maintained, will help you establish an advisory role with clients. Extending valuable, efficient tools and services to clients will allow them to make business-critical decisions around this information and allow you to manage the life cycle changes in this environment.

Work less for higher margins. You can double your margins without doubling the amount of work. In the past, most infrastructure-focused companies would equate doubling of margins to selling twice as much product. That's not a very effective way to grow a technology business, or any business for that matter. Certainly, doubling sales is a good thing, but you should be able to double sales and quadruple profitability if you know how to build a great maintenance services practice. Generally speaking, maintenance should be estimated at 10 to 17 percent of organizations' overall product revenue numbers. The margins of any good maintenance business can average 80 to 90 percent for manufacturers and approximately 10 to 20 percent for their channel partners depending on the product being covered.

Capture and manage the annuity. As mentioned, retaining customers and driving higher margins is a benefit to driving a good maintenance services business. There's one more key advantage to building a successful services business. Maintenance is not a one-time sale; it's an annuity and should be managed as such. If an organization has the right tools in place, they should be able to manage the life cycle of any maintenance agreement that they have sold and enable the renewal to be sold at a future date. Invest in extendable maintenance management tools. Not only are maintenance management tools essential in the managing and renewing of maintenance contracts but in the evaluation and turnover of technology. Not all maintenance is renewable. Product life cycles are shorter for some products than others; therefore, technology refresh becomes extremely important. If you can't track the maintenance life cycle on a product then you'll never be able to talk with your customer about the cost to replace versus renew. With the correct tools in place to manage the data, you can automate the process by which you and your clients take action. Start developing a continuous flow of actionable data, and you will have created a services annuity engine that will grow exponentially.


For more information on related topics visit the following related portals...
ROI and Strategic Intelligence.

Shayne Skaff, VP of business development for MaintenanceNet, brings to the organization more than ten years of experience in helping organizations develop and build a profitable IT services business. Skaff may be reached at sskaff@maintenancenet.com.

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