August 2001

Big Returns For (Professional) Services Rendered

BY MARK MCKERSIE

Imagine this: Your refrigerator breaks down the day before your annual Fourth of July barbeque, and you have to call someone to troubleshoot the problem, someone else to fix the fridge, someone else to fix the freezer, someone else to rewire the socket the electrical cord is plugged into...you get the idea. And you find out (after the fact) that people who frequently host barbeques shouldn't buy that particular brand of fridge, as it doesn't provide efficient shelf space for maximum hamburger storage. By now your hamburger meat is bad and your beer is warm and your spouse is annoyed that you didn't know how to fix the fridge yourself.

So why do we expect our customers to feel any differently about their communications needs? Especially when a lot more is at stake than a party in your backyard. End users don't know what to ask for to improve (or fix) their existing systems, any more than you could have known what was wrong with your refrigerator. Your customers are uncomfortable with the complexities of newer, IP-enabled systems -- but they can certainly benefit from integrating them into their existing infrastructure. And you, as their supplier, can broaden your profit margins by incorporating professional and technical services into your contracts with end users. It's a win-win situation. You increase your revenues while your customer remains happy and adequately supported.

HOW DO YOU DEFINE YOUR BUSINESS?
As you well know, there are many different players in the channel marketplace. Almost daily, new "labels" are evolving to describe business offerings. How do you define yourself? Interconnect? Voice VAR? Data VAR? Systems integrator?

To avoid any confusion, I'm going to offer a few brief definitions of the different types of channel partners I'm going to discuss, so we're all on the same page (no pun intended). This list is not comprehensive, and these definitions are by no means complete. You may call your business something else entirely. I offer these as a guide for this article only.

• Interconnect -- representatives for businesses that are primarily voice-oriented (approximately 80 percent of revenue coming from sale of voice equipment and services, 20 percent from data). Many interconnects are now referring to themselves as "communications service providers" or CSPs.
  
• Voice VAR -- resellers that derive more than 70 percent of their revenue through sales of voice products and applications.
  
• Data VAR -- resellers that derive more than 70 percent of the their revenue from data gear sales.
  
• Systems Integrator -- channel constituents that develop enterprise-wide solutions working in a multi-platform environment. Many systems integrators are now referring to themselves as applications integrators.

THE MARKET OPPORTUNITY
Regardless of how you view yourself, the opportunity resulting from the professional services market can make a difference in the overall growth of your company. How you take advantage of this revenue stream will depend on how you want to position yourself. But you must first get a feel for the composition and size (in dollars) of the market.

The professional and technical services category comprises network integration services, software support, and computer-telephony integration support, as well as planning, design, and installation of systems. Professional services also refer to the support and services for IP-enabled voice systems and server-based telephony.

According to the TIA 2001 MultiMedia Telecommunications Market Review and Forecast, spending on services for the voice and data communications market for enterprise end users totaled $138.3 billion in 2000 (up 18.3 percent from 1999). Spending on professional services increased by 22.7 percent to $93.2 billion in 2000 -- over two-thirds of the overall market. As you can see in Table 1, field maintenance and repair was the second largest category at $31.2 billion, and logistics and other support services was the third largest category with an estimated $13.9 billion in 2000. Total equipment spending by end users on voice and data equipment for 2000 was $91.2 billion.

The moral of the story is that end users are spending much more on the integration of the convergence applications than they are spending on the technologies themselves. And there's no guarantee that channel partners will hold onto their share of the equipment market (estimated to reach $119.6 billion in 2004) if they don't step up to capture their share of the professional services market.

Going forward, the market for professional services is projected to increase in importance, growing to three-quarters of the overall services market in 2004. Table 1 shows that services spending in support of voice and data equipment will rise at a CAGR of 20.3 percent through 2004 to reach $289.6 billion. Professional services will contribute roughly $218 billion of that total.

WHO PROFITS FROM DELIVERING PROFESSIONAL SERVICES?
Companies with data roots have long since become accustomed to charging for their technical support services. But one of the greatest opportunities for channels with voice roots is cultivating the ability to charge for professional services that they may or may not already be providing. To help channel companies understand the magnitude of the opportunities available, TIA has recently released a channel benchmarking report. Results from the report indicate that of the interconnects surveyed, 80 percent of their revenue coming from voice broke down into 65 percent product and 35 percent services revenue. On the product side, hardware and software has an 80 to 20 percent split. Most voice service revenue (96 percent) was derived from adds, moves, and changes; repairs; and carrier agency commissions. And only 4 percent of voice services revenue came from professional services. There's a lot of untapped market potential there.

In the same group of interconnects surveyed, many are beginning to derive more of their data revenue from professional services. The report found that 20 percent of their overall revenue is derived from data, and the split between product and services is fairly even. Thirty percent of the services revenue was from applications and professional services such as network design, project management, application integration, and training.

Of the systems integrators surveyed, services accounted for approximately 80 percent of all revenue for both voice and data sales, with professional services accounting for 70 percent of that total, with the remaining 30 percent coming from maintenance, network management, and cable and product information. Clearly, this business model was able to show the greatest financial gain from the market.

For voice VARs, the practice of charging for professional services has been slow to take off. If you're in the voice business, you know that voice margins for hardware are higher than data hardware margins. But data service margins are higher than voice service margins. So the adoption of professional services into your voice-oriented business model can help smooth your business' blended margin. For data VARs, of the 80 percent of their revenue derived from data sales, 40 percent came from services. Of that 40 percent of their revenues derived from sale of services, 24 percent can be credited to professional services.

The data shown in this benchmarking survey confirms the value of professional services as a way to protect margins for the total channel business. And these services continue to rise as a critical component of business models because they contribute to the overall profitability of a business.

We'll save the exploration of other sections of this report for another day, as the information within it serves as a milepost for measuring future channel evolution. However, it should be apparent that our report suggests how you can restructure your company, cultivating an account management relationship with your customers to emphasize positioning and professional services over mere transactions. We also look at labor rates, billable hours, and metrics for your service technicians, resource utilization, strategies for partnering, and more. The study is an excellent resource for those looking to sustain and grow their channel businesses.

IT'S NOT VOICE VS. DATA, IT'S VOICE AND DATA
All channel companies must understand the importance of developing a services strategy based on the type of customer served and the value proposition offered. For dealers transitioning to a converged business model, navigating new and different levels of cost to maintain a balanced profitability is the greatest test of business judgment. At TIA, we're helping CEOs of channel companies examine a range of options available to them for repositioning. Should a CEO train existing resources, hire new employees with the skill sets they need, partner with another channel with a complimentary skill set, or acquire the necessary resources? These strategies are explored in the TIA benchmarking report, and we'll look at them in greater detail in subsequent articles.

Of course, there are several other sensible arguments and options for new business models. Each business is unique in and of itself, and there is no "one-size fits all" solution for transformation. But one thing does remain clear: It's important to watch where the market is going and prepare your company with maximum flexibility to adapt and change at the same rapid pace as the converged marketplace.

THE BOTTOM LINE
As end users voice their frustration at having to prescribe their own solutions, manufacturers and network service providers increasingly rely on channel partners that provide professional integration and consultation capabilities. These suppliers want to know that their partners are offering a total package. So they look beyond the label of the business, and instead focus on the potential channel's business direction, the better to assess the potential partner's capability and capacity for convergence. And many suppliers base their discount structure on the level of support the channel partner commits to sustaining for the end user. If you haven't invested, one way or another, into providing professional services, you're probably going to pay more for the product.

There's no way around it. Professional services are an essential element in preserving the dynamics of e-business growth. If you're playing in the convergence space, be sure you have a sound business model that allows you to change as the market does. If you don't, you'll have to watch your margins erode, while your competitors sustain growth, and you'll lose your position with your existing customer base that needs the flexibility new IP technologies can offer. In these days of consolidations and shakeouts, the survivors will be the companies that maintain a clear focus of what needs to be done. And the integration and management of professional services in a converged business model for channel partners is what needs to be done to secure survival and maintain profitability.

Mark McKersie is the president of First Telecommunications Corporation in Grand Rapids, Michigan, and chairman of the TIA Voice/MultiMedia Working Group. Mark can be reached at mckersie@first-tel.com. For more information on the reports referenced above, please contact the Global Enterprise Market Development Department of TIA at 703-907-7472 or gemd@tia.eia.org.

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