Psst, Wanna Buy a Server?
First web integrators revamp their businesses to look like old-school systems integrators. Now theyre considering pushing one step farther back in time, taking title to products and reselling them as part of a solution.
Vendors and Web integrators alike say theyre in talks to resell high-end hardware and software, a move that would both supplement the Web integrators top-line sales and make their companies look far more attractive to investors and customers.
On the flip side, Web integrators could help vendors to weather the current economic slowdown. EMC, Motorola and Sun Microsystems each issued surprise earnings warnings last week, pulling the Nasdaq down to a two-year low.
Sun, for one, has signed a deal with MarchFirst to resell its servers, and is in talks with many others about similar arrangements. IBM likewise is undergoing the same kinds of discussions with Web integrators, sources say.
"MarchFirst was the first deal we signed," says Joe Womack, VP of Americas partner sales at Sun. "But there will be more to follow. What were seeing is a huge blurring between consultants and VARs, and between a nontitle-transfer business model and a title-transfer one."
MarchFirst declined to comment on the Sun deal, but iXL did note it has been in discussions with Sun and others. So far, iXL hasnt shifted its model from pure services.
"We are considering it and were more open to it than we have been in the past," says Lorin Coles, VP of alliances at iXL. "Were looking at a number of new options and new revenue streams. But the more strategic direction is building category-killer solutions by industry."
Whether that includes actually selling solutions or just recommending solutions remains to be seen, Coles says. While Web integrators traditionally have had close relationships with top vendors, they always kept them at arms length when it came to selling products so they appeared impartial to their customers.
That was easier to do, however, when business was pouring in from dot-coms looking for quick Web-site design and e-commerce systems. With those companies melting down at an astounding pace, its much tougher for these e-integrators to ignore a quick way to prop up their sales.
In Suns case, the pending reselling arrangements would involve servers that start at $100,000 and run all the way up into the several million dollar range, Womack says.
Shell Game Even more important for Web integrators is that they dont have to break out product sales from overall revenues. As a result, investors and customers have no idea whether an integrators sales come from products or services unless the integrator wants that information known.
Some integrators, such as Tanning Technologies, disclosed quarterly product sales data in order to highlight a transition to a services model. But Tannings quarterly reports no longer include product data, because the company says its entire business now is based on consulting services.
Many large consultancies, including Accenture (formerly Andersen Consulting) have had reseller operations for years. While most prefer not to talk about it, because it raises impartiality questions, it does help pad out top-line sales numbers.
Analysts say 18 months ago, Web integrators avoided even the inference of handling product. But today, they say, working with product may be the only way they can get their foot in the door on certain customer contracts.
"I dont think for certain that any of these Web integrators are going through the VAR channel process, but it wouldnt be surprising that they would look for a way to drive top-line growth," says Sandra Notardonato, an analyst at Adams, Harkness & Hill.
Notardonato says that there is nothing wrong with Web integrators selling products, but it would never show on their balance sheets. "They could hide [product sales] in their services revenue and that doesnt bode well. Im not saying they are doing anything illegal or dishonest, but if they are going through being a VAR on Suns product, it has not been disclosed in the P&L," says Notardonato.
Web integrators say their vendor relationships wont lead to biased product recommendations. But e-consultants note that they need to be intimately familiar with technologies before they can recommend them.
J.P. Frenza, manager of Web integrator communications and e-ambassador with IBM, says Web integrators arent becoming resellers because of the business model. Instead, theyre embracing the reseller model as they seek to standardize on certain technical architectures. Frenza says Web integrators want to start with an infrastructure foundation for a given solution set, rather than start from scratch. "They cant reinvent the wheel," he says.
MarchFirst, Frenza says, has included IBM technology in its M1 Solution, the companys recently announced go-to-market strategy. With M1 Solution, MarchFirst aims to focus on such solution sets as customer outreach and enterprise improvement within specific vertical markets. Ironically, Microsoft and Novell both own stakes in MarchFirst.
Bulking Up There is a fine line bet- ween VARs that sell services and integrators that sell products. While services may generate more of the profit, the products may generate more of the sales and make a company look bigger for investors, companies on the acquisition trail, or corporations looking for sizeable partners to build solutions.
Regardless of how they classify it, the more outlets for vendors the betterparticularly now that corporate earnings are getting hammered.
Bad Omen EMC, for example, which was one of the mainstays of the Web-commerce boom, issued a warning last week that sales could be as much as $1 billion lower than anticipated.
Sun also issued a warning last Thursday for the second time this quarter, slashing earnings per share to 7 cents to 9 cents per share instead of the expected 15 cents and said revenue would grow 10 percent to 13 percent instead of the 30 percent analysts were looking for.
The company blamed the shortfall on a slowing U.S. economy, although Merrill Lynch downgraded the stock because it said there was too much used Sun equipment on the market due to the collapse of the dot-coms.
If there was any debate that the New Economy has merged with the Old Economy, this should end it once and for all.
John Moore contributed to this article.