Product Pushers Lose Their Shirts

Classic resellers are hitting costly bumps on the road to services.

For many resellers pursuing services, the promised land of profits more closely resembles the valley of death.

Wasmer Business Solutions has studied the financial statements of about 50 resellers and has found that most companies in the transition from box pusher to service provider are losing money.

"The reality is, most resellers across the country providing services are losing their shirts," says Ken Wasmer, president of the Alexandria, La., company that consults to resellers. "We see that very few are actually making money in that transition."

The study, which examined companies in the $5 million to $500 million range, found that the deeper resellers pushed into services, the more their profits declined. He discovered that the top third of the study group, in terms of profitability, were pure box movers, the middle third were a mix of product and service providers, and the bottom third were primarily service providers.

Wasmers analysis runs counter to the commonly held belief that services are salvation for margin-impaired product resellers. He cites a range of problems that have kept reseller service operations out of the black. Those difficulties include poor utilization rates, billing rates that fail to track with engineers compensation, and layers of nonbillable management positions.

Moreover, some resellers may not even realize they are losing money in services. Wasmer says the way resellers allocate costs may mask problems.

For example, resellers may allocate service costs—such as labor and commissions that encourage salespeople to sell services—to the hardware side of the business. As a consequence, they dont have an accurate picture of their service profitability, which leads to trouble.

Ron McClellan, president of iCepts Technology Group, a solutions provider in Middletown, Pa., says resellers have struggled to understand costs in the services business. ICepts runs its hardware business and its "soft side"—e-business consulting and customer relationship management, among other offerings—as distinct profit-and-loss centers, he says.

"Youve got to look at those things separately," McClellan says. In addition, resellers must account for hidden expenses such as travel and the cost of materials for customer presentations. Also, resellers need to have the infrastructure in place to deliver services, says Bev LeBoeuf, a spokeswoman for Concorde Group, a solutions provider.

Facing up to the services reality can save some resellers a lot of grief.