TAMCO surveyed over 194 US-based technology integrators. Despite these findings, it is still astonishing that integrators are not making dramatic changes to their business model or are still only dabbling in services as opposed to building complete strategies around them. Look at the below four data points and let’s unpack why more integrators are not selling services and discuss simple changes that can create a gold mine business for solution integrators.
- The average margin on a new system, project-based sales is 20%
- The average margin on contracted multiyear maintenance (MYM) agreements is 52%
- Out of the 194 Integrators, 85% felt comfortable standing behind their service (SLA’s) and supporting multiyear maintenance contracts.
- Yet, the average success rate of an integrator capturing contracted multiyear maintenance, with a new projected-based sale, is less than 10%
The Survey Findings & Our First Reaction
The first two points regarding margin are neither good nor bad. They are technically facts without much change occurring within the market over the years. What we found to be most perplexing is how even though integrators were comfortable standing behind their SLAs, and despite the lucrative margin on sales with multiyear maintenance agreements, across the board, there is an overall lack of effort or direction from leadership to try and sell and capture multiyear maintenance on new sales. There is a nonexistent concerted effort or strategy to even include multiyear support on proposals.
Why this is, we are not sure, but let’s begin by unpacking the impact of multiyear maintenance on an integrator's business and address the low success rate for selling it.
The Impact of Selling Multiyear Maintenance
Consider the impact of a $200,000 transaction with $80,000 in multiyear maintenance, over 5 years. This increases the revenue on that sale by 40 percent. Once you start to see how that can impact your overall annual revenue, just by changing the way you sell, it becomes meaningful on both service revenue and service margin (assume 52 percent margins).
Selling Multiyear Maintenance as a CAPEX is HARD
For the integrators who did make an effort to propose and sell multiyear maintenance, when we compared their percentages, there was not much of a difference. The reason lies within the way the sale is being presented, as a CAPEX cash sale.
Take that same $200,000 opportunity mentioned above. This won't be easy in itself, but then you add in and ask for an additional $80,000. You're essentially asking for an advance on services that haven’t been performed, which is completely unorthodox. I know I wouldn’t and, customers don’t either, there’s no recourse or leverage from a customer’s perspective. It arguably is the toughest sale to make as a technology systems integrator.
To make this sale, and earn the more desirable margins that come along with multiyear maintenance contracts you have to change what you believe about solution sales. It can be done, but it takes a new approach. An approach that focuses on you believing in and selling the use of the solution versus the need to own it. Understanding why ownership is not the most ideal way to procure technology anymore is the first step towards successfully selling multiyear maintenance.
3 Reasons Why Ownership Is No Longer an Ideal Offering
If you are one of that 85 percent that has a robust service offering you can get behind and you want to capture multiyear maintenance on your new solution sales (you could be capturing MYM on 60-70% of sales), you have to flip the script on how you sell. You're sitting on a gold mine! To access it you have to move away from the idea of transactional, one-time sales, and selling for the sake of ownership. And begin to believe in and adopt the concept of use-based solutions, providing access to and not ownership of the technology.
There is validity to believing in providing use of and access to technology versus ownership. Ask yourself these two questions; If you were buying technology, why would you want to use your cash/capital and why would you want to own the solution? There is no financial, technical, or logical business reason.
1. Non-Recoverable Costs
Look at the bill of materials, you’ll discover more non-recoverable costs than recoverable costs. What is a non-recoverable cost? They are intangibles that can’t be recovered after installation. For example; design, labor, licensing, software, etc. Also included in the non-recoverable costs are manufacturer profit, distributor profit, and integrator profit. Peel off the non-recoverable costs and you now have 30-40 percent in hardware. So, what does a customer own when investing capital into a solution?
2. Non-Revenue Generating
From a CFO’s perspective, these solutions do not generate revenue after they are installed. While these technology solutions are vital to any organization and arguably essential, those two outcomes or performances are different. A basic financial principle is to use cash/capital when you can receive a monetary gain on your investment and leverage a service or a monthly payment when you can’t.
3. Technology Obsolescence
Lastly, as it relates to the value of subscription or use-based solutions versus spending capital to own technology, from a buyer's perspective, take a closer look at the rapid movement of technology. Technology obsolescence is an inevitable reality. R&D spending has increased year over year in all technology sectors. Technology is constantly evolving. What is bought and sold today will almost certainly have to be upgraded or replaced in three to five years.
Technology-as-a-Service | This New Way to Sell is a Gold Mine!
If you see merit in the three reasons above why CAPEX and ownership make poor business sense, it is easier to embrace and sell an offering that is in line with the performance and outcome of the solution. More importantly, it makes it easier for you to sell multiyear maintenance with a project-based sale and build recurring monthly revenue (RMR). No one in the solution sales industry has had a better response to achieving this way of selling than with the creation of a true technology-as-a-service (TaaS) offering.
Technology-as-a-service and the subscription consumption model is the most dominant way we buy these days. It’s the only method of procurement that removes the burden of ownership and places greater value on the customer experience of the solution and relationship.
Selling Multiyear Maintenace With TaaS to a Customer
Let’s revisit that same $200,000 transaction with $80,000 of multiyear maintenance support and build a technology-as-a-service solution offering. So we’ll take $280,000 over a five-year term. For the customer, it will produce a monthly payment in the neighborhood of $5,360.00. Which includes everything in a typical bill of materials along with five years of maintenance and technology obsolescence protection. Consider what you now understand about ownership and using CAPEX, this should really start to come together as greater value and flexibility for a customer.
The Gold Mine | Selling Multiyear Maintenace With TaaS as an Integrator
When leveraging an as-a-service finance company, they will pay you the $200,000 upfront and then pay you $1333.33 every month for 60 months for the multiyear maintenance ($80,000/60 months). That $1333.33 is part of that $5,360.00 monthly payment to the customer. Once the finance company receives that monthly payment they will peel off $1333.33 and remit that back to you, the integrator, which in turn builds your RMR.
Scaling The Gold Mine | Multiple TaaS Transactions
Take 10 transactions at $200,000 with no multiyear maintenance on any of them. Just on the project sale, this totals $2,000,0000 in revenue. Compare this to 7 transactions at $200,000 with $80,000 of multiyear maintenance on each of them. That’s $1,400,000 (7x $200,000) in revenue on the project sale and $560,000 on multiyear maintenance (7x $80,000) and total revenue of $1,960,000.
Remember, from our survey of 194 integrators the average margin on project-based one-time sales is 20% and the average margin on multiyear maintenance is 52%. Based on the above comparison you can sell 30% fewer transactions and gain relatively the same amount of revenue at considerably higher margins, all while building RMR and creating a greater valuation for your company.
In a very short period of time, you can move from sitting on a gold mine to realizing your gold, just by changing the way you sell.
