Services face margin squeeze

Services face margin squeeze

The future of high services margins are under threat. In what looks like a sign of things to come, Cisco and Com Tech have signed two separate contracts for a network installation at PricewaterhouseCoopers, ARN has learnt.

Cisco beat a raft of vendors to secure the hardware deal, while Com Tech won the integration and services component with the outsourcer.

The deal will see Price-waterhouseCoopers install a Cisco's networking infrastructure at its new Darling Harbour, Sydney, offices in what one ARN source reports is a multimillion dollar contract.

The contract, however, is a warning sign that large IT-savvy enterprise customers are no longer happy to negotiate one single contract for equipment and services such as network installation, management and maintenance.

In this case, sources indi-cate the customer tendered directly with vendors, negoti-ated almost margin-free hardware, and separately negotiated service margins with resellers recommended by the competing vendors.

PricewaterhouseCoopers and Com Tech refused to comment on the deal. Cisco was not available for comment by press time.

But according to failed tender-hopeful Nortel Networks, this type of contract negotiation is becoming a firm part of the industry landscape. "We are seeing more customers put out tenders this way," commented Gary Starr, Nortel Networks channels manager.

Starr said the example demonstrates the challenge facing integrators when it comes to articulating a service proposition after a vendor has articulated the technical solution.

Starr said Nortel works consultatively with partners so both the vendor and integrator can achieve the right competitive price point.

In commenting on the trend, Mitch Radomir, NetStar's marketing and business development manager, said customers are hoping to secure two levels of discount.

"Guess what, it's not going to happen because services themselves have a cost incurred," he said.

Radomir said network integrators cannot afford to dramatically discount services without sacrificing quality and potentially threatening ongoing revenues.

"It's going to force people to seriously evaluate their services pricing models," he said. "It's going to create so much trouble for integrators they will start to walk away from deals."

However, one ARN source close to the PricewaterhouseCoopers tendering process, explained the company is simply shouldering the responsibility for the project and coordinating the various hardware and services elements.

"At the end of the day, they've distributed [the project], and they are sitting right in the middle," he said.

As a result, he said the customer can ultimately only blame itself for any failures because equipment and services suppliers are only responsible for specific portions of the total project.

Jonathon Fisk, CEO of Senteq, commented that negotiating separate services and hardware contracts is "fairly common" with large customers, but conceded services margins are falling.

"There is value in what the channel provides, customers are just paying for services as a single item," he said.

Meanwhile, Darron Lonstein, Com Tech's director of technical marketing, does not view separate services contracts as a big problem. "We've always been solution focused," he said.

John Grant, managing director of Data#3, agreed. "The reality today is that service margins have been under pressure for some time," he said. "The trend in the industry is that commodity style procurement is moving up the value chain into services. The issue is when it comes to integrate it all. The organisation putting out the tender has to do a lot of the work in-house to bring these two components together."

Louis Vellios, national marketing manager for Business Computers of Australia, said this approach is going to weed out organisations that don't have strong service divisions.

"In the past, companies have secured deals on products but haven't had the services infrastructure to support the contract," he said.

"We are actually structured as two separate divisions, a services division and a products division. But we found a need to have a single sales contact within the company," he said.

"High value-add services like consultancy aren't commodity products yet and I don't think they ever will be," Vellios concluded.

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