PIPEDREAMS: Return of the 35-point margin

PIPEDREAMS: Return of the 35-point margin

I'm old enough to remember the golden age of hardware, before practically everything in the industry became a commodity. The first personal computer I sold - an IBM XT turbo with dot-matrix printer and sundry software - was a $22,000 investment for the customer; my personal commission cheque was $1,200.

Since then our industry has specialised in generating huge volumes while cannibalising the channel through ever-lower margins. Within a few years we'll be able to look back on the golden age of software when margins were a lofty 10 points, as companies try to generate a return on capital from single-digit margins.

It's got to change. The traditional defence against declining hardware and software profits - diversifying into services - works, but only after substantial investment in staff, support structures and new business models. So what about the myriad systems integrators and resellers that are excellent at delivering professional solutions to their customers, yet still have a reasonable expectation of making money from what they sell?

The answer, of course, is selling products for service margins - taking a service that can be purchased at wholesale and sold at retail, and adding a 35-point margin. The source of this nirvana? Application Service Provision, or ASP.

ASPs take the software applications we sell every day - mail, collaboration, CRM, financials, e-business - and turn them into services. The applications are rented across the Internet with no capital outlay, so setup times are minimal and the sales cycle is short. Which is fine if you happen to have invested the millions of dollars necessary to become an ASP.

The first generation of ASPs built great infrastructure but tried to sell direct, competing with the established channel. The results show that most failed. The latest ASPs, however, are beginning to leverage the channel by delivering wholesale and OEM services. This allows the systems integrator or reseller to sell ASP services under their own brand without having to invest in the infrastructure. They buy wholesale services, bundle them with their own products and services, add a suitable margin, and rent to their customers.

The big difference between ASP and traditional packaged software is in the margin. With many resellers struggling to make 15 per cent from software in a box, ASP delivers the same application as a rental service with a 35 per cent margin. So you can sell the same stuff for more money.

How? Essentially, ASPs aggregate large numbers of customers into the same computing infrastructure. This affords much higher economies of scale, from hardware to software licences, from security to systems management. The result is rental services that are price-competitive with traditional implementations, yet generate dramatically higher margins for the reseller.

It's not all beer and skittles, of course. Resellers need to change the way they think about selling software, and wean themselves off the "easy come, easy go" model of customer relationships. If you're renting an application to your customer, you'd better be prepared to have a long-term relationship with them.

The results can be worth the effort. Not only are margins better, but the cash flow is too - the margin flows through the door automatically every month, making it easier to plan and build your business.

As applications get more complex, ASP becomes more compelling for customers. And as software margins decline into single digits, ASP becomes even more compelling for resellers. Kent Duston is CEO of Cavillon Systems

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