Toronto — Paul Dippell has more than two decades of experience building, running and acquiring solution providers and in his opinion, customers in Canada are not spending on IT because they fear the poor economy as opposed to being impacted by the recession.
As part of an Ingram Micro Canada event, Dippell, the founder and president of Service Leadership Inc. of Plano, Tex., spoke to about 100 solution providers on how to survive and thrive in a down economy.
1. Floating a ball park price
A good way to know if you have a potential customer is by floating a ball park price verbally. Make the price either 20 per cent below or above what you might charge.By doing so, Dippell’s research has found that 80 per cent of those potential customers eventually sign off on the deal.
By floating a price you can also save on proposal costs because if the potential customer balks at the price, you’ll know not to write one. According to Dippell, the average proposal cost CompuCom about $50,000 over time when he worked for that company. Dippell believes that it cost the same to a 10 per cent VAR on a proportionate basis.
2. Look to managed services
Dippell surveys resellers for Service Leadership, and in those studies he found that 18 per cent of the respondents believe that product hardware sales will not change. With that, project management sales will also remain flat. However, only 54 per cent of those surveyed said that managed services will remain the same. That means everyone else believes it will grow in the downturn. Also, in all past recessions customers have looked for outsourcing options.
“When the economy is in decline, the customer will want to reduce headcount and have predictable costs along with accountability. Those are things customers want in a downturn economy. Attorneys, for example, are not in the IT business, so why would they want to pay for internal IT people? You get better results and better response with managed services,” Dippell said.
3. Don’t be a block head
One of the classic mistakes solution providers make in a down economy is to offer block time to sporadic customers. These customers typically don’t want to get into a managed service so the solution provider sells them a block of time for a set price. Two things occur when a solution provider makes this mistake. The first is they offer the lowest published rate. The second thing they do is drop everything to service this customer. “Those are two ways to kill gross margins,” Dippell said. A better option is to price your services better.
4. Call the plumber
A lot of solution providers struggle with pricing. Dippell advises them to call the local plumber and ask him about his rates. “When you call a plumber to ask him to fix a leek in the shower you want that plumber to come out right away,” Dippell said. Plumbers have an emergency rate of about $275 an hour. “And this is a person who does not know active directory and other technical expertise,” he added.Solution providers should offer two-day service at their best rate. For those customers looking for a quicker fix, increase the price by 25 per cent for a one-day rate. Also offer an immediate or emergency rate that is 50 per cent higher than your best rate. “Every other industry charges more for an immediate response except for the channel, and that’s because we haven’t figured it out yet,” he said.
5. Staffing situations
According to the Service Leadership survey, the most popular strategy for handling employees during a poor economy is to replace them with contract workers. But Dippell said this strategy has its risks unless the solution provider has excellent controls and methodologies in place. If cash flow is down sharply then you need to take action.
“The single biggest mistake during a down-turn is not addressing headcount. It’s very painful, but if you are not cash flow positive every month you need to take action,” Dippell said.
While the process of staff reductions is a painful one it can lead to healthier and more motivated staff in the long run. Dippell has found that the bottom third of sales reps and other staff almost never improve their performance over time. Good sales reps always hate carrying others who don’t perform, so eliminating them it will lead to better morale.
However, Dippell suggests hiring after a period of attrition.
6. Compensation strategies
It turns out that people will do what you pay them to do, according to Dippell. Many times, VARs don’t attach incentives to the company’s bottom line, and that’s a mistake. Dippell believes that 10 per cent of a person’s pay should be at risk (based on performance incentives) and 25 per cent should be based on incentives for billable system engineers. Those who agree to work under such a system usually have the confidence to perform well, and those with low confidence will leave.
“It’s good to scare the turkeys, because they usually do not perform well on average,” he said.
7. Get rid of low dollar customers
Dippell surprised the audience a bit by suggesting they should fire low dollar customers if they don’t want to pay your new rate. He also suggested finding the profitability factor of each customer, and suggested not being surprised when more than half a dozen customers don’t measure up. This usually happens because they’ve been offered a great deal to get them in the door.
What you must do is start to engage your customer in a margin increase strategy. For example, if you have a customer that is a fair distance away you would want to charge all or a portion of your travel costs. A solution provider’s top 20 customers should all be in a margin increase program, and if they do not buy into the program they’re probably better off with another solution provider, Dippell surmises.
8.Show customers a bargain
One solution provider, said Dippell, sells its managed service for $300 a user on a per month basis. Many of its competitors charge less than $100. What this solution provider did was show customers a Gartner Group study that found Fortune 500 companies pay roughly $3,600 per employee on IT on a monthly basis. Showing smaller companies this statistic resulted in $2,400,000 in business for the solution provider.
This solution provider also has a tactic for those who balk at his price. He offers contact names and number of his competitors. The thought being, he’d rather pass low dollar customers to his competitors while he focuses on more lucrative opportunities.
9. Don’t lower your price
One of the least favourite strategies for keeping a customer during a downturn is to lower your price. Instead, Dippell advises promoting managed services more or removing a line of service that isn’t profitable. Another choice would be adding a line of service, but you should be careful to do it in a low risk way.
10. Don’t get your head stuck in the cloud
Dippell said that solution providers should look to partner with white label hardware and software-as-a-service providers instead of building their own data centres. But one thing to keep in mind is to always put your brand in front of the customer. That’s why a white label managed services is such a good choice.
“Developing your own HAAS or SAAS is risky unless you have access to large amounts of capital,” he said.
Bonus: Continue partnering and acquiring
No matter what the shape of the economy, it’s always best to partner with local solution providers because you can help each other out with best practices, said Dippell. Also, look to acquire companies during the rough spell because prices have come down.
With acquisitions, look for companies that have solo practitioners. Companies run by 55 to 65 year-old sare good targets because those owner-operators are “ready to hit the beach,” Dippell said.
Finally a new investor is a better solution than getting more credit.