What should we expect from our IT company?
The short, flippant answer to this question is: “Exactly what you pay for”. The longer answer is a commentary on how the IT industry makes money and why you have to pay for the things you get.
I’m frequently faced with potential clients who want to upgrade their IT systems, and many of them are realistic and easy to get along with – but, unfortunately, many people in small business have interesting misconceptions about what one needs to pay for.
Just last week I was discussing this topic with others in my industry who were saying we need a professional body that sets the standards for this, so that the general business world can seek support over the issues that arise. Really they just want their clients to understand why they have to charge for their design and installation services.
I thought writing about it here might be a good place to start…
Many years ago, selling PCs and servers was a very lucrative business to be in. When PCs were not well understood and one PC cost $5,000, it was easy to make a 30% profit on the sale of a PC, and so PC sales companies developed the reputation of being very wealthy. There was also some expectation that with the sale of the box would come some level of free support that went beyond the industry warranty.
Today, PCs are a commodity item sold at prices so close to the distributor or manufacturer’s price that retailers frequently go broke just for holding too much stock. The fact that our Australian distributors are holding the local prices artificially high compared to US distributors of the same product is a different matter, and not a subject for this article.
Today, the sale price of PCs is being driven down by interest dealers who work on skinny margins and high turnover. The implication being that you get the PC and manufacturer’s warranty, and the only service is delivery. There is no helpdesk to call or onsite installation.
Many IT companies offer hardware sales as part of the service they provide, but the old days of service to go with the sale are truly over. The service that comes with the sale are the services paid for. It would be nice if the manufacturer’s warranty could be extended to include all the support computers need, but the truth is that this is a very different business proposition, and best provided by the local IT support company.
When an IT services firm is “giving away free services” it is typically the loss leader for what they hope will be a sale or a project, or an ongoing services relationship. With the ever-increasing cost of IT staff in our marketplace where there is no unemployment, the cost of each hour must be recovered somewhere in the business.
A recent benchmarking exercise of IT service providers to the SME sector, run by Corelytics in the US, showed an industry average EBITDA of 6% of total revenue, with a decrease of 4.3% across the managed services component over the past two years (to December 2010), due to pressure on margins. The alarming part was that it shows the EBITDA of the managed services component at 2%. So, the industry has been forced to change and pre-sales service must come at a price.
So, if you’re wondering why you’re getting poor service on your request to scope the equipment your business needs, consider the risk each of the vendors you call is taking with the hours of work they must do to furbish you with a free quote for the right solution. Each of them knows they have a one in three or four chance of winning the deal, but that the decision may have been made before they were invited into the mix. They can’t afford to do hours (sometimes days!) of design work to solve your problem.
My recommendation to anyone who is in this situation is to form a partnership with a reputable IT company, and once they know your business, have them design the best solution – even pay them for the work. This will lead to the time being put into design the right solution without shortcuts being taken. You may still shop around the design to confirm you have a good price for the resulting project, but if the company is reasonable, the prices will not vary much and you will do well to remain with your trusted advisors.
Most technical companies want to do a good job, but there is real cost involved, and as margins are squeezed there will be less and less free service to go with the sale. As buyers, it is good to know how the industry works and make sure you get the best solution.
Remember – the best solution is the one that aligns your IT systems with your business plans so that IT does not impede your growth.
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David Markus is the founder of Combo - the IT services company that ensures IT is never an impediment to growth.