Services to Profitability

Merely selling the PC in boxes is out, bundling them as partof services is in. Barring Dell, this seems to be the trend with all vendors.Most of them–Compaq, IBM, HP or Acer–have been selling via the traditionalchannel model. A good model, but with profits being distributed in the channelchain, vendors are left with a meager profit margin of 5-6%. Dell affords to bean exception because of its direct selling model–it can offer customers lowerprices, as compared to its competitors, and with a positive impact on its bottomline.

“Dellaccounts for about 50% of the total profit pool of all the PC companies,”says Chip Saunders, president, Asia-Pacific and Japan, and senior VP, Dell. Notthat companies like Compaq did not try to replicate the Dell model, to increasetheir shares in the overall profit pool. Only they did not meet with success.So, after spending much money and energy, they now continue with the traditionalchannel model.

With their meager profit margins, vendors face the risk of asmall change in percentage points drastically affecting their profitability.Says Aditya Pant, head of research, IDC India, “A marginal 2-3% impact onprices due to component price rises or custom duty hikes could have a seriousimpact on profitability projections of all vendors in India.”

Moreover, the companies have to compete with the gray marketplayers, who offer better specs at comparative prices. So, a majority of vendorshave to adopt the high-volume low-margin business model.

Services key

Thus, to increase profits, these players need to focus on theservice component. Agrees Thandava Murthy, director, customer services, CompaqIndia, “With the increasingly thin lines of differentiation among vendorsin product offerings, service is increasingly becoming the deciding factor inpurchase decisions.”

Though companies will have to employ a larger number of staffin their service divisions, they also stand to earn higher profits. Numeroussoftware companies engaged in exports and services earn net profit margins over20%.

Major vendors like Compaq, IBM and HCL have professionalservices in place for their big and medium-sized clients, but smaller clientsare serviced by resellers and smaller integration companies. Though the servicesmarket is yet to saturate in India, globally–especially in the US–it hasshown signs of wearing out. The focus seems to shift not only to other marketsbut also the small office, small business (SOSB) segment. India will see asimilar trend a few years hence, and the vendors will have to look at thebiggest, albeit the toughest, SOSB segment, to increase net profits throughservices. Agrees Hans T Koppen, senior VP, Ingram Micro, “In the hardwaremarket pyramid, the biggest chunk is at the bottom.”

At crossroads

Can vendors just increase their support staff and storm intothe services market?

With channels and resellers already in this space, doing thiscan be difficult. Also, at the lower end of the market, it’s the channelplayers who are moving into the value addition mould. Traditionally, resellerswould make a sale on a ‘mark-up’ percentage on the boxes. But the Internethas changed this equation. With the market led by customers’ pull and with thepricing information available on the Net, the old ‘mark-up’ no longer works.So channel players are paid for value-adds; no longer for the boxes alone. Thisbrings them in direct competition with the vendors, who are also angling forthis fast-growing business space.

Distributors and bigger channel players are also eyeing theservices market to add to their bottom lines. However, whether channel partnersin the medium segment can do the same is debatable. Says Murthy of Compaq,”The majority of channels are not geared to meet the customer’sincreasing demands.” However, IDC’s Pant is of the view that vendors willlike to move down the value chain but face a tough job. “The massiveinfrastructure and logistics will make it nearly impossible to target thismarket in the face of nimble resellers and systems integrators,” hecomments.

At such a juncture, apart from Dell, most of the PC vendorsare at crossroads, between profits and partners. In case the top-line marketsaturates, the option is to move into the SOSB segment. Trying to aggressivelymove
into services can hit the business hard as partners, resellers and systemintegrators may move to other brands. But if a company continues to stay withits
partners, profits can be affected, as it won’t be able to tap the big chunk ofthe services and hardware market. As the services
market in India matures, this is the biggest challenge for vendors here.

Yograj Varma
in New Delhi

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