Remember Y2K? Sheldon Waters certainly does—though not for the same reasons the rest of us do. In 2000, Waters adopted a radically different business model for his Toronto-based firm.
DSM Computing Solutions Inc. had been selling computer hardware and software to Toronto-area SMEs since 1988. But in 2000, even though sales volumes were high, sales margins were at 15%—half their historical level—due to increased competition from big-box and online retailers. Waters was also concerned that the Y2K feast was going to be followed by a famine. “Who could you sell to?” Waters recalls. “Everybody had bought all new stuff.”
That’s when Waters decided to transform DSM into primarily a service provider. DSM is not alone in making the switch to service. Many companies, particularly those in the computer and other tech-related industries, are moving out of low-margin product sales to the more profitable service side. But the strategy has its risks. Considering all the changes required, it’s not unlike starting your company all over again.
Before the switch, DSM offered only limited, after-sales services, such as on-site hardware repairs and system support, on an as-needed basis. But using that limited experience, his industry knowledge and client feedback, Waters developed five services he believed could generate profitable revenue: IT systems support, e-mail spam filtering, firewall monitoring, domain and e-mail hosting, and high-speed Internet service. All would be offered by term contract or monthly subscription, thus generating the recurring revenue that helps companies avoid cash crunches and better plan their growth.
Waters’ next step was selling clients on the move. DSM’s marketing emphasized the benefits of signing up for his new services on a long-term basis. For instance, clients would receive the support of a full-service IT department at a fraction of the cost of operating one in-house. They’d also enjoy the peace of mind and convenience offered by a consistent monthly bill rather than invoices that fluctuated wildly. Finally, customers who signed on to the service package were promised priority treatment. (No package? We’ll get to you when we can.) Waters had no problem signing up almost all of his clients.
But customers weren’t the only ones who needed convincing. “You have to really deeply commit that this is where you’re going to go, and you have to rebuild your organization around it,” says Waters. As a result, some staff were retrained or replaced. The bulk of his employees today are “field techs” trained to fix problems on-site and identify new business opportunities while they’re there. At any given time, about a quarter of Waters’ in-house staff is available to go into the field to deal with surges in demand—a challenge common to providers of subscription-based services, which can’t tell customers to find help elsewhere. To keep labour costs down, Waters invested more than $250,000 in developing a sophisticated monitoring system for his clients’ systems—”We know when our customers’ computers burp,” he says—and in equipment and tools to automate many of the services DSM provides.
Waters also had to shake off the tendency to focus on sales figures. At first, the $2 million or so drop in sales was a discouraging source of sleepless nights. “But when you start to see profits are 25% to 30% higher,” says Waters, “you say, ‘Who cares?'”
When your specialty has been products, which come with fixed costs, pricing a service can be tricky. Waters readily admits that he “guessed in the beginning.” In its first few years as a service provider, DSM sold clients a predetermined number of hours of work, reconciling overtime charges or refunds on a quarterly basis. It was an administrative nightmare; so, about a year ago, DSM moved to a fixed-price monthly fee.
Today, only about 30% of DSM’s revenue derives from the few hardware and software products that customers still demand. Although the transition was difficult, Waters credits the undertaking with DSM’s survival through the tech bust. Whereas many of his one-time competitors are now out of business, DSM is enjoying its best results ever. “My recurring monthly revenue has tripled in the last three years,” says Waters, “and my net profit is up 25%.”