The enterprise technology landscape is evolving at all levels of the supply chain. Based on 2012 year-end revenue reports for both Cisco (News - Alert) and its channel partners, trends indicate that profitability is an ever-changing dynamic between products and services.
In a Q3 2012 report on networking trends published by Canalys in mid-November, Cisco’s service gross margin was cited at 66.9 percent, while product revenue — including switching and routing — was down for the year. Similarly, in a November board report for Cisco channel partner Alexander Open Systems (News - Alert), founder and CEO Gary Alexander noted that the company was up 8 percent year-to-date in product revenue, while, comparatively, service revenue was up 46 percent.
AOS, a consultative technology partner in the Midwest, has built a gold-level partnership with Cisco since its beginnings in 1992, including a Master certification in unified communications, security and managed services. As a part of our “consult, architect, implement, support” business model, AOS utilizes Cisco products and technologies for communication, networking, data center and security solutions, among others.
President Thatcher Alexander attributes the growth of service revenue to a gradual change in the sort of projects undertaken by AOS.
“In the early years, our business was 80 percent product and 20 percent services,” Alexander said. “The change is simply that the products we are selling take longer to install, and we have offerings that are purely or predominantly services. Solution sets are higher content in services.”
At the broader level, where Cisco is concerned, this service revenue growth can largely be attributed to enterprise business, such as the $5-billion acquisition of NDS (News - Alert) Group for video technology services referenced by Canalys. While these professional services do not include channel partners such as AOS, they are yet another example of this growing shift in demand – and the trickle-down effect it’s having on all parties involved.
Cisco’s spike in service offerings has given the company’s channel partners new positioning in the marketplace. As the demand for products goes down, the customer demand for teams to manage their networks and their data centers is up. More importantly, customers want local solution providers who understand their business, providers that can be considered as extensions of their team; that’s the gap channel partners are equipped to bridge.
With this new breed of customer desires in mind, Cisco has put a larger emphasis on developing its partner network to be able to address clients’ service needs. Cisco partners communicate regularly with Cisco Services Partner Development Managers, who assist in the planning and implementation of partners’ Cisco service offerings (such as AOS’ AOS ONE – Operational Network Essentials program). The hands-on relationship between Cisco and its partners translates to the partners’ relationships with their clients, ensuring that every organization receives close attention and guidance.
Cisco and its partners are taking advantage of a slew of new opportunities afforded by the products-to-services evolution. Most recently, Cisco introduced the Global Services Partner Program at its annual partner summit in April of 2012. This initiative gives partners access to the latest, most advanced corporate-branded and collaborative service offerings, providing organizations like AOS with an enhanced menu of solutions to increase their competitive edge and better serve existing clients. Cisco’s Services Partner Program will only further enable AOS and its contemporaries to provide quality service offerings to its customers, while at the same time increasing collaboration between partners. The resulting high-caliber services will allow partners and clients to take advantage of high-value, high-margin projects.
In sum, both Cisco and its partner companies have (separately) built their offerings around market demand. As customer projects become increasingly in-depth, the resulting demand for service — maintenance or otherwise — provides a new opportunity for growth and profitability.
Increased collaborative efforts between channel partners ensures that this market demand will be met in a way that is both beneficial for the provider, and most importantly, for the customer.
Edited by Braden Becker