Selling White Label Services
Reselling services represent a significant – and growing – part of the business for many IT consultants. Margins on IT hardware, and to a lesser extent, software, have fallen steadily. The fees that can be charged for higher-value work, such as code customisation and application testing, have also come under pressure, not least because of competition from suppliers in markets such as India or Eastern Europe and Russia.
At the same time, the proportion of clients’ IT budgets spent on services is rising. This is a trend that will only accelerate, as software as more cloud computing or software-as-a-service offerings come to market, targeted especially at SMEs.
Over the last few years, the market for hosted and white label services has grown significantly from the provision of simple Web space, and, to a lesser extent, dedicated servers and data centre services, to include a much wider range of applications.
Hosting providers have branched out to provide virtual servers as well as physical co-location, but also ecommerce or Web shop front and back ends, database hosting and media streaming. Basic email access is being complemented by more sophisticated offerings such as Microsoft Exchange, as well as hosted versions of Microsoft’s Direct Push technology for mobile phones and PDAs, and even hosted versions of the BlackBerry Enterprise Server.
At the infrastructure level, reselling basic Internet connectivity has given way to various flavours of broadband, including SDSL and leased lines. And growth has been faster still, in complementary services such as Internet telephony, or VoIP.
Other communications and collaboration tools are also being offered on a hosted basis: the service provider Gradwell (www.gradwell.com), for example, recently announced it would be offering Microsoft’s Office Communications Server across its network. Add to that the growing market for hosted spam and virus protection, data backup and business continuity services and even hosted business applications, and it is clear that the services-based model for IT is here to stay.
You may be happy to advise clients to buy such services directly, and some clients, especially larger organisations, will be comfortable doing so. But many more IT advisors will want to work with clients when they’re choosing services, or at least integrate them into their customers’ existing IT infrastructures. From there, it is a small step to selling services directly, branded by you.
Business Model Choices
However, that leaves you with several further choices to make. In some cases, it might be financially viable to build and host a service in-house. If you’ve developed a large amount of custom code, perhaps to support a particular vertical industry, this is a logical choice.
It might also be viable to build and host services using specialist or emerging technologies, especially where there is no commercially established ‘wholesale’ market for the technology.
But unless your business is large, and you already have access to an enterprise-strength data centre, it is probably not financially viable to build and run more commoditised services in house, such as email, Web hosting, video conferencing or Internet telephony.
If you opt not to build a service in house, there are two alternative options. The first is to simply resell a vendor’s services. Typically, the vendor will pay the IT consultant or reseller either an initial sales fee, a recurring commission, or a combination of the two. The service provider will often bill the client directly for the service, and handle both first and second-line support.
Not only does that mean you might be cutting yourselves out of the customer relationship, but your clients aren’t getting a customised option. The alternative is to buy in a ‘white label’ service, which you then sell to clients under your own brand. This is a well-established model for Web hosting and related services, where companies ranging from mid-sized IT consultancies and value- added resellers to freelance Web designers and developers provide Web space and other facilities – such as simple email – to clients in return for a monthly or annual fee.
“Software developers and IT contractors will be talking to lots of businesses about lots of different products,” says Steve Holford, chief marketing officer at hosting provider Fasthosts (www.fasthosts.co.uk). “They might be selling a Web site, but also search engine optimisation. Or they might have email, but want to offer mobile email, so they will sell that as an additional service. They will always be much closer to their customers than we can be and they can offer bespoke solutions. They also know their customers well enough to know what they will pay.” For Fasthosts, Holford adds, resellers and IT consultants in particular are an important, and growing, part of the business model.
The advantages of white label services for IT consultants are clear. Buying in a service from the wholesale market avoids the costs and risks associated with in-house development, and allows the consultant or reseller to go to market quickly with new products and technologies. White label services also offer a foundation for moving from a hardware and software plus installation model to a business model based on recurring, monthly revenues.
The Financial Side
In most cases, white label services require little in the way of up-front capital investment: there is no need
for data centre space or servers, or software licences. The original service provider will usually bill the reseller monthly for all their clients’ accounts at a wholesale rate. These rates can be significantly lower than public rates, offering margins (before costs) of as much as 50% of the ‘public’ price.
The original service provider may offer you a considerable degree of flexibility over how you bundle or market services, and how you brand them. You might be happy with the minimum of branding, but some service providers offer considerable degrees of customisation, from customised invoices delivered directly to the customer (but with your payment details, not the service provider’s) to client self-service control panels that can carry your company’s logos and support contact details.
In the case of Web hosting, hosted email and increasingly, voice over IP, service providers have sophisticated control panels that allow you to choose the degree of configuration and account management you want to carry out, and how much you will allow the client to change.
Interfaces for voice over IP management or Web mail can be configured either with your own branding – or with your customer’s. This can be a powerful sales tool, for example when selling hosted email to clients who have previously run their own mail servers, and want to present their own corporate brand – rather than the branding of their IT consultants, let alone the original service provider – to staff checking messages from the field.
White label services can also be an important tool for retaining customer business, especially in the face of growing competition in areas such as software as a service. If a client who currently pays for maintenance or support on an email server, is looking at moving to hosted solutions, you face losing two, or even three, revenue streams. You lose the maintenance revenues, and you lose any potential margins on new servers or on upgrades, as well as any revenues on new releases of the software.
And if a customer switches over to hosted email, you might also lose revenues from additional services such as security, backup and recovery and even installation and integration. These are services that the new, hosted provider might be able to offer; they can claim they’re more integrated – and for any business, it is always attractive to pay just one bill.
On the other hand, if you can offer the hosted email service the client is demanding, not only do you preserve some of the basic services revenue but also keep the opportunity to provide additional help with installation, data migration and other services, such as security. Rather than looking like just a sales partner, you can position yourself as part of their IT strategy.
“White label or co-branded reselling is definitely the way forward in my opinion,” says Sean Gallagher, of Liverpool-based IT consultants Computer Plus Maintenance, which resells services from hosting and VoIP provider Gradwell.com. “I don’t see the point in reinventing the wheel, and if the major Internet service providers and telcos have the infrastructure in place then we should simply re-sell that rather than investing in or managing our own. To justify our own infrastructure we would need very large numbers of subscribers.”
Against this, IT consultants have to set a number of risks when it comes to selling white label services. As well as the issues of legal liability (see The legal issues), resellers and consultants carry the financial risk of collecting fees for the services, and may also be responsible for at least first-level support, account provisioning and setup.
“The motivation for setting up a white label deal is often the increased margin, but if gaining 25% margin comes at a cost of a 50% drop in future sales that move becomes a false economy,” cautions Iain Sinnott, manager for the indirect channel at hosted service provider Timico (www.timico.co.uk). “On a forecast model the white label option can seen compelling but when you factor in sales hours being replaced by [support] issue resolution time, the pendulum can very swiftly swing.”
Arguably these costs might be no higher than for applications developed in house, but they are a factor. In addition, it’s your business, not the original service provider, who carries the cost of marketing a white label service.
As a result, white label offerings are often most effective, from a business point of view, when they are offered as additional services to existing customers, rather than as a way to bring in new business. If you’re most interested in building up your business, there is one further option to consider: co-branding.
Co-Branding: When 1+1 = 3
Co-branding allows IT consultants and resellers to build business in areas where you might not already have a strong reputation, or where customers might demand reassurances that the services they are buying are backed by a much larger vendor, or by a supplier with specialist expertise.
Not all customers will be concerned about the company providing the actual service. You may have a sufficiently close relationship with them that they trust your recommendations. It might also be that the value of the bought-in service is relatively small, relative to the overall contract. Again, then it will be your reputation that matters most.
In other cases – such as services that need a large data centre – it will be fairly obvious that a small IT consultancy will not be able to run such an operation on its own. Co-branding can go a long way to reassure potential clients about the credentials of the services on offer, but still allowing your customer to buy the basic service along with your specialist expertise, such as application development, integration or deployment. It can also provide ways for more specialist consultants and integrators to offer larger-scale services that customers might otherwise have to obtain elsewhere.
Co-branding also works well, when the companies providing the original IT service are among the industry’s leading names. For almost all consultancies, providing services developed or run by the likes of Microsoft, IBM or Research in Motion is likely to add kudos to their offerings.
IBM, for example, has been taking steps to improve its channel offering by increasing the number of software products it offers as a service, and which its business partners can then resell to customers.
According to Jacqui Davey, vice president, business partners at IBM UK and Ireland, the company has been working to add services, including hosted services, to its conventional mix of hardware and software. “We have been developing services around Internet security, backup, data recovery and email security. These are tools partners can resell as bringing IBM’s enterprise-class, robust offerings to their services. We have a programme, Built on IBM Express Advantage, which is being offered across a range of markets,” she says. This scheme is proving especially popular among IT consultants building applications or business processes for mid-market clients.
Consider the market for hosted email, and the way that many hosting services and resellers work with Microsoft in particular. Although most Web hosting companies now offer at least basic, POP3-based email accounts, many also offer Exchange as an added-value service, both to direct customers, and through their direct channels.
Most use the Microsoft Exchange branding, at least in part, on their sales material. Consultants selling on hosted Exchange to their own customers can keep the Exchange branding and let it stand alone, co-brand with the hosting provider, or develop their own branding around the Exchange product.
Other key business applications, such as Research in Motion’s BlackBerry service, Sun Microsystems’ MySQL open-source database, IBM’s Express Advantage range of software and newer technologies, such as Microsoft’s Office Communications Server (OCS), are also a chance for consultants to build on existing, powerful industry brands.
Co-branding need not be an either-or choice. You’ll probably want to offer a mix of services, including some under your own name, others using terminology such as ‘built on’ or ‘provided by’, where it is clear that the service is bought in, and others using the original software vendor’s own branding in whole or in part.
The key is to strike the right balance between using the service provider’s branding and track record to add credibility, and continuing to promote your own company as one that adds valuable expertise and services to the client. These might well be services that clients would not be able to obtain, or which would be much more expensive or complicated, if they went direct to the service provider.
One other reason clients might not want to go directly to a service provider, is the sometimes overwhelming choice in the market.
The range of hosted applications consultants can resell as they are, or customise and combine with other services, is growing steadily. Alongside infrastructure services such as Web hosting or voice over IP, and services such as Exchange and OCS, there are a number of options for reselling hosted applications such as Salesforce.com and NetSuite. The number of companies offering remote, or ‘cloud computing’ services is growing rapidly, and the number of vendors offering services for resale is also expanding at a healthy pace. Not all those cloud services are equal and not all are suitable for small businesses.
Now more than ever, customers need a trusted adviser to guide them through the various hosted and service offerings, as well as to migrate data from legacy systems and to provide integration. This is only likely to continue as organisations such as Amazon, Google and especially, Microsoft, with offerings such as its Business Productivity Online Suite, move into the hosted applications services market.
It might be that for some customers, simple, white label services will be enough. For others, buying a combination of white label and branded services, along with bespoke consultancy, will be a more suitable option.
In many cases, the well-informed client will be asking their expert IT adviser about the merits of cloud-based options or software as a service, quite possibly as an alternative to the physical hardware and on-premises applications you installed and integrated for them just a few years, ago. You can’t put your head in the sand about this, so you need to be ready to take advantage of this discussion. If you can reply that these are services which you not only understand, but can provide, customise and integrate you will have gone a long way towards safeguarding future revenues and profitability.
The legal issues
When it comes to reselling services provided by third parties, you can’t afford to ignore the legal framework for the business.
As a reseller, you know your responsibilities and in a consultancy engagement, the legal and commercial liabilities are usually clear enough: if a consultancy fails in their duties, the client has grounds for complaint and possibly, for court action.
If you’re providing a third-party service, it’s more complex and the liability will depend to a great extent on whether you are making an introduction to that service provider, who then bills the client, or whether your are adding your own customisation, or possibly your own service level guarantees, to the raw offering.
“When you offer a white label service, you risk damage from a contractual perspective but also to your brand,” says Garfield Smith, a partner at law firm Pinsent Masons (www.pinsentmasons.com). “The customer won’t see the failure of the supplier, but of the brand that is selling the service to them.”
Often, companies with little experience in providing services face difficulties when they offer commitments, which the original service provider either fails to meet, or never guaranteed in the first place.
Smith cautions that IT consultants should look carefully at the service levels and guarantees offered by their suppliers. If you offer any commitments over and above that, you will have to carry the risk.
Another pitfall is data protection. Any service that involves moving data to a computer system, either on your premises or elsewhere, can bring up data protection issues.
You need to ensure that any service you resell, whether it is back up and recovery or simple hosting, offers sufficient protection for confidential data. In the case of services hosted outside the EU (or cloud services with failover to data centres in the US and elsewhere in the world), it might be difficult, if not impossible, to offer such guarantees.
At the very least, you will need to tell your customers if data could be moved outside the UK.
Microsoft and Cobweb
A deal announced in May between hosting provider Cobweb, hardware vendor HP and Microsoft shows how white label services are moving beyond simple IT infrastructure offerings, such as Web space hosting, and into application software.
Cobweb will host a range of Microsoft applications in its data centres, running on IT infrastructure supplied by HP. Value-added resellers will then be able to sell on these ‘software as a service’ (SaaS) applications to their customers under a white label arrangement, branding the applications as their own, rather than as coming from Cobweb. However, the applications will still clearly be based around Microsoft architectures, and Cobweb will also be selling services under its own brand.
Initial software offerings include Microsoft Dynamics CRM, SharePoint and Exchange Server, as well as Microsoft email archiving. The project, according to said Lisa Wolfe, manager for worldwide midmarket strategy at HP’s Technology Solutions Group, will help ”channel partners deliver a broader range of offerings with the hosted services and remain trusted technology advisors for their customers.”
Details of terms for resellers for the new SaaS offerings aren’t public but Cobweb offers margins of up to 40% of recurring revenue for its existing white label services.