Magazine Article | April 23, 2013

"As a Service" Means Risk, But Great Rewards For POS VARs

By Mike Monocello, Business Solutions Magazine

Experts share their thoughts on the “as a Service” model and advise POS VARs on the steps they should take to make the transition.

Since RSPA INSPIRE back in January, the topic of “Retail as a Service” has been top of my mind. We’ve been writing a lot about how this business model can — with some effort, admittedly — create a more stable flow of revenue and lead to a more profitable business.

In seeking advice and input on this topic from various industry leaders, Terry Zeigler, president/ CEO of Datacap Systems Inc., had some excellent thoughts worth sharing. “We’ve all been talking to dealers from the perspective of how good it is for them to do rental programs because they will earn more money over the life of the merchant account than they would by selling the product outright,” he says. “So what? The dealer thinks he is OK with his current financial model as is, and he’s being asked to do something different just for fun.”

He goes on to explain that, like it or not, merchants (particularly restaurants) can’t get the financing to pay the up-front load on a new POS system. And, he says, that is driving merchants to take inferior systems and business deals from folks in the bank card industry simply because they can get technology for no up-front cost. “With this in mind, maybe dealers will realize that this isn’t a choice about a different business model, but a choice about survival,” he says. “Then they will get a little more realistic about pursuing the options for implementing an ‘as a Service’ program and start pushing their vendors to help them.”

Jason Richelson, CEO of ShopKeepPOS, also has a strong opinion related to survivability. “Windows-based POS systems are on their way out,” he claims. “VARs need to start learning new ways of delivering services and features to their customers or risk going out of business.”

Zeigler shared another unique perspective that some older VARs might find intriguing. “I had a discussion on this topic with one dealer that was quite interesting,” he recalls. “He made the comment that trying to get to the rental model was important to him because he has come to understand that when he wants to sell his business, he will get four to six times EBITDA [earnings before interest, taxes, depreciation, and amortization — an accurate measure of profitability] for a company with a one-time revenue model, but six to eight times EBITDA for a company that has a recurring income model. So same business, same income, but a much larger equity value when it’s time to sell.”

You Want To Make The Shift. Now What?
Let’s assume you’re convinced that the “as a Service” model is right for you and key to your longterm survival. As I’ve written previously, there are some hurdles that need to be overcome. So what’s the best/most feasible way to fund the shift?

Departing from the traditional hardware resale that carried up-front revenue recognition, channel partners will now need to build, manage, and provision this as a service to their end users,” says Lee Eberding, HP Financial Services’ Americas business development and marketing leader. “Acquiring the technology needed for this may require a significant up-front cash outlay that may impact cash flows and introduce a number of financial and credit risks many are unwilling to take. Subsequently, we’ve seen a number of channel partners turn to financial institutions or their vendors directly to help assume some of the financial risk and fund the shift many are working through.”

“This shift presents a significant challenge in terms of cash flow and revenues,” says Henry Helgeson, CEO of Merchant Warehouse. “Ultimately, VARs will be challenged with how to fund the shift and, while they may begin with credit lines, micro-leasing companies, or even seeking private or venture capital investments, the most feasible solution is to selffund.”

John Giles, Future POS, agrees. “The POS VAR will have to shoulder much of the up-front cost and the headaches of figuring out how to make it profitable. Fortunately, these VARs have partners who can and will help them make the transition.” Giles goes on to explain that his company and others have SaaS rental versions of their software. Additionally, some payment processing companies have been willing to fund the hardware portion of deals for some dealers in the past. “Most POS VARs don’t have the extra cash lying around to make a large push to a SaaS model overnight,” he continues. “Fortunately, if they partner with companies who have SaaS options, they can start by dipping their toe instead of diving in head first. We’ve also had resellers leverage used/ old hardware for one or two terminal customers who have bad credit. It can be just that easy to get started. All it takes is the determination to get out of your comfort zone.”

Unfortunately, because there’s no blueprint to this model or clear path to making the shift, there’s a lot of confusion and hesitation in the marketplace. “Right now, it seems as though everyone is looking at one another in terms of who is going to change their business practice to fund the impending shift,” says Helgeson. “Granted, hardware manufacturers and others may help, but it’s really about a changing business model for VARs and their merchants. There is such a high perception of risk, and the way I see it, the further you are away from the merchant, the greater your risk, which leaves the VARs in the optimal position — closest to the merchant, least amount of risk, and greatest opportunity in the long term.”

Advice For Progressive VARs
“The most successful VARs will begin today, recognizing the business opportunity,” says Helgeson. “Of course, it’s critical that they not put their existing business at risk, so exploring various models and establishing goals and targets are the first step.” He adds that it’s important to remember that this is a transition — a marathon and not a sprint. “Don’t wait for someone else to figure this out for you. Take action today, beginning with business modeling, goals and targets, and a long-term strategic plan. Begin with only 10% of your customers, using the other 90% of your business to support the transition. Over time, move incremental percentages of customers to the new model. If done correctly, the cash flow will balance out quickly, with very little risk.”

Giles cautions that the SaaS model is not a one-sizefits- all solution. “There will always be people who want to buy the system, depreciate it, and own it outright,” he says. “There are also going to be people who don’t want to buy it up front and are willing to have a fixed monthly cost in order to have a POS system. The percentage of each may shift, just like cash versus credit, but this change won’t happen overnight. As long as dealers keep an open mind and learn how to implement the ‘as a Service’ model, there will be opportunities for both types of deals.”

Richelson encourages VARs to just do it. “Stop looking around and studying the market,” he says. “Start experimenting and implementing some of the new service providers. So many VARs call us in their ‘research’ mode when others are already out there selling and earning as much or more money than the old-school way. It is the younger VARs that are willing to take the risk, we have noticed.”

Eberding’s advice is to not lag behind. “Industry reports show that the move to ‘as a Service’ is happening at a rapid pace and scale,” he says. “To avoid being left behind, channel partners will likely need to implement the business-model change required to support this transition.” He goes on to say that the market is wide open with a majority of the cloud services opportunities up for grabs. “The VARs who can implement the business-model change the fastest may be in the best position to capitalize on it today and in the future,” he concludes.