Following is an edited transcript of a conversation between Business Solutions president Jim Roddy and Paul Constantine, president of ScanSource POS and Barcode North America. The discussion took place at the ScanSource Worldwide Partner Conference for POS and Barcoding, March 16 to 18, in Greenville, SC.
Roddy: You and I sat down for an interview in 2013, and you talked about the role that VARs can play creating what you called “the Apple Store experience.” The general term we’ve been using for that is customer experience — making the buying experience for customers of your merchants seamless, easy, fun, memorable, all those things. How big is that opportunity today, for retail IT resellers?
Constantine: That’s one of the biggest opportunities in the enterprise retail space, Jim. The customers are demanding — as they have these experiences in more and more stores — they’re demanding this kind of experience, and really, like lots of technology, it starts in the enterprise and works its way down.
It’s something that we really haven’t seen in the low tiers of retail yet, because again, a lot of smaller retailers are smaller stores. They don’t need to equip their associates with mobile devices to provide a mobile experience, because you walk into a small store and everything’s right in front of you.
We really think it’s more of an enterprise opportunity today. The manufacturer partners of ScanSource, companies like Zebra and Honeywell, have really made a lot of strides in their mobile product development and their mobile printer development, but like everything else, it all comes down to the software.
There’s been a lot of software development on that front, too. It’s critically important for a reseller who’s selling into the upper tiers of retail, who has customers that are trying to drive towards that mobile-associate-type of solution so they can deliver that experience to their customer, to identify the right software partner.
It’s still a fairly fragmented market. There are lots of good solutions out there now, as opposed to two years ago, but it sometimes can be difficult to find the right one, especially one that can interface seamlessly into the POS (point of sale), and into all the back office applications and be able to give the store associate the information that the customer needs, when they’re on the store floor.
Roddy: You’ve mentioned that there’s less of a need in the small-to-medium retail establishments for customer experience technology. Is that the reason that the needle hasn’t moved faster in this area?
Constantine: I think that’s part of the reason. I think the other reason is, again, everything comes down to software, and everything comes down to the solution. We have the easy job, coming up with good hardware platforms. The hard part is coming up with good software solutions that really address the needs of the partner.
In an early-stage market, like the store associate mobility solution is now, there are just lots of different solutions out there. There are lots of immature solutions out there. It doesn’t mean they’re not good; they just haven’t been around for ten years. Retailers are very, very picky about what they put in their stores. The last thing they want to do is implement a technology that slows things down or that even can bring down a store. They’re going to be very, very intentional about how they roll out these solutions, because this is a fairly new phenomenon, and because some of the solutions haven’t been on the market a long time. I think the retailers are, in some instances, taking a little bit of a wait and see mode, even though they’ve probably piloted things, they’ve seen things. They’re not in a huge rush to deploy.
Now, in the small and medium stores, I think what’s going to happen long term is you’re going to see the total store experience change. You’re going to go from a small store with maybe two cash registers, to one cash register, and the two or three people that do work in that small retailer, or maybe even one or two, equipped with mobile checkout devices.
Over time, I think you’re going to see the traditional POS station, and I’m talking about over the long term — this is a five- to ten-year trend — the point of sale station slowly start to disappear, being replaced by mobile POS and payment solutions that all the store employees are equipped with.
Roddy: In some of those lighter traffic retail areas?
Constantine: Right, and that’s when you’re really going to see the “hockey stick” of mobile POS adoption, when that mid-market really starts to take advantage of some of these trends, because the solution’s now become a little bit more mature, have a little bit more of a track record, and have a little bit more visibility to even those mid-market retailers.
Roddy: If it’s more of a future trend, what actions should VARs take in 2015 to get ready for it? Is there anything they can do to accelerate this or anything they should do from a business or technology standpoint, to get ready?
Constantine: Well, number one is they should listen to their customers. If the customer is asking for these kinds of solutions, know they exist — they’re not hard to find. But again it’s very important, when you’re talking about the retail front of store experience, for everybody to be very — I used this term earlier, and I’ll use it again — intentional, about the process.
My advice would be find what’s out there, based on what your customers are asking for, and invest some time and energy into demonstrating some of these functionalities and features for your customers. Then take it from there. It may work great, or you may identify issues. It’s not just a technology solution.
There are a lot of operational things that the store owner or store managers need to take into account, when they implement this kind of mobile technology. It’s not just about implementing technology. It’s about reorganizing the way the stores are laid out, and what you train and instruct your associates to do. It’s more than just about implementing technology — it’s about reengineering the whole store experience, and that takes time.
Roddy: I’m going to bring up another one of your quotes from a couple years ago. Two years ago, we talked about the as-a-Service business model, and you said, “Stay tuned.” What advancements have you seen in this area since then? What should we expect to see in 2015, and can you catch up the folks who haven’t attended this partner conference, where we are, because that’s been a subject of a lot of attention so far?
Constantine: Yes. The as-a-Service model is obviously taking off in this space, again, driven by what end users are demanding. What we’re doing at ScanSource is rolling out a couple of different initiatives this year, to help VARs take advantage of the drive by end users to spend less money up front, to pay for their solutions over time, and to pay for outcomes rather than to buy technology.
One of the first options that we’re rolling it is a solution called FlexAbility. To use a term that’s been batted around a little bit, it’s kind of a hybrid SaaS model. It allows the VAR to get paid up front for the hardware, so they don’t have to change their commission structure to pay their salespeople, but it also allows them to take their own services and other third-party services and software, and roll them into one monthly payment that the end user makes.
This tool also administers that payment to all the different parties involved. It finances the hardware, and it pays the ISV, if it’s a cloud-based software solution from a third-party ISV. If there’s a third-party service provider, it applies each portion of that monthly payment to that third-party service provider, and then gives the VAR their piece of the pie.
It’s a really smooth, seamless, and flexible tool for helping VARs get into the as a service business without totally changing their model.
Roddy: The one thing I’m always nervous about is talking to resellers who have had the same business model for 25, 35, 45 years, to say, “Oh, it’s easy. Just take these couple steps and begin the migration.” We’ll probably make it sound easier than it actually is, but what steps can resellers take to start that migration, or if they’ve already begun, to really accelerate it?
Constantine: Like everything else, it’s what their end users are asking for. If I were a reseller today, and I’ve been selling products for 20 years in the same manner, and my end users are not asking me for these things, I would make sure I was aware of the trends, because sooner or later, you’re going to get asked for it.
But I wouldn’t necessarily jump into this thing head first. Now, on the other hand, if I have customers that are saying, “Hey, I don’t want to spend $100,000 up front. I read in some other publication that you can buy stuff over time now, and you can pay for outcomes, not technology. Can you do that for me?”
That question’s going to come, and I think what these resellers and our partners want to do is look at alternatives, an incremental evolution into this model. Nobody is going to go from a traditional VAR to an as-a-Service VAR overnight. The stresses on the business are just too great.
One of the things we like about this FlexAbility solution is it allows partners to start incorporating third-party services and software into their solutions to provide different types of solutions, and also to provide it to the end user as pay-for-an-outcome rather than buy a bunch of hardware.
We’re really excited about the FlexAbility solution. We also have a POS-as-a-Service solution that’s done a little bit differently. It’s a hardware bundle — it’s a pioneer POS system, it’s an Epson printer, it’s an APG cash drawer, it’s got a third-party services wrapped around it — that provides advanced exchange of break-fix services.
The VAR supplies the software of their choice, so it’s software agnostic, and then that’s all financed on a monthly payment basis — the end user pays for it monthly, the VAR pays for it monthly — everything’s done on a monthly basis, rather than a traditional acquisition. The end user doesn’t own the equipment; they rent the equipment. It’s one more thing we’re doing to try to help VARs move into this new world of the as-a-Service model.
Roddy: I’m curious if you’re seeing what we are. When we talk with resellers and we say, “How did you make the transition to the managed services model?” sometimes it’s not with their current customers because that’s not what their customers are used to. But they’re able to get into smaller customers who have those cash flow struggles, and that might be an avenue for them to maybe be able to seek out some of these smaller customers and get that built up. Have you seen any of that?
Constantine: That’s the theory. I’m not sure how much of it we’ve seen. I think our partners typically are always trying to sell and to find the biggest opportunities they can, because at the end of the day, it takes the same amount of time and effort to sell to the small customer as it does to a medium sized customer.
That’s why the small business market has always been a tough market. I’ve been in distribution for over 20 years, and one of the first manufacturers I was responsible for managing came to me about was the small business initiative. Small business has been the — there’s no good analogy. It’s been like the golden chalice or the Golden Fleece or whatever Monty Python was searching for in that movie — the holy grail of technology.
But it’s hard, because it’s a lot of work. Now, the key there, since it’s the same amount of work to sell it, is to take the cost out of the process of delivering the solution. If we can take a solution, do all the configuration in our facility — we can load the software, we can drop ship it straight to the end user, it’s packaged to where it’s simple enough to unbox and plug in and turn on — the VAR doesn’t even have to go on-site to install it, they just sell it, they make a phone call to ScanSource, we deliver the configured solution. That’s the way small business is going to be able to be profitable for most of our VARs, in a model like that, where we can take so much of the cost out of the cost of delivery and the cost to serve that customer that it becomes profitable for these VARs to sell into the small business space.
Roddy: And if the cloud can enable them to monitor that way, then they don’t have to do it on-site.
Constantine: Absolutely. The more services that they can wrap around it too, over time — the key is, in any of these models, when you deploy a solution, is to keep the same solution out there for three, four, five, six years and continue to get that monthly payment. That’s where the profitability comes in, and again, it’s a business model that you have to ease into. We wouldn’t advise any VAR to just jump in this thing with both feet. Set a goal. Do 5 percent of your new business in 2015 in the as-a-Service model. In 2016, set a goal for 15 percent. In 2017, set a goal for 30 percent. You know what? You may end up evolving faster than that, as your end users drive you faster — or you may not — but it will help moderate some of the cash flow issues that result from the pure as-a-Service model. Or, just stick with the hybrid SaaS model, like FlexAbility, where you’re still getting paid up front for the whole solution.
Roddy: I’m glad you had that measured approach, because the traditional managed services providers we’ve talked to, they said on average it has taken them seven years to get some significant percent where they can call themselves managed services providers.
I’m moving along to the last two topics — we didn’t discuss them two years ago, but now we’re seeing from ScanSource today: EMV and services. You recently hired Beatta McInerney as business development manager in payments, and she’s really involved in the RSPA already. We’ve also seen the expansion of the ScanSource Services Group. Can you quickly talk about the evolution of each, and how important EMV and payment security and services are to the point of sale and bar coding channel?
Constantine: EMV, or the opportunity in payments, is the single biggest opportunity I think we have, tactically. I say tactically, meaning over the next two to three years. It’s going to take two to three years for the retailers in the United States to become fully EMV compliant. We think that this opportunity is measured in the billions of dollars over the course of those couple years.
The payments industry is complicated, and that’s why having somebody like Beatta on staff has been hugely beneficial to us. She comes out of that payment space; she’s worked for payment processors before. She can talk the talk. She’s an expert in that area. She’s really helped us really concentrate our efforts on areas of higher return.
We’ve made a bunch of new investments in our configuration center and our secure encryption facility and our Southaven, MS, warehouse. We’ve quadrupled our capacity, made more equipment investments there, and made people investments there, hiring more people. We continue to add different encryption keys to our library of keys. We feel like we’re really positioned ourselves just at the right time, to help our partners take advantage of this huge upgrade cycle.
We’re already starting to see tons of opportunity. The pipeline for 2015, for payment processing deals, is huge. The manufacturers are adjusting their supply chains. But right now, we’re starting to see some longer lead times, from some of the payment equipment manufacturers, just because of the surge in demand. It’s not really taken them by surprise, but the forecast of it, sometimes it takes a quarter or two to get the supply chain to catch up to the demand.
I think that’s where we are. From a short and mid-term perspective, we think the payment space is just a huge opportunity for our partners. We have partners that have never sold into point of sale. They don’t sell front of store, but they sell a lot into retail that are coming to us with customer opportunities to upgrade payment systems. That’s how pervasive this is.
Roddy: Then in thirty seconds, your take on services? We’ll link to on this page our full interview, with Mike Burns from the ScanSource Services Group. Your take on services in terms of POS and bar code?
Constantine: Yes, services has always filled a dual role at ScanSource. Number one is really, 10 or 15 years ago, when we really got committed to our services group by forming a new business unit around services, the goal was more around just creating tighter links with our partners. We wanted to create a portfolio of services that they could lean on, that could help them scale their businesses efficiently, that could help them be more profitable, and that tied them tighter to ScanSource, with the goal that they would buy more from ScanSource.
Over time, that’s changed a little bit. There’s a huge profit opportunity for us in the services business. We’ve never really taken full advantage of it, because again, the primary goal was to tie our partners tighter to us. But now we see more and more opportunity to enhance our business through playing a greater role in the services space.
Sometimes that’s going to be services provided by ScanSource, sometimes that’ll be services provided by third parties. A lot of that is also services provided by our manufacture partners. We’re also committed to helping our manufacture partners expand their services businesses, as that becomes a more important part of their strategy.
At the end of the day, it all boils down to the same theme: that the hardware business is getting more and more challenging every year, whether it’s end user buying habits or the nature of the products. The profitability model is changing. It’s moving more towards the services space, obviously. Most of your readers know that.
As VARs, they understand that services is where their profitability comes from, and we, as a distributor, are starting to recognize that as well, that playing a greater role in the services space to help our VARs build competencies to perform services, to help them scale, that could be a potential area for us to enhance our business as well, and be able to continue to invest in more other value-added services that can help our partners grow.
Roddy: Good to see things moving in that direction. Paul Constantine, president of ScanSource POS and Barcode North America, always a great pleasure to talk with you.
Constantine: My pleasure too, Jim. Thank you.