March 8, 2004

Service With A Smile

Home Is Where His Heart Is: Integrator Rick Butare Carries Services Across The Threshold

By Jeff O'Heir

Take a deep breath and hold it for 10 seconds. Now exhale. In that short time, odds are the sweet 20-point margin you hoped to make off that new media server, wireless setup or flat-panel TV just dropped by five. Wait until next week, and you can kiss goodbye another point or two. That's the reality of selling computer products.

But there's a new reality forming. Hundreds of digital integrators serving the home market aren't holding their collective breath waiting to make their number on the next high-margin product. Instead, they're offsetting inevitable product margin erosion by standing firm on the price of services. Some are even increasing prices, and most are adding innovative offerings to their arsenals as they leverage customers' newfound willingness to fork over more for services than they paid for the actual product.

"The issue today is that the homeowner can't do all of the integration, it's too complicated," says Rick Butare, president of IntelliHome Tech, a Martinsville, N.J., digital home/SMB integrator who believes his services-based approach to the market is leading him to the cusp of something big. "We've been able to justify the cost of services by providing the customer with enhanced value, better functionality and truly customized whole-home systems."

Butare wasn't speaking solely about his business. He was speaking for his fellow integrators-those that cut their teeth in the IT networking world and then headed home for new opportunities, as well as for traditional A/V pros and installers affiliated with the Consumer Electronic Design and Installation Association (CEDIA), who are breathing new life into high-end entertainment centers and home automation systems by networking them to the Internet. These digital integrators are driving profit through a plethora of services that typically yield between 30 percent and 50 percent in margin.

"Listen, you can get your buddy to pull out your teeth, right? But you don't. You go to a dentist because you know he'll do it right," says Chad Buhrnam, sales manager at World Premiere, a Mechanicsburg, Pa., entertainment and automation integrator that, only a short time ago, gave its services away. Now, World Premiere charges between $75 and $100 an hour, reaping a 50 percent margin. "We've been very successful at making technology easy. That's why people pay for our services."

While some customers might expect services pricing to drop along with the price of products, integrators say they've overcome that perception by forging deeper customer relationships through recurring services, customer education and training programs for a household or community. Training programs, integrators say, are attracting more middle-class homeowners, who realize they need to integrate IP technologies to serve the needs of their growing families, and are opening up new avenues of sales and recurring revenue opportunities along the way.

"We're trying to make our clients self-sufficient in today's technology," says Mike Hamlin, president of App-Techs, an integrator in Lancaster, Pa., that focuses on home networking, digital video surveillance and telephony. Hamlin frequently hosts packed training nights dealing with digital cameras, surveillance systems or multimedia PCs at App-Techs' headquarters. "When you make someone self-sufficient and comfortable with technology, they come back to you because they have fewer problems," he says. "They become rapid adopters of the next high technology because they now have a source they rely on to successfully deploy, implement and install that technology."

Break-fix warranty work is still the vanilla staple most integrators add to their menu of services. But the flavors grow more interesting. Digital integrators are taking on custom white-box design; remote diagnostics, network management and troubleshooting; help-desk tasks; education and training; project design and management; consulting; and, of course, product procurement.

Scott Moser and his crew at Premier, a home entertainment and systems specialist in Bellevue, Wash., didn't stop there. After growing sick of dealing with electricians who didn't know the difference between a CAT5 cable and a tabby cat's tail, they bought their own electrical company and watched sales of related products and services increase about 30 percent. "It was one of the most compelling ways to get long-term larger jobs because the customer doesn't have to talk to five or six different trade people," Moser says. "It allows us to be on the job longer and helps establish very good contact with the builders."

Likewise, Butare used IntelliHome Tech's services expertise to form a tight bond with a contractor, in this case, Kara Homes, one of the fastest-growing home builders in the New Jersey area. The tale of how Butare partnered with Kara Homes to become its chief digital architect illustrates why integrators should refuse-in most cases, at least-to reduce the price of their services just to win over a customer.

Butare entered the home market after toiling about 25 years for the likes of Smith Barney, Merrill Lynch and Dow Jones as a senior vice president in charge of big, cutting-edge retail financial systems and multimillion-dollar IT projects. For the past few years he has worked as a freelance CIO for several large health-care and insurance companies. He thought the home market, if addressed with the same strategies a CIO applies to the enterprise, could prove lucrative. "I'm picking top-notch, fast-growing companies," he says. "I'm not partnering with someone who's dying." About a year ago, Butare approached Kara Homes and pitched his vision: By installing the proper home infrastructure for technology early on and continuing to serve the homeowners' IT needs as long as they owned the house, the contractor could capture a long-term customer. There was one problem: Kara Homes wasn't quite ready to pay what Butare describes as "Wall Street prices" for a digital architect. Butare admits his price rides on the high end and hinted that he charges $25 to $75 more than the average. But 25 years of IT experience comes with a cost, and there was no way he was going to commoditize precious knowledge.

Ultimately, Butare proved his value by offering Kara Homes in-house services in small doses. "I'm not looking to make all my money in one shot," he says of his overall strategy. "I'm looking to give customers what they can afford at the time they can afford it." For example, Butare reconfigured the structure and billing methods of Kara Homes' own phone system for a 60 percent savings, including a $10,000 reduction in monthly cell phone costs. By leveraging his past relationship with Hewlett-Packard, he upgraded Kara Homes' systems with a new line of HP machines for a 25 percent savings. "It was about selling myself and selling my services and keeping the relationship alive so that when they're ready to act they'll come back," says Butare, who currently has seven solid home customers. "You have to hold your guns because the customer will pay more if they see value in the long term."

Kara Homes plans to construct more than 1,000 homes this year, and Butare is now along for the ride. As he captures the networking business of more homeowners, he plans to develop an IntelliHome Tech Alliance made up of integrators that will be hired as needed. Even if Butare captures long-term business from just 1 percent of those potential homeowners, he'll be happy. That's because the services he'll offer will help establish a lasting customer relationship, recurring revenue and the solid margins he needs to grow his business. "I'm not looking to make a profit off the hardware. I'm making minimum or cost-plus at best," Butare says. "It's the services piece I'll make money from."

Integrators of all stripes see services as the key to developing broader, deeper relationships with customers and partners. Plus, it pays off. Most charge between $45 and $100 per hour depending on the job and the customer's location. Premier, for instance, charges an hourly rate of $95 for program and system design, $75 for engineering, $45 to draw up schematics, $65 for project management, $75 for master technicians and $35 for administrative work. "We're moving more items out of overhead and creating profit centers around them," Moser says. "We're finding less resistance from clients because they understand the model of professional services."

Like Moser, most integrators break their services cost out of the solution and charge for them separately. Jason Brewer, CEO of Automated Lifestyles, an integrator in Gladstone, Mo., who just raised his services rates by 10 percent, has one explanation: "We have different people in the company wearing different hats so we have to charge different rates for different services," he says. "We can also retain them longer because of the different compensation." To further control costs, Brewer also stopped bidding on jobs as he was losing too much margin on the lowballs. The number of jobs Automated Lifestyles took on over the past year dropped about 17 percent, but the size of its projects increased by 40 percent.

Integrators are drawing fat services fees from more than high-end customers. Many typically work on about six high-end jobs-ranging from $100,000 to $500,000-annually. But they really butter their bread with multiple $10,000 to $30,000 gigs, which lend themselves to cross-selling activities. Over the past year, every one of those clients has become a prime target for a new strain of less costly but higher-margin remote services, such as management, diagnostics and upgrades.

Those services are driven by free or cheap apps such as the remote desktop feature in Microsoft Windows XP, LANDesk Software products and Symantec's pcAnywhere. The increasing home popularity of custom systems, which have a high-touch sales model and are easy to upgrade, is also driving the trend. "Every computer we build with XP will have remote desktop features," says Nathan Baney, co-owner of High Tech Hobbies, an integrator and retail outfit in Mifflintown, Pa. The company currently spends about three hours a day supporting home customers through a 900 number at 25 cents a minute. Looking forward, High Tech, which sells about 250 custom PCs a year, plans to charge its home customers $100 up front for a limited amount of remote management time, something the company already does with its commercial clients. "Once it catches on in the home, people will see the value in remote services instead of having to drive to the store," Baney says.

Lyle Epstein, system engineer and founder of Kortek Services, a $2 million integrator in Las Vegas, has already seen remote services catch on with the home buyers of his custom systems. Just a few months after offering the service, his company is receiving about six calls a day, averaging about 20 minutes each. He charges them a minimum half-hour in services at about $45. Epstein, who also serves commercial clients, expects Kortek's home sales to grow at least 20 percent this year, pushed mainly by services. "The upsell with remote services is pretty substantial because we can see if you need an antivirus update or anything else," he says. "The referrals are awesome because people tell all their friends about what we're doing."

Epstein makes a good point that's not lost on any integrator: Products, for all the obvious reasons, are still incredibly important. Epstein's friendly referrals often lead to a product sale, which leads to a services sale, and then another product sale, and so on. Integrators pray that high-margin items in the traditional home control and theater space offered by vendors such as Lutron, Crestron, Xantech and Runco, to name a few, can hold their ground in the face of growing competition. But with every major PC manufacturer and big-box retailer pushing inexpensive, quickly commoditized networking gear into the home market, product margins will erode all too soon.

"There's certainly a potential for a margin hit," says App-Techs' Hamlin. "But there's one thing that doesn't drop: services."

ADDING IT UP
Integrators, whether they approach the home from the IP networking or pro A/V side, report typical services fees of about $100, give or take $25 depending on the client location and type of service. Whatever they charge, margins usually yield 30 to 50 percent. Gone are the days of giving away services to attract customers. Here's a breakdown of the types of solutions provided by integrators interviewed for our story.

Home Office
Services: Full wireless and network security integration for the work-at-home executive. Remote management fees range from a minimum half-hour charge of $45 to $100 an hour. Don't forget full software upgrades.

The Kitchen
Services: Smart appliance networking; wireless integration for smart panels and wireless TVs; integration of sound system; programming, integration, installation of whole-home monitoring. Design, programming and installation fees range from $65 to $100 an hour.

Lawn and Garden
Services: Programming, design, contracting to landscaper and security firm, remote management, wired and wireless networking. Hourly services range from $45 to $100 an hour. Recurring services revenue, such as surveillance camera maintenance and monitoring, ranges from $100 to $250 a month, depending on the contract.

The Living Room
Services: Product procurement; design, integration, engineering, programming; remote PC and product management, diagnostics and help desk; broadband connectivity. Services fees range from $65 to $100, while product margins range from 5 to 10 points on low-end products to 50 points on high-end home entertainment gear.

The Van
$5 to $60 travel fee.

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