MSP Acquisitions: Buying into Hardware

We all know the story – a traditional reseller or another hardware-centric company snaps up the hot managed service provider, with dreams of enhanced profitability and new services to offer customers dancing in their heads.

This is not one of those stories. This is, in fact, almost the exact opposite of those stories.

Toronto-based Quartet Service was one of those solution providers for whom “hardware” is a four-letter word. The company would certainly do hardware deals – but only when doing hardware was necessary to get a more lucrative services deal.

So when Quartet announced its purchase of KLM Solutions, another Toronto-area solution provider, but one that is as focused on hardware and integration services as Quartet is on professional services, it was a bit of a head-scratcher.

What could make a man, Quartet president Rob Bracey, who ran from low-margin hardware business as fast as he can, decide it was time to purchase a hardware-centric reseller?

For Bracey, it was a realization that it was time to maximize the hardware opportunity. Quartet is a member of Ingram Micro’s VentureTech Network Community (as is KLM) and an active participant in its Masterminds peer groups, where solution provider managers essentially serve as an external board of directors for each other.

It was through one of those Masterminds meetings that Bracey realized selling hardware wasn’t bad. His company just needed to improve and invest in their approach.

“We’ve been underselling like crazy,” Bracey said of Quartet’s hardware business.

Because the company’s business model was so anti-hardware, it wasn’t devoting many resources to the hardware business. The result – Quartet was getting half of the best practice total margins on hardware.

Quarter needed a turn around, more focus was needed on navigating vendors’ front-end and back-end rebates that can make or break profitability on hardware deals, and it was all but impossible to get vendors’ attention because they weren’t selling enough product. Then came the eureka moment!

“We were struggling with crappy up-front margins and not getting any support from the vendors,” Bracey said. “As a stand-alone business, [hardware is] not viable. But as part of an integrated solution, it’s imperative. We’d always used services to pull through hardware, but I think it can work going the other way too.”

It’s too early in the merger process to say for sure how things will work out, but Bracey says he expects to see total margins to be “considerably higher” as a result of the KLM buy. And at a time when Bracey reports more customers are calling on his company to act more as an outsourced IT department, Quartet will now be able to go both ways – the services can lead to hardware sales, or hardware sales can drive services.

Do you deal with hardware strategically at your MSP business, or is it a necessary evil to sell hardware? Can a company born and raised in services find happiness in hardware?