WHEN profit margins on the products being sold by technology firms started to be squeezed, they had a smart solution switch to supplying value-added services such as consultancy, systems integration and technology hosting services.
It made enormous sense. A customer could shop around for products and pick the lowest price, but a company that offered professional support services could surely charge a premium. So everyone from Datatec, Comparex, Dimension Data and a slew of smaller players joined the global trend.
However, what happens when budgets are so slim that customers not only stop buying new products, but also stop spending on services? Unlike product suppliers, which simply stop ordering more inventory, service firms are left with expensive staff sitting around not earning their keep.
That is just what happened to Datatec, which admitted yesterday to the astonishing feat of turning revenue of R20bn into an attributable loss of R248m.
Datatec's Logical division earns a margin of more than 30% for its services, far higher than the 15% it makes on products. Mason, the UK-based telecommunications consultancy, makes a 50% margin on its skills. Compare that with the meagre 9% margin Weston, the group's largest division, makes from selling products.
Datatec does not expect further deterioration, but poor demand has already seen it pare costs and slash its headcount. Yet it cannot go too far for fear of shedding the very skills that will be required when new projects do materialise.
The market will recover eventually, as firms need new technologies to run their businesses. When they are ready to invest, they will also need firms with the skills to ensure every cent is spent wisely. Datatec's strategy cannot be faulted. Sympathy would be more apt.
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