“Educate them. But don’t OVER-educate them,” that was a former boss’s direction before pitching my former company’s solution to a client. He was afraid that if a prospect truly understood the economics of Cisco third party maintenance (“TPM”), they would choose to do it themselves rather than buying maintenance from us. My goal today is to “OVER-educate” you by opening the kimono on the economics of the industry.
The Economics of Cisco Maintenance
SMARTnet is rumored to be a 90% margin business for Cisco. Since TAC and software development costs are necessary overhead, Cisco’s only direct cost for SMARTnet is the management of hardware logistics. Because the failure rate is so low (0.5-2%) for network hardware, there is remarkably little turnover of the sparing inventory.
Third parties have a similar model. Since they are smaller, the cost of sparing dictates how much they can discount and how profitable a deal will be. Density is key – If I can support many devices in the same location with a single spare, I can save my customer a fortune and make a very handy profit.
Suppose a client has 50 Cisco WS-C3850-24T-S switches in their facility. Basic SMARTnet (Next Business Day hardware replacement) is roughly $20,000 per year at a typical discount. At this density, a TPM can easily save their client 75% by selling the same support for $5,000 per year. Great deal, right?
Well, it is an even better deal for the TPM. They can purchase 2 spares on the secondary market for $2,000 each. Over a 3-5 year period, they earn a very hefty profit on this deal.
Enter Smart Licensing and Audits
In the last few years, Cisco saw their SMARTnet margins threatened by the growth of TPMs operating under this model. Rather than making their prices more competitive, they chose to punish their own customers.
Cisco began auditing their larger Fortune 500 clients who chose to use third party maintenance. Claiming that only the initial purchaser had the right to use the IOS software on Cisco hardware, they attempted to force their clients to pay penalties for any spares they received from a TPM.
Even worse, they decided to make hardware transfers technically infeasible by instituting Smart Licensing. Smart Licensing associates a device with its initial purchaser. If it is resold or used in a general inventory pool, it cannot be reassigned to a new company without paying a substantial relicensing fee. That means a TPM cannot buy sparing inventory from the secondary market because those devices simply won’t work – or can be disabled at any time by Cisco. Even if a TPM bought its inventory pool directly from Cisco, they, not their end customer, would be the entitled party. As soon as they provided the hardware to a client as a replacement, Cisco would insist that the device was not validly licensed to the client.
Where Does XSi Fit into This?
Did you know that 40-60% of your existing Cisco assets are not getting the full benefits of expensive SMARTnet support? Perhaps you’ve already found out that independent hardware support (aka Third Party Maintenance) can help establish a Hybrid Hardware Support model, and you’re already driving new cost reductions while receiving truly customized support. That’s a great start!
But, what if there existed an independent hardware support provider that could help your team even further by teaching you how to build an internal parts sparing model that provided 100% entitlement compliance, yet added no asset management labor, but could readily expose new savings opportunities at every milestone date (EoS, EoL and EoSW), and could support a much broader range of hardware than a traditional third party maintainer?
In the coming 10 days, look for a new service announcement from XSi. Even better, choose to follow our business profile at LinkedIn for announcement posts.
Again Recognized by Gartner
Since 2009, Gartner has frequently recognized and published content about the value of a Hybrid Hardware Support model, as well as the credibility within the Independent Hardware Support Provider industry. For the third time, Gartner has recognized XSi in its “Market Guide for Data Center and Network Third-Party Hardware Maintenance (ID G00414695).”