Gates/Arrow Distributing chief executive officer Larry Kem is, to paraphrase the Chinese curse, living in interesting times. Around him swirls the fast-paced, acquisition-heavy, "we're-bigger-than-they-are" world of computer and network distribution. Part of Kem's charge is to grow and acquire and in so doing make Gates/Arrow a leader in the enterprise-systems market. Recent evidence of this strategy is the firm's acquisition late last year of Support Net, one of IBM's premier distributors. IDG's Dave Brambert caught up with Kem to talk about how Support Net plays into Gates/Arrow business, what challenges and potential wins exist for the distributor, and how Gates/Arrow will work with its channel partnersIDG: This year has represented big change in the distribution world. Gates/Arrow is a major US distributor, but at the same time it's a distributor interested in comparatively few SKUs and high-end products. Can you strive for volume and highly technical distribution?
Kem: We emphasise the high-end systems because we believe that's an area that hasn't been staked out completely by anybody. We can gain market share with the high-end offerings. We can use the low-end to service our high-end customers. Every time you sell a server, you'll need some other things such as networking, storage, and so forth. It's not a de-emphasis of the network and desktop side but rather that we emphasise the high-end.
Are your VAR customers going through similar changes, hanging their hats on high-end products? What's in store for them?
They have to come back to, if not a glass house, at least a hierarchical model of integration, because their customers are maturing in how they implement and manage networks. They must focus on services and management.
Is Gates/Arrow equipped to resell services, considering it represents such a huge opportunity to integrators?
The commercial-systems group of Arrow Electronics spent some time trying to figure that out. We looked at this question and decided that we're not set up to deliver services like personnel management, training, or other related activities. Putting our customers face-to-face with that service is something we can do. We can do it to a limited extent with service contracts.
You mentioned Gates/Arrow's parent company, Arrow Electronics. How will you leverage Arrow's expertise to help you as a systems distributor? Are there ramifications for channel assembly?
First and foremost, Arrow's cash flow is in the hundreds of millions of dollars. We have money to invest, and are looking for companies that are like Support Net - big companies in their niche but lacking the finances to support their own growth. Support Net was growing at the rate of 100 per cent or so a year, and to do that you must have 100 per cent return on equity after taxes. That's tough to accomplish. But we made the investment to make it happen.
Second, we're very good with Arrow logistically. We understand warehousing, we have good warehouse design people, and in the US we have a great setup for warehousing and logistics. We're making companions between the components business and the computer business. We're doing the same thing in 10 places in Europe.
Third, we have good buying power. When the chairman of Arrow talks to the chairman of FedEx, they know each other pretty well. That helps. We have significant relationships with companies like Hewlett-Packard, since we deal with people from that company on both sides of our house - components and computers. We have a strong relationship with Intel. With some companies, such as Intel, we have relationships in both buying and selling.
Fourth, we can follow the technology. We know what the technological risks are, and we can follow them from a component side and then parallel that into the computer side.
Let's get back to Support Net for a moment. What do you think made the acquisition a reality, and why would Support Net agree to such an acquisition, other than more capital?
The goal that we have in such a partnership is that our equity partner will gain as much wealth on the back-end of its contract as it did on the front-end. What we're celebrating is using Gates/Arrow resources to develop that business, which we believe is an outstanding marketing model.
Everybody who works at Support Net thinks they own it. They manage their own time and affairs just as aggressively as any entrepreneur I've seen. The people are technically sound and aggressive in marketing.
What does each side bring to the table?
Support Net brings the marketing expertise, the technical expertise, and a very large field of product skills. The company builds a kind of loyalty that's hard for competitors to shake. It builds it because it earns it. It's good at supplying leads, and it's good at communicating IBM's programs to its business partners.
We will support the company logistically by doing the authorised assembly program for its RS/6000 business, which is considerable. We'll work jointly on Netfinity product and provide the PCs or whatever it needs with PC service. We'll help it with accounting and MIS central services.
Some "crossover" products play to both ends of your reseller spectrum, large and small - for example, the Netfinity servers and the bundles IBM is putting together. Does this product take on new meaning for you now?
We believe that the Netfinity program is a very good program. IBM has come out with a product that, in terms of technology, availability, speeds, and feeds, is good. It's not legions ahead, but it's in a nice range on every aspect of computing. Significantly, IBM has come out with a program that lets us deal with Netfinity as a value-added server. IBM is the first company that has done a thoughtful job with this type of program.
How do you classify your channel partner organisations?
We go through a process of market planning and market segmentation. It's a process that we borrowed in large measure from IBM. It gives us a definition of a reseller's vertical orientation, what kind of resources it has, where it wants to go, and its business plans. We get a pretty good idea of what we have in terms of a reseller - who it should be linked with, what expertise it has. We take that very seriously.
This way we begin to understand what the reseller needs. There's no such thing as a bad customer. There are some who have more horizontal applications and don't need quite as much technical exposure to us. For smaller VARs we provide a higher level of technical support. We will tailor different financing programs, and that depends on the reseller's size and financial needs.