Rationalisation to drive margin boost

Rationalisation to drive margin boost

An industry representative has predicted further rationalisation in the integration channel will pave the way for an elite tier of services organisations to re-establish healthy margins. But he suggested second tier integrators could suffer unless they are able to communicate value.

Commander's general manager of strategy and development, Steve Evans, said ongoing consolidation would lead to simpler partner classifications.

Resellers were not currently differentiated regardless of service capabilities, he said. As a result, customer competition had become a price war. The traditionally fragmented nature of the industry had further undermined channel value.

"Today, we don't do a good enough job of selling the reseller value proposition," Evans said. "Our margins suffer as we are competing with those providing fewer services."

"If we develop a tiered model of full-service providers and box droppers we will polarise the industry. The value of full-service organisations will be more readily recognised."

He suggested tier-two players would be hardest hit by the changes if they failed to articulate their value proposition. Smaller players would also exit the market.

"The people who will miss out are those in the middle because they will still face margin competition from box droppers," he said. "Survival will depend on specialisation."

Evans claimed only Commander and Data#3 could currently claim to be full-service, national resellers. But he allowed for niche tier one players servicing state markets.

While agreeing there would continue to be rationalisation in the reseller market, BCA managing director, Stephen Harrington, argued there was still a significant spot for tier-two and -three players to address.

"There will always be the super players but the tier twos will start to find their own niche and specialise around certain value propositions," he said.

"As the market matures, new players will find a different place to play as the gaps appear. I'm not convinced you have to be big."

Commander's Evans said defined channel tiers would create a major split between customer types: those who wanted a fulfilment-only supplier and those who wanted services. This would bring margins back into the value-added channel.

"If we have a few stable players who can articulate the value-add and what the channel is worth, I expect we will bring margins back up," he said. "It should make buying decisions easier for IT purchasers."

BCA's Harrington disagreed less players would mean more margin.

He said vendors had made it difficult for resellers to grab a slice of large accounts. This had seen integrators jockeying for mid-market business.

"We have some very large corporates but acquiring new enterprise customers is a difficult thing to do," Harrington said.

"We are working hard to maintain what we have got against the pressure of HP and Dell, but we're not trying to find new business in that space. Mid-tier is our sweet spot."

Data#3 CEO, John Grant, said the problem with competing on contracts that called for product and a services element was that other organisations would balance margin across both categories. The Queensland-based integrator targeted contracts which were led by providing value-added services around products. "Over the past two years, our product mix has swung away from high-commodity, low-value PCs towards high-value products in the communications space," he said.

SCCS CEO, Mark Kalmus, said there were plenty of large organisations still looking for smaller and more nimble integrators to provide value-added services. SCCS was currently looking into establishing its own consulting services practice to help it move up the value chain.

"Some customers have been let down so I think the wheel is turning again," he said. "There will always be a place for those with niche skills, like traffic management and load balancing services for example.

"It's not the big guys who provide these. The bigger guys are about processes and methodology, while we're based on being quick and responsive." Kalmus said the integration market would continue to be fragmented.

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