Channel Panel faces the challenges of the future

Channel Panel faces the challenges of the future

Question: What do you get when five high-powered channel identities partake in a lounge room-type discussion in front of delegates at IDC's Directions 2002 annual market intelligence gabfest in Sydney last week?

Answer: You get close to 300 vendor and marketing types - plus a sprinkling of end users - glued to their seats and hanging on every word.

As Susan Searle, ARN publisher, IDG vice president (Channel Division) and moderator for the Channel Panel discussion at last week's conference, said in her introduction, the only thing missing from the scenario was a couple of bottles of good red.

A one-hour debate covered a multitude of theories, challenges, and fears within the channel across a range of issues such as margins, soft dollars, consolidation and plain old relevance in the IT industry's supply chain strategies.

Joining Searle in the forum were Colin McKenna, Avnet Australia country manager; Peter Masters, Express Data national marketing manager; Allan Brackin, Volante CEO; Anne Mossman, Tech Pacific sales and marketing director; and John Grant, Data#3 CEO.

During the course of proceedings, all agreed that despite the industry currently facing its biggest challenges ever, the channel is more relevant today than at any time in the past. Margins are facing increasing pressure, consolidation is accelerating, misunderstanding between the different tiers of the supply chain is rife and demand is flat. However, a consensus was reached that the strong are surviving and thriving.

So what is the biggest single challenge facing the channel today?

Perhaps Grant summed this up best by stating the obvious fact that after many years of market growth the past three years have seen market recession.

"We all have to reset our expectations," he said. "We have moved from a supply-driven environment to a demand-driven environment. That means that the customer now absolutely has the whip hand so we have to be very responsive to that and get back to our core."

It is all about putting the value proposition "under the microscope" and looking at what value is offered by each tier of the channel, Grant said.

The distribution tier faces different challenges, according to Mossman. "Our issues are really focused on the very high fixed costs of logistics capability, capital investment and credit provision," she said, before pleading for vendors to give much longer lead times in terms of marketing strategies and budgets.

"Look at it from our perspective and give us a little more consideration in terms of timing and what you are trying to achieve with those plans," Mossman said.

When the conversation switched to what value the channel brings to the industry, the panel insisted it was substantial.

McKenna said that under the "demand restraint of the last couple of years", pressure has mounted on vendors to maintain growth, which means accessing SME markets.

"There are many more contact points at that level needed to grow market share," McKenna said. "With good databases and access to resellers, the value distributor brings context in terms of marketing, sales, technical support and working capital funding to vendors targeting this space."

Grant said the difference between channel partners and vendors is that most channel players in the first and second tier are essentially small businesses.

"Our value proposition is very much geared around being flexible, creative, adaptive and moving very quickly. Vendors are the reverse and can't do that," Grant said. "Our benefit to our customers and the vendors is being able to leverage those characteristics."

According to Masters, the two-tier channel model "has a rosy future in Australia" but is under pressure from overcrowding, which means "inevitable market forces" will drive consolidation.

"[Distribution] is being squeezed from all angles at the moment," he said. "We see vendors looking to take costs out of their business by driving those costs down to the distribution layer and we see resellers striving to drive costs out of their business by driving those costs up into the distribution layer."

Masters added that the channel has "very few enemies in Australia" because it is "such a good machine", but he did imply that vendors have little understanding of the costs of distribution.

"A lot of [vendors] have attempted to take on the burden of being a distributor for themselves - taking on logistics, credit and all the other things that go with good distributing," he said. "But they underestimate the costs and it is usually a fairly long time - 6 to 12 months - before they work out that it isn't such a great idea."

Brackin said it is critical that vendors, the channel and customers all work out who carries what cost and who carries what risk in the supply chain.

"I still don't think we are getting anywhere near the efficient chain we need to be and there are customers out there who are playing on that big time," he said. "They are paying very little in terms of implementation costs and the risks are always being transferred to either the channel or the vendors," Brackin said.

With the discussion swinging back to margin pressure and the drying up of soft dollars, Mossman dropped a bombshell in openly declaring what many have suspected to be the case during recent price wars: zero-margin selling is here.

"It is probably not fully understood that a distributor exists these days almost entirely on its soft dollars," she said. "A transaction is executed at almost cost and we live on soft dollars. We live from month to month in terms of profitability and that is why it is significant to us that there is a longer notice period when changes occur to the supply of soft dollars."

Demand generation has traditionally been the responsibility of vendors, so the question was posed as to whether this is changing in the face of economic climate changes.

Data#3's Grant believes it is. "It has to be a combination of the organisation that touches the customer and the organisation that produces the technology," he said. "And that includes the disties in the middle.

"There are currently too many players and not enough customer dollars and that will be the case for some time. Until there is further consolidation and the pendulum moves back from being totally demand driven, we all need to understand each other's position and implement it correctly.

"Demand generation is one aspect of that and it has to be done with a concerted effort from all three tiers without doubling up."

Avnet's McKenna had a slightly different view on demand generation. "The channel has a vehicle for demand generation in terms of their quality databases, their telesales and promotional activities, but there is a need for vendors and channels to work together on a more tactical level," he said.

"This is where the soft dollars come in for particular promos."

Brackin was a little more blunt about the attitudes of the ever-precious end customers. "It is important for vendors to have a demand-generation strategy totally in synch with their channel partners. In many cases, especially in the medium space, we do have an ability to change the vendor.

"Most of these customers need a solution rather than being led by specific technologies or brands."

Grant also had strong opinions about brand loyalty. "We have all reacted with short-term solutions to the difficult times but we have a model in place and now we need to hold the line even if we have to pay a bit of a price along the way," he said.

"This apparent dysfunctionality between vendors and the channel is allowing customers to have a great time. The customers should be brought into this supply-chain equation because they also have to accept some of the risk.

"They have to be made to understand that their suppliers have to make some money as well. There will be serious issues for many customers if their supply chain goes broke."

Express Data's Masters was also adamant that the customer has to pay a price for the value that distributors and resellers introduce.

"If everything is always sold on price at every level of the equation, it only stands to reason that the ones with the lowest price will have the least to offer," Masters said. "They will deliver the lowest customer satisfaction, give the lousiest service and have nothing to add to the equation except price.

"If you multiply the lowest common denominator through each tier of the channel, then the vendor is running huge risks of destroying customer satisfaction at the end of the chain."

Conflict in the channel in relation to services also received some airtime. It was suggested this might be forcing a reversion to box shifting for the channel as vendors move into an area of the market in which the channel has been attempting to establish a beachhead for years.

McKenna felt it was a perennial problem that was taking on new proportions as vendors of all shapes strive to build new revenue streams.

"At the moment, a number of vendors are pushing a professional services capability onto the buying community whereas previously they would have partnered with the channel," McKenna said. "They are very new to the services side of things and we have seen some tension there."

While Brackin said his Volante Group was seeing good growth in services, he also felt vendor strategies in this area lacked clarity and too often competed against the channel's own service revenue aspirations.

"Some vendors have a pretty clear delineation and others are having a bit each way," he said. "It is the same with all strategies - clarity is the key. The costs of accreditation, pre-sales resources and implementation people are still extremely high. So we need to know where we stand."

The discussion then attacked the question of who actually owns the customer. To begin with, McKenna said that he didn't think customer ownership was a valid concept. "The market owns the customer. If any of us delude ourselves into thinking we actually own the customer we are heading for a fall."

Masters was more pointed. He believes the reseller owns the customer because resellers are the only ones capable of generating the levels of loyalty necessary so that the customer "wouldn't dream of doing business with anybody else".

Grant was a little more circumspect, saying ownership belonged to "the organisation that delivers the value that meets the customer's requirements".

A question from the floor, asked by Citrix Asia-Pacific's MD, Nabeel Youakim, asked what the panel considered to be the right number of disties and resellers.

Masters was of the opinion that only two major distributors, each with different specialties, were needed to maintain a healthy balance of competition and profitability. "Any more sees people crossing all over each other, which duplicates resources and drives up costs," he said.

At the reseller level, Brackin said it really comes down to how many resellers are prepared to invest the dollars required to sell the products.

"The vendors have to be very stringent on how they view the value propositions of their channels," he said. "There are too many resellers at a low-cost level that don't meet the criteria vendors put in place yet they are still allowed to flog the kit."

Grant simply said there are too many. "There is a tremendous commitment required to sell effectively and the vendors need to appreciate and support the organisations that make that commitment," he said.

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