Major economic shifts in PC distribution channels have led to a rapid erosion of the PC reseller market.
In light of these changes, corporate buyers who still work with resellers should re-examine those relationships.
"If I were an IT manager today, I would very carefully review any reseller agreements I had in place. I would do competitive pricing and put them out for an RFP [Request For Price] bid, and I would do it every six months as the market shakes out," said Julie Giera, an analyst at Giga Information Group in Massachusetts.
Competition from direct manufacturers -- namely Dell, Gateway and Micron -- is forcing indirect manufacturers such as Compaq, Hewlett-Packard and IBM to offer more direct sales programs. This is putting a squeeze on resellers, driving them to consolidate and to fight back with services such as desktop integration with back-end systems.
Some signs of the times for resellers include the following:
-- Inacom said it will purchase financially troubled value-added reseller Vanstar to beef up its PC services.
-- Systems integrator MicroAge considered taking Pinacor, its PC distribution division, public. But a downturn in the reseller market convinced MicroAge to sell Pinacor instead. A pending "transaction" announced in January has been delayed, probably by price-haggling, according to Giga's Giera.
-- In January, DecisionOne announced it would lay off 10 per cent of its work force, due to its inability to meet its credit obligations. The investment banking firm that took it public less than a year ago has extended credit through July. However, some analysts regard its future as uncertain.
"This is an instance of the kind of deterioration we're going to see unless resellers can truly provide value-added services," Giera said.
A primary benefit of buying direct is dodging reseller markups. That can save customers between 5 and 10 per cent, according to the Gartner Group. Other benefits include built-to-order products and faster delivery, due to a more efficient supply chain.
Northwestern Mutual Life, in Milwaukee, buys its PCs directly from Dell. The IT department gives Dell standard hardware/software configurations, and companies order desktops from an intranet.
"It saves time, and it's somewhat easier to control the image," meaning the proprietary software that Northwestern installs on the machines, said Phil Zwieg, vice president of technology services.
For these reasons, the direct purchasing model is rapidly gaining ground. In the third quarter of 1997, 25.9 per cent of PC sales in the US were made directly from the manufacturer. In the third quarter of 1998, 30 per cent were direct, according to Dataquest.
"A five percentage point change is significant for a distribution market," said Charles Smulders, an analyst at Dataquest in California.
The downsides of buying directly from the manufacturer include the possible loss of warehousing and delivery services. For instance, if a company buys 5000 PCs through a reseller, the reseller will store the boxes in a warehouse and deliver to specific locations. If the same company buys directly from a manufacturer, it may have to manage delivery itself, although Dell is starting to offer distribution services.
Additionally, direct manufacturers do not offer much in the way of post-deployment help such as integration and maintenance. And direct sellers typically do not sell their competitors' products.
"If you rely on one vendor, and its supply chain is disrupted, you're stuck. We recommend two PC vendors, and a reseller can help you manage, for instance, your Compaq and HP relationships through one provider," said Marilyn Truglio, an analyst at the Gartner Group.
Although purchasing PCs through an intermediary may appear to cost more at first, resellers' increasing focus on value-added services may make the extra cost worthwhile.
"We have branched off from resellers somewhat and gone the direct route in terms of desktop systems with Dell and Micron. However, we still get some significant value add from the resellers that we deal with, and we would be loathe to completely walk away from them," said Frank Petersmark, vice president of IT at Amerisure, in Michigan.
In addition to offering one-stop shopping and distribution services, the biggest channel players are beginning to offer on-site deployment, management services for procurement, asset management, and integration with back-end systems. For instance, PC distributor Pinacor has launched a unit to help resellers target enterprise systems integration. But most of the resellers are new at the game and have yet to prove themselves.
Meanwhile, indirect manufacturers aim to make the channel as efficient as direct manufacturers by tightening up supply chains, offering built-to-order boxes, assembling PCs in the channel, and launching co-location programs in which resellers and distributors set up operations directly within a manufacturer's facilities.
For instance, IBM launched its Authorized Assembly Program (AAP) and Advanced Fulfillment Initiative early last year. IBM can now manage its supply chain from buying components to delivery to dealers and end users, thus reducing dealer inventories from three months to just one month. The company is this week expected to announce that it has sold 1 million AAP systems and that the company has increased its number of co-location partners to nine.
Also, at the end of March, Compaq is launching its Partner Direct initiative to improve supply chain logistics.
But some observers are sceptical about these programs.
"We have been very negative about channel assembly. It's more costly than building in a manufacturer's own factory, because managing people and inventory in two locations adds to the cost," Smulders said.
And customers must consider the possibility that with industry consolidation, their trusted resellers might not be around tomorrow as indirect manufacturers move toward direct sales.
IBM, for instance, expects to be dealing with a very select number of distributors and fewer of those distributors' resellers. Most of those surviving will have superior service and support capabilities, said Dave Boucher, general manager of IBM's Advanced Fulfillment Initiative strategy, in Atlanta.
Another option is to take a hybrid approach. More companies are negotiating directly with OEMs such as Compaq, Dell, and HP for pricing and using the channel for deployment services.
"Before, only the largest companies were going in and negotiating with OEMs. Now the threshold is lowering, and resellers are actually doing the fulfilment of most of the cases," Truglio said.
Truglio added that companies spending more than $US1 million on PC desktops may want to negotiate prices directly with manufacturers.
Programs such as these may help resellers find a place in the new world.
"If we look at a pendulum swinging from indirect sales to direct sales, we think it has swung as far toward direct as its going to go because people are buying computing services, not a computer, and service relationships are very important," said Matthew Nordan, an analyst at Forrester Research in Massachusetts.
But analysts expect direct manufacturers such as Dell to increase their services offerings as well, which will keep acquisition managers surveying future PC sales landscapes.
"Resellers have to add services or it's not going to be worth anybody's while to continue to go through a middleman -- especially if you're purchasing high volumes, that premium adds up quickly," Giera said.
State of the reseller market
As resellers expand their businesses and services, they face significant challenges.
-- CompuCom established a service division last fall, but is having financial difficulties.
-- Entex is very well-established in the services arena, but relies on alliances for global services, which can be problematic. Entex is highly leveraged, leading some to question where it will get money for growth.
-- Inacom is in a good position to offer integration services, but some companies are leery about doing business with Inacom because of potential difficulties absorbing Vanstar.
-- MicroAge announced an integrated desktop outsourcing solution with Hewlett-Packard, Cisco, and Microsoft, targeting customers with 500 to 5000 desktops. MicroAge is trying to off-load its Pinacor PC distribution division.
-- GE Capital IT's outsourcing solutions began with the acquisition of other companies, but its integration services could take a year to complete, despite good capital.