IT Distribution: Treading water

IT Distribution: Treading water

Surviving the sustained flat spot currently being experienced in the IT industry has been the greatest challenge many distributors have faced in the history of their existence.

The raging bullish demand of years gone by has diminished and may never return and no-one can be sure just when a return to confidence will arrive. But as sure as the sun rises in the east, it will come back.

Not only do distributors have to get through the downturn, they also have to position themselves so that when customer demand does come back, they are able to take full advantage of it.

It has been called everything from rightsizing to downsizing, rationalising to consolidating, but just about all distributors over the last two years have engaged in the exercise of reducing staff and cutting overheads.

This is the obvious way to deal with the present market conditions, but such hibernation needs to be accompanied by a strategy of preparation for better times.

Having had to lay off 15 per cent of its staff in February this year, Express Data has been down the rightsizing path. But it has also made determined moves to prepare for a future. When the market returns, it wants to ensure it remains in the top three distributors in the country.

Earlier this month, Express Data launched a whole new business unit, Express Online, with a Web-based strategy. Peter Masters, Express Data's general manager, says the online business unit is "not a radical departure but it is a pretty good finesse that we can offer" in preparation for the future.

"[The new venture] is all about being a more broadly-based distributor online than we are as a value distributor for the vendors we currently represent," Masters says. "There are a lot of good-quality commodity products out there that want representation and, quite frankly, they have been coming to us wanting to be represented by ED."

Meanwhile, Masters is adamant that a vastly different channel will emerge from the other end of the current flat period.

"There has been huge consolidation and that has still been going on," he says. "There is no question that there will be less vendors, less distributors and less resellers going forward. The ones that have built good solid businesses and have survived the tough times will be better businesses for it.

"There will be less of them but they will be better structured and more successful." Michael Muscat, managing director of Melbourne-based distributor BBF, agrees that tough times represent a great opportunity to introduce new efficiencies to business.

"We have been tightening our belts for the last two years making sure we are going to be around for any upswing in the marketplace," Muscat says. "Our turnover has been flat but we are actually increasing the volume of product we move.

"This has forced us to hone our logistics skills. Our staff numbers have dropped by about 20 per cent just by attrition during the last two years, yet we have been able to cope with increased volume. That has put us in a very good position.

"We have improved our efficiencies all over the place, which prepares us very well for when things do get better. In that sense, the tough times have really done us a favour." Muscat also pointed to a renewed focus on accounts as well as relationships with both vendors and customers.

"We have had to look at our accounts a lot closer," he says. "A lot of our customers are companies we have been dealing with for a long time. It is just as important for us to make sure we work with them to make sure they stay on the rails and that their situations don't affect us."

It is the same with vendor relationships, Muscat says. "Long-standing vendor relationships also help us in tough times. The vendor partners we work with are the ones that will be providing us with the new technologies that will drive future growth."

Avnet Computer Marketing is another value distributor that is putting in the hard yards to ensure that it is in the right strategic position for future demand.

Managing director Colin McKenna says Avnet is totally focused on providing "a great deal of depth" to a limited number of vendor relationships.

"In terms of preparing for the future, we have been investing quite heavily in internal systems to Web-enable the business and also to offer better customer service," McKenna says. "We work hard on managing customer relationships and have quite a slick marketing team as well.

"This will be essential to the value distribution model that we are trying to put together for the future. We see the role of value distribution as being the tactical implementation of our vendor partners' marketing plan.

"Our vendors will decide broadly which market sectors they want to attack. Our role is then based around refining that segment focus and doing what we call the demand mining -- or lead generation -- into those markets."

Having a financially sound, US-based parent company has allowed Avnet to "take a long-haul approach" to developing a "true value distribution model", according to McKenna.

"Obviously we need to be profitable," he says. "That is quite difficult at the moment but we are investing to put the fundamental systems in place that will allow us to have a sustainable value proposition in terms of our vendor partners and our reseller partners.

"The better we can be at lead generation and helping our partners to grow, the more our business will prosper. I see these systems and processes as being really fundamental to long-term success and we are taking a view that if we can be successful in hard times, then when things start to ease up, we will be well-positioned for good growth."

McKenna says that tough times also means a good opportunity for distributors to look at new ways of adding value for their customers as well adding vendors to their line-up.

"A flat market is a good time to consider adding vendors," he says. "The vendors are looking at their cost structures. They are looking at their go-to-market models. For us it is particularly relevant because currently most of the vendors are looking to the mid-market as an area of expansion and that is where we specialise.”

Meanwhile, "resellers are under lot of pressure themselves", according to McKenna. So if a value distributor can "intelligently help them with lead generation, with marketing programs and a degree of technical help" then that also "helps them to expand their markets in a cost-effective manner”, he says.

"So I actually think that the true value distribution model comes into its own in tough times. Value really comes to the fore when everybody needs a little more help -- provided they are prepared to pay for it.

"It can't be free. One of the fundamental rules we look at is if it is true value then people will be prepared to pay for it."

Smaller companies that are starting off on a small base in economic downturns are in a far better position to prepare for the future, the theory being that if they can survive through tough times then they can surely take advantage of better times in the future.

So says Paul Kern, managing director of fledgling distributor Techplus Distribution, which has been facing challenges on two fronts.

"Not only has the market been down, but some of the products we distribute are at the end of their lifecycle," Kern says. "We had a range of products -- such as direct dial, remote access products -- that were becoming obsolete. These are technologies that people aren't really using any more. So our focus over the last six months has been to look at new product markets and growth markets, and using that to ride out the decline in sales of previous vendor partners."

Kern says that in addition to keeping overheads at a minimum, it has been a carefully managed strategy to move into new technologies such as content management and network security.

"First you have to isolate the opportunities and then get a piece of the action with a decent product," he says. "There is no point just joining the fray with whatever is available. You must have a quality offering."

Kern says that preparing for the next wave of technology uptake is all about "getting back to the basics" of good business practice.

"You have to look after your own backyard, look after your accounts and look after your customers," he says. "If we can get all those practices right, in place and all working well during the tougher times, then that means we will be ready for when things get better.” Express Data's Masters agrees it is time to focus on the fundamentals of wholesaling by adding value to vendors and resellers as well as investing in the right technologies.

"It is more important than ever to be providing a differentiator, expertise and great value to the channel with extreme levels of customer service," Masters says. "Distributors have to try and pick the winning vendors and the best technologies in the market and run with those."

BBF's Muscat also describes it as "keeping your own backyard tidy" and staying loyal to customers and suppliers. "We are just working with our current vendors and waiting for their lead as far as emerging technologies are concerned," he says. "The vendor partners we work with are the ones that will be providing us with the technologies that will drive our growth."

Kern is convinced that customer relationship management is the most important of all secrets to surviving a downturn.

"You cannot walk away from your customers at any time," Kern says. "You have to stay in contact with them so that when their customers start requiring product again, they will also start buying product from you again and you will still be their preferred distributor partner.

"I think the last 18 months must have been really tough for the larger distributors, which tended to disregard their smaller customers when times were good. With the times now being a little bit tougher, they are finding that those little guys could be the difference for them and they have had to go and try to win back their business."

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