Like technology itself, the supply chain for its goods and services has undergone a massive evolution. While the route to market has become essential to a product’s success, there is still no definitive answer to what constitutes the best channel. On the one hand, the industry is facing the reality of high commoditisation and a changing set of customer needs, on the other, there is shareholder pressure to keep operational costs at a bare minimum. In this chain, the channel is the vital link expected to deliver value to both ends. ARN’s inaugural Round Table asked six industry figures to discuss whether the traditional value-added distribution channel was set up for the higher economic efficiency/higher value paradigm.
And the answer is ... yes!
THE NEW VALUE DEFINITION
Editor-in-chief, ARN, Tamara Plakalo (TP): What constitutes value-added distribution these days? What is the value a distributor delivers to business partners and what is the value its delivers to resellers? Is there a space to provide any value at all in a highly commoditised industry that is driving economic efficiency?
IBM director of global business partners, Andrew Baker (AB): When we looked at our needs for value distribution we started with a blank page and pretty much with a channel that comprised solution provider resellers that were taking there capabilities to the market and a well developed volume channel as well as a range of ISVs and integrators. The other thing we saw was that the SMB market was the largest market in Australia and that medium-sized was the fastest growing piece of it. One of the key drivers of the channel, and for that matter the key customer spend, is around services — 50 per cent of the business is based on services. The challenge for us is to make sure we are getting the sort of market share we are looking for and part of the answer is through value distribution. We determined that we needed to take a range of value products — including servers, storage systems and software products together with some of our services — to the market through value distribution and also to get into some relationships where a value distributor can offer what the resellers of those products are looking for.
Managing director, Enterasys Australia, Gary Mitchell (GM): One of the key drivers for us in a value-added distributor (VAD) partner is effective use of our limited resources. We have a fairly small team in Australia and I need to maximise opportunities by having my staff working with a small number of value-added reseller channel partners in a fairly deep relationship. We focus on that on a state-by-state basis. Our brief to value-added distributors is to make sure we are growing a number of other partners that they are focused on and in order for them to provide value it takes a lot more than just supply chain mechanism and that sort of thing.
TP: What value can a VAD add to business that doesn’t necessarily have to be quantified in revenue generation terms?
AB: A more traditional channel is built on product resale whereas a lot of the opportunity in the mid-market space is around solution led business and that’s the value piece of the market. For vendors to access opportunities it makes sense to work with a combination of partners who, in their own right, might not be able to bring in a significant amount of revenue but can open up opportunities by having great solutions that might in turn create opportunities for the distributor and vendor.
GM: A lot of that comes down to opportunity cost as well. A $100,000 sale that a partner has sold without too much interaction from us is worth more to me than a $200,000 sale where I have had to do all the work and bring a partner along. How much can you grow your partner relationships so that there is a lot of standalone, self sufficiency out there rather than having to do all the deals yourself?
TP: What is the value that resellers are looking for from a VAD?
Meier Business Systems, Martin Meier (MM): There’s obviously intangible value and as a customer of a distributor I become a much bigger fish in a smaller pond. But some of the more obvious things I have found have been favourable credit terms, ease of supply, prompt and efficient fulfilment, technical knowledge and ability.
Computer Merchants, Norman Jeffries: What we look for in a VAD partner is someone who’s not just there with supply but takes an interest in our business, in our people and, vice versa, we like to be involved in their business as well. That’s very important to us and, like Martin said, you become a bigger fish in a smaller pond — obviously our value to a distributor is greater than our value to a vendor. I guess from a technical point of view I would look for the vendor to provide the majority of technical support and for a distributor to bring expertise in configurations, which means we can deploy a price to a customer within 24 hours. In terms of partnership, a distributor needs to take the time to know our business, where our focus is and where possible partner us with other people that compliment our business.
TP: As a distributor, do you feel there are too many expectations from both sides?
Managing director, Avnet, Colin McKenna (CM): The way we see value, from a vendor perspective, it is really about growth in the mid-market. At the top end of town, accounts are handled by a direct team with partners playing a niche role. In the mid-market there is still a very high concentration of whitebox — still 40-50 per cent — and there is a growth opportunity that requires skilled partners whether they are software developers, professional service organisations or integrators. Our value proposition to vendors is that we will grow their share in the mid-market more cost effectively than they could by going direct. From our partner perspective we have an acronym called LSMFT — which is logistics, sales, market, finance and technical. There’s a range of services around each of those and we find with our partners it varies dramatically. The key to value is understanding where your partner is taking their business and what part of your value proposition makes sense for them.
TP: Steve, you have been one of the people in volume distribution who has been exploring value. I would like you to tell us what you are taking away from this discussion of value.
Managing director, Ingram Micro Australia, Steve Rust (SR): The business I’m involved in is large numbers of customers and quite a large number of vendors. The value we can add to our suppliers is very different to the value we add to our resellers. To some extent, it’s much easier to see the value we add to our suppliers.
For example, Microsoft is releasing a new licensing product that is quite complex and the distributors have had to change systems and processes. We will be marketing this product to the channel on behalf of Microsoft, preparing the channel to sell this product to customers. It’s a very different way of selling a license because customers pay in three instalments and there’s a lot of complexity around invoicing and collecting. Microsoft, for whatever reason, decided the distributors would invoice the end users. Distributors don’t normally invoice customers so we had to modify a lot of internal processes, create a marketing website for it, go out and communicate with Microsoft to the channel, recruit resellers and prepare them to sell it. That’s a lot of value and we don’t get paid a dollar for that – we are just preparing ourselves for the business that we get.
With customers it is a different kettle of fish because a lot of the products we sell, quite frankly, are commoditised. There are lots of different types of resellers that have different purchasing patterns just like consumers — some place more value on price than anything else but others put a lot of value on relationship. But when I read the sales figures at the end of every month the real measure of value is in extra margin, there’s no point in adding value unless someone is paying for it. Value is normally around products that are slightly more complex and we are often selling to smaller resellers. I think they come to us because they have a level of comfort in buying from us and we can answer their questions and give them advice. There are lots of opportunities for distribution to add value in lots of different ways other than just the traditional stuff.
TP: Speaking of traditional notions of value-add, Cisco recently came out and said the majority of its distribution partners and resellers are actually not set up to provide value or target the type of vertical market they are after at this stage. How does a VAD compete in that context?
CM: The available market for a VAD must justify the expense of having one. It’s really looking at whether the total available market will support the service levels that a VAD could provide. The role of the VAD is to understand and work with the vendor to set strategies and then be prepared to invest in the effective attack point of those strategies. That requires a degree of market size and availability and, while there will also be competition in the market, if demand is over distributed then the reality is that there’s probably not much margin. You always have to be looking for smarter and better ways of working with partners.
TP: If volume distributors are capable of filling part of the value-added space and vendors are going to their tier-one channel partners directly, how do you think there is still enough space for a VAD?
CM: It varies from market to market but there is a degree of common sense. You have to ask what proportion of a market you could reasonably get as a VAD and there are certain markets where you wouldn’t even try. I think in a lot of the more complex Intel markets you can argue the case for a value distributor but in the mid-market and down you’ve got to question it, whether you can have all the value-add services and still make a buck at the end of the day against Harvey Norman.
TP: Do you as a volume distributor think that you have to provide more value these days?
SR: I find that the successful model requires a blended approach. In the kind of business we are in you couldn’t set up in Australia and just sell low-end commodity products because a small organisation with lower costs would be able to undercut you on price. We have to offer a broad range of solutions from the solution end to the commodity end in order to be successful. It’s a broad-based approach that works. For my mind, you either need to be big and broad-based or niched. You can be niched as a small commodity supplier or around value. There are companies in Australia that are specialised around a particular vendor and if you have only one vendor or solution to sell then your organisation will inherently be better at it.
TP: Doesn’t that create a dangerous situation for a lot of VADs? If they do concentrate on one set of products, what happens if they make a significant investment and then lose that business?
SR: You do become a little dependent on the success of the vendor. You can provide all the value you like but if the vendor’s going out of town you will suffer as a result. All business has risks but you make a judgement call on those risks.
GM: The reverse is also true because Avnet is our sole distributor in Australia and we are equally dependent on their success. The good thing about that is that it forges a stronger partnership. I absolutely want them to be successful and make lots of margin on my product.
AB: All partners [vendors, distributors and resellers] are relying on each other and as long as those three elements are in balance you are on a winning play. When you get out of that balance then it’s time to make other decisions.
TP: Looking at the changes we are facing — tight margins, tough credit conditions and increased consolidation — what are the key indicators of sustainability?
CM: We try to make sure value is something people pay for and we need to keep costs appropriate to what value is required in the marketplace. The other part is having a balanced scorecard. When we work with our customers we give them regular updates to make sure we are getting it all right and get regular feedback by staying close. With key vendors the scorecard is measured in terms of reaching commitments, acquisition of partners, growing market share and success of marketing programs.
TP: All the vendors have come out and said they want to focus on value added distribution. It’s a repetitive story from everyone who has been looking at streamlining their distribution but how much growth is there in the market?
CM: In the mid-market, because of the penetration of whitebox, there’s still a reasonable amount of growth for the major vendors but it’s been hard to get good solid data on exactly how much.
AB: The market is growing at compound between 11 and 14 per cent over the next 3-4 years in what is still a pretty depressed market. Our strategy within that has been to take a product set coupled with service offerings that has never before gone through distribution to the market. It requires a group of partners that are very savvy but we see this SMB opportunity in particular as being led more and more by solutions rather than technology. We think value distribution as I have defined it is a play that can give us growth.
TP: What would you like your distributors to take away from this roundtable in terms of your feedback on what value they deliver to you what value you would like to see them deliver? What problems do you have with what they are doing now and what are they doing well?
AB: There are two key measures of VAD from an overall scorecard point of view. One is growth and the other is the satisfaction of our partners. There has been some very deliberate activity from Avnet in partnership with us to make sure that the skills and the people they have provided have been suitable for the environment and that has paid off. Areas for the future we have discussed include retaining linkage as IBM through to our full community of partners, further development of state responsibility and broader experience in the IBM product portfolio. Finally, the better we are able to provide value propositions to resellers the better we are able to leverage opportunities in the marketplace. n