Maintaning the balance

Maintaning the balance

When the bell tolled for Dataflow on the 30th of May this year, the channel rumour mill ran rife with explanations for the disaster.

The official line put the company's collapse down to the botched implementation of a new enterprise resource planning (ERP) system and poorly managed warehouse relocation. A press statement from consultants Arthur Anderson also attributed part of the blame to an adverse reaction to the appointment of new investors to a Dataflow Internet startup and a bad run in the press over supply issues.

The story is not complete without mentioning Microsoft pulling the plug on a deal which represented an estimated 60 per cent of the distributor's sales.

Unfortunate as it may be, the downfall of Dataflow reads like a checklist of distributor danger points. In order to be successful, distributors must strike a balance between the needs of resellers, the demands of vendors, rapidly changing technology, price and currency fluctuations, warehousing and real estate concerns, media relations and investor participation.

The high end

Mention an IT distributor, and more than likely one of the larger players spring to mind. According to ARNnet's Channel 100 figures, Tech Pacific is far and away the biggest distributor in Australia, with a reported annual revenue of well over a billion dollars and 600 staff. This kind of size translates into a nationwide presence, massive buying power and warehousing capabilities throughout Australia.

Tech Pacific's category manager for printers, supplies and imaging, Lorraine Cowan, believes the distributor's business model must be centred around communication.

"We have a two-end approach - we focus on establishing a close relationship with the vendors in order to understand their requirements and business directions. The key to distribution is how to clearly articulate that message through to the reseller channel, and meet their sales and support requirements," Cowan said.

According to Cowan, Tech Pacific is particularly effective when it comes to managing this relationship because of its call centre and effective market segmentation.

"We are in a position to manage this communication in a particularly effective way because we deal with over 80 vendors, and we are in contact with a lot of resellers," Cowan said. "The call centre is really the backbone of our operations."

Smaller in terms of revenue and brute size, Ingram Micro nonetheless manages to run at 97 per cent of Tech Pacific's productivity per employee.

It takes a similar approach to Tech Pacific when it comes to managing corporate communications. According to Ingram Micro sales director Vince Accardi, much of the company's success can be attributed to a highly categorised, organised sales structure.

Ingram Micro's approach to managing vendor relationships requires a five-tiered categorisation of vendor partners. Vendors are organised into different divisions according to their product range, and each division is staffed by appropriate specialists.

"We deal with a large portfolio of vendors whose products we need to match with the needs of over 4000 resellers throughout Australia," Accardi said.

Accardi believes one of the key factors in maintaining a buoyant market lies in supporting a mixture of resellers, and keeping alert to new opportunities in the reseller market.

"Who could imagine a few years back that mobile phones would be sold through service stations. The general public is becoming used to technology and as a result it is no longer buying only from specialist outlets. IT is appearing all over the place and as distributors we are aware of the importance of keeping track of that change," Accardi said. "That means that our reseller partners represent an increasingly diverse range of businesses."

Accardi added that Ingram Micro manages to keep abreast of its reseller relationships via a call centre where a team of 40 staff, including vendor specialists, service the reseller channel.

Coming in third on revenue, according to ARNnet's Channel 100, and reporting a slightly different business focus, is Express Data.

Express Data's national marketing manager Peter Masters honed in on the importance of customer service and a focus on reseller partners.

"The Australian market [consists of] roughly 200 big corporates and 800,000 small businesses and the only way to get to the small business sector is through the smaller resellers," Masters said.

He described the Express Data approach as underpinned by a strong relationship with the reseller channel.

"We have spent the last few years building a really strong reseller channel because our success depends on theirs. Fundamentally, resellers need their distributor support to grow and prosper - you have to talk to them on a daily basis."

Although this personal focus results in a slight drop in productivity per employee in terms of revenue, there is a firm argument in favour of Express Data's approach.

"Return business is the name of the game in distribution, and resellers are more likely to come back if they are happy with their experience."

Piggy in the middle

Analysts predict the top end of the market is set to expand as the mid-range market hits the distribution danger zone.

Ian Bertram, a senior analyst with research firm Gartner, foretells disaster for distributors who fail to react quickly to changing business models. His predictions are especially ominous for mid-range distributors.

"We are going to see massive shake-ups in the channel, unless distributors manage to provide some kind of value-added process to their services, most of them will go bust, it's that simple," Bertram said.

He describes what he terms the "hourglass effect", through which market share will be increasingly divided between the large high-volume distributors and smaller niche distributors.

"We are already seeing the big guys getting bigger and the niche guys finding more business. The difficulty for the guys in the middle is that they are running against the big guys, but they don't have the volume to survive the margin squeeze," Bertram said.

He believes this situation will result in a number of changes in the distribution channel, including higher rates of consolidation, and many businesses hitting the wall.

"To survive, mid-range distributors will have to focus on a few areas and do them really well. Even then, they will probably be forced either to attempt to grow through acquisition or get swallowed up by another distributor," he said.

Inform's director David Hancock agrees, quoting the now near traditional adage, "get big, get niche, or get out. Distributors in the mid-range are really competing with the big guys on price issues but they don't have the buying power. At the same time they are still trying to provide more personalised services," Hancock said.

Fiona Dicker general manager of Dicker Data is well aware of the squeeze, but is confident the company will ride out any distributor channel shake-up. The Dicker strategy is based around limiting the number of vendors and products it offers to the reseller channel.

"Margins are by far our biggest challenge, however because we are a specialist hardware distributor and we only deal with four vendors, we have a little more sway with prices," Dicker said.

In fact, Dicker believes that despite its mid-range status, Dicker Data is able to outgun large distributors on price and ensure high standards of service.

"It all comes down to how you organise your relationships. Resellers have a combination of needs, but essentially they need to run a business. They want the product at a good price at the right time," Dicker said.

Comparing distributors to greengrocers, Dicker said IT distribution was fundamentally a question of streamlining inventory management. "Like fruit and vegetables, our products are perishable," she said.

The strategy appears to be working, with plans in place to begin construction of a new warehouse later this year.

Other distributors such as Computer Hardware of Australia (CHA) are undergoing restructuring in preparation for the leaner, meaner future analysts are predicting.

CHA director Roger Bushell explained that recent changes had seen the company take a "centralised regional approach" to distribution.

"We have set up regional warehouses that are linked by a centralised call centre in Melbourne, so that the stock is available from all of our warehouses. We are also embarking on an e-commerce project."

Bushell told ARN the changes resulted from extensive consultation carried out with CHA resellers throughout Australia. As far as the distributor was concerned, one of the main difficulties was balancing the need to provide regional services with a consolidated streamlined approach to fulfilment.

In order to maintain a regional focus specific to different areas, CHA has established regional business development managers and CHA sales and service is designed to run out of the Melbourne call centre.

"Resellers basically want to know that they can get what they want when they want it, with a line of credit attached. So we have designed an approach which gives them the opportunity to do all that."

There is one distributor who has managed to ride out the acquisition wave and stay afloat in the big end of town with a mid-size payroll.

According to Hugh Evans, managing director at Siltek, the company has managed to integrate Agate, Siltek Communications and Prion into its distribution model and come in fourth in the Channel 100 top distributors, through effective human resources management.

"Our model is different to all other distributors. To integrate the different offices and companies, we have brought in an ERP system from Great Plains. We standardise where we can, using a common telephone system and computer network so there is very little duplication of resources," Evans said.

Siltek appears to represent the type of distributor which could emerge from the "hour glass" squeeze, highly efficient companies with a national presence, and a history of acquisitions.

Net, neat and niche

Although much of the negative forces of the "hour glass" effect appear to be aimed at the mid-market, smaller distributors are also faced with some important changes.

While the adage of "get niche or get out" still applies, many smaller distributors already depend upon niche markets, or demands of regional centres.

Gartner's Bertram believes the survivors of the IT distribution shake-up will ultimately be those who are able to capitalise on their skills.

"It will all come down to core competence. Distributors should focus on what they do best, and add value in any way possible," Bertram said.

However, smaller distributors already in niche or regional markets face an extra challenge. They will need to do what they do best, and do it online.

Inform's Hancock estimates that by 2004 roughly 50 per cent of fulfilment services will be Internet driven. "Distributors will be forced to take online services seriously if they are to stay in the game," Hancock said.

Munsoor Khan, Digital Network Australia's director and sales manager, has recently overseen the restructure of the company in preparation for the Internet age.

"Over the last couple of months we have seen a steady rise in the queries we receive from our resellers related to e-commerce. Whereas 12 months ago every one wanted to talk connectivity, these days they ask questions about e-commerce, online security, and bandwidth," Khan said.

DNA's approach to these changes is to facilitate entry of its channel partners into e-commerce offerings.

"There are a lot of resellers out there that want to get into this space, so we are focussing on an education campaign as well as providing them with access to the benefits of online sales through our Web site."

According to Khan, the benefits of the DNA approach lie in its ability to promote e-commerce offerings and streamline the companies processes simultaneously.

"We focus on a number of areas, but really our bread and butter is Internet management and reporting. We work to help our resellers use the Internet to their own benefit."

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