Internet market offers false hope

Internet market offers false hope

Converging technologies, industry consolidation, the changing face of value-add and the greedy ideology of the revolution is sidetracking the channel from preparing its businesses for survival in the Internet age.

An industry survey conducted by ARN last week has revealed channel executives are increasingly disillusioned by the "get rich quick" attitudes of their peers with Internet-centric businesses.

It appears some resellers willingly compromise the channel's hard-earned reputation for adding real value to customers' businesses in exchange for a quick buck.

"A lot of people go for anything with on the end and jump on the proverbial bandwagon," said Michael Rebiffe, general manager of CIE Pacific, a Siltek group distributor.

"These companies do a huge turnover with low margins, so it looks attractive on paper and acquisitions happen. But really they are just shell companies."

A financial consultant, contacted by ARN, who asked not to be named, is also critical of the trend. "It's not good for any of us. The move to the new world does, by inference, cannibalise a reseller's business," he complained.

Explaining that, in the long term, both investors and companies that take shortcuts are likely to get burnt by not getting the expected return on investment, he said many companies assume profit and loss figures in an IPO prospectus that are based on customer or subscriber numbers that are clearly unattainable.

Instead, the consultant said they should focus on providing value to a customer base they have the ability to support.

The trend, which has been sparked by the rapid commoditisation of Internet-related services and investors' faith in businesses that claim to provide them, is forcing the channel to rethink its business strategies.

"Today, the intrinsic value of a business is represented by its brand and relationship equities and in the near future customer equity will become a key component of market valuation," Dale Renner, managing partner for Andersen Consulting Global Customer Relationship practice, explained in one of his recent public addresses to the channel.

"This requires a new set of integrated capabilities that will allow a company to differentiate from competitive solutions."

Driven by this transformation, the nature of value-add is also assuming a different role, according to system integrator Com Tech's director of technical marketing, Darron Lonstein.

"Organisations need to understand the Internet and the world as an opportunity to enhance service and value-add," he asserted.

Lonstein believes the channel is not unfamiliar with technology-driven changes and should use the current shift to reinvent the value-add paradigm.

"One thing we have noticed throughout our history in the market is what is value-add today can quickly become commodity tomorrow," he said.

"So if [value-added resellers] are going to survive, they are going to have to keep up with the change by constantly updating skills and innovating in the services arena." However, margin reductions, which have been forced upon resellers by the introduction of the new distribution channel - the Internet - are making the task of adding value increasingly difficult.

Instead, the lure of quick cash by acquisition or listing, as well as mere business survival in the new age, seem to dictate volume sales and customer base enlargement as a short-term priority and an easy option.

"On the distributor side of things, value-add [has become] an old, clichéd, non-realistic term, so most distributors [tend not to provide it] as they are either too small to afford it or too large to focus, " CIE's Rebiffe said.

"We have the best of both worlds. We are a small, focused company, but we are part of the Siltek group, so we have very deep pockets.

"For resellers, value-add is their only choice. Vendors are selling over the Web at margins of 5-7 per cent.

"No reseller can live on those margins. Internet companies don't need to value-add because they can discount so heavily," Rebiffe addedJohn Macintyre, managing director of systems integrator cum Web-company Office Productivity Centre (OPC), agrees.

"Distributors advertise an 'estimated street price (ESP)' which is a go-to-market price, " he claimed. "It's a competitive price to get customers, but there's no room for the reseller to do the things they would normally do [because the margins are too low].

"You have to say that it's just a price for the box with no services which creates a negative attitude with the customer, or you cop it on the chin and take the loss."

However, according to Jonathon Fisk, managing director of network integrator Senteq, a lot of companies have kept up with the change by simply following good business practice.

"We identified a couple of years ago that the value-add that the channel was providing two, three or four years ago was now to a large degree of little or no value to customers," Fisk explains. "Senteq has worked very hard over the last few years so that the value we provide is now measured in terms of business results and business focus, rather than just supplying a pre-determined requirement."

Fisk said inventing the new value proposition for Senteq's customers required significant business changes within his company.

"Even though our job as a systems integrator is to combine products and services to deliver a solution, what we really had to do is work with our customers on improving their customer relationships in order to help them achieve their core goals," Fisk said. "To do this requires a major investment over the long term. It's not something that can be done in words. It's a huge investment in a totally new [value-add] culture."

Fisk's new philosophy has in fact already been perfected by Thomas Siebel, CEO of the US CRM vendor Siebel Systems, who commented that every business should measure its worth and future potential by establishing and following a customer satisfaction index, rather than share performance, as a key measure of performance.

After all, customer satisfaction is what value-add has always been about and in the Internet age, that will be the only thing to differentiate you from the greedy conquering the world on the back of the paper value of the new technology.

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