ARN

Round Table: The future of the PC reseller

ARN, in conjunction with Lenovo, invited a select band of resellers with different business models to discuss the major issues in our industry today.
Brian Corrigan, ARN (BC): What are the main challenges facing resellers today in the PC industry?

David Abouhaidar, Klikon Solutions (DA): The biggest challenge is staff - you are always either under- or over-resourced. Another would be resellers that come in looking to buy business instead of selling a solution.

Steve Evans, Commander (SE): I think the market has become quite saturated. If you go back a few years, there were a limited number of resellers that could add their own special value but now the vendors have appointed so many resellers that it is very hard to protect your margins. At the top end of the market we have vendors that are partners but also competitors as they look to take business direct. We are increasingly seeing that from one or two of our vendor partners.

Marcus Heron, Corporate Express (MH): There is a broad perception now that the reseller community won't have the ability to deliver the value it was required to many years before Dell came in and changed the world. The perception is that going direct will save you money and the resellers are the only ones promoting the reseller model. Some of the vendors derive 70-80 per cent of their business through a reseller model but only promote themselves rather than the partnership. That is a major hurdle; having to redraw your value proposition every single time you walk into a client's office.

Chris McKay, Classic Blue (CM): We would find it very hard to justify selling just PCs today. We lead with other solutions or platforms and drag PCs into the deal. We suffer from all the things the other guys have said here so far. The margins have eroded so far that it is very difficult to justify salaries for staff or to support service level expectations. Customers have no loyalty and will go wherever they can find the best price regardless of relationships.

SE: Is that true across the industry?

CM: No, but it is in this [PC] space. I don't think it's true with midrange, services or mainframe but I do find customers don't have loyalty when it comes to these types of boxes. There needs to be other value-add and people who are doing that will survive.

MH: In the mid- or top-end of town, you are sitting with a professional procurement person day in, day out. These guys will analyse the crap out of every bid you put forward and break it down to a level where they can drive the margins out of every single deal. To say it is highly commoditised would be an understatement in the PC space.

CM: You need to be making a minimum margin to stabilise or grow. If you are not doing that, then there is no point staying in the business. We have seen IBM move this product out and I think that is a big signal for everyone.

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Michael Blumentals, DPI Systems (MB): I would agree staffing is the biggest issue. We run a very small team in comparison to some of the other resellers that are here but still face the same issues. If we have one or two leave, it could wipe out 50 per cent of our sales staff. Our business is built completely around product fulfillment - we don't install, integrate or provide any of the traditional value-add services - and more than ever we find we have to listen carefully to some of the key vendors about attach rate business. It used to be a case of giving a customer what they ask for - no more, no less - but now the margins are so ridiculous that we hang all manner of things off every deal. Even with low staffing and infrastructure costs, you have got to make sure you are selling additional items to make the whole thing worthwhile.

MH: As a listed company, it is a problem trying to persuade the board that it is worth hanging in this business when the returns available in other industries like furniture or promo products are two, three and four times higher. Some of the vendors are chewing into what is a traditional marketplace for us. It's easy for them to say there's a whole heap of business worth $11.8 billion in the SME market but you can't change a business overnight.

MB: As the vendors, and big listed resellers, come down into medium business, we in turn are trying to reinvent ourselves in an attempt to look after the great unwashed. We are finding they are becoming more tech savvy now and it isn't that hard to deal with small business owners. They often know what they want so the cost of sale isn't that high.

MH: Another issue would be smoothing out inconsistencies in our supply chain. I fail to understand how Dell can get a PC to a client in four days when most of my manufacturers can take 10 days to deliver it to me. The vendors are making our job harder than it needs to be. Distribution is quicker but if you are talking about a special build - those don't come through the disties. Less than 50 per cent of my business is PCs but it is a very important lead product and if you can't provide a good service on that then you might as well pack up your bags and walk out.

MB: We are out there selling commodity products from 115 vendors that can be bought from any one of Ingram's thousands of active resellers. Finding people that can articulate the value of your business comes at a fairly serious price.

Guys on $70,000 or $80,000 retainers plus commission have got to be moving a lot of kit to recover that. We are opening up sites that service that commodity business in the retail sector, for example, because the cost of employing somebody is getting too high.

BC: Drive-by shootings are a perennial problem but I have spoken to a couple of vendors that have systems in place to reward resellers for finding business even if they are later undercut by another partner. Does that work?

SE: There are instances where resellers will go in at zero margin, or even negative margin, to get a toehold into a business and then recoup that margin later. Drive-by shootings are a big problem with commodity items and we try to combat them by building relationships with customers.

MH: Staff retention is a big issue because the industry is heavily prostituted. [Sales] reps feel like they own the customers. We need a dose of reality because there are a bunch of prima donnas running around commanding what they want. We are getting to the point where we need to find an alternative route to market.

We have got to work hard to change the industry a little because people are constantly moving from one organisation to another for an extra $5000 or $10,000 and, all of a sudden, you have a cost model that can't be sustained unless you grow another 25 per cent in the following year.

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DA: It is a challenge but the reality is that 80 per cent of the good reps out there do own the client, whether you like it or not. It doesn't matter what your company is going to offer, people buy from people.

MB: We have 35 per cent of our business coming through our website and my aim is to get that as high as 50 per cent in the next 12 months. Sales people do feel they own the customer and, if they leave, they can sometimes take customers with them. Taking business online is a way to combat that.

CM: We are the other way. We do none of the Internet, commodity products and try to do everything facing the customer to get a hook in and get stickiness developing. The online model wouldn't work for us because we are adding a lot more value. We need to get in there and get some commitment from the customer.

MH: We find clients break down spend and will separate components out as much as we try to pull them all back in. My experience is that it's getting harder to do. They are more prepared to break things up than they ever were before.

CM: We haven't found that. We've found people want a one-stop shop because the relationship has been developed over time and there's trust because of a proven record. They don't want to involve multiple suppliers.

SE: It's one throat to choke.

CM: There is one invoice, there is less paperwork and it's easier for them to manage. They tend to value that.

CH: If it is IT led I would agree with you; if it is procurement led, it's difficult.

BC: What services are you offering to build margin into your business models?

CM: For us its managed services and security. With those types of services you are typically talking to customers with 500 or 1000 seats and quite large IT budgets. You know when they are demanding these types of services that they are going to be running high-end servers or mainframes. You know they are dealing with serious IT budgets and are going to require the types of products and services we are offering. When you provide those services and the relationship develops to the point where they commit yearly revenue, the chances are they will give you the hardware business because they see that as an easy transaction.

DA: Although we push a lot of product we lead with services. Klikon was founded as a service organisation and we only got into product about four years ago. We do anything around Microsoft specialising in Active Directory or Exchange migrations; we do a lot of work in security, mainly around vulnerability assessment and Sarbanes-Oxley; we have a dedicated Lotus Notes development team; we do network monitoring; and offer Citrix services.

About 60 per cent of Klikon staff are engineers and consultants. On the back of that expertise, any recommendations of product to our clients are pretty much snapped up.

SE: Our objective is to make it easy for IT departments to deal with us, or easy to deal with IT. If a new member of staff comes along, the customer notifies us and we make sure the right equipment is in the right place at the right time with the right image on it. We also go up into full managed services where we provide a full end-to-end solution and are effectively the helpdesk of the IT department.

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MH: Our heritage is very much logistics so we really focus around configuration and deployment services. Application deployment is starting to come through with reasonable momentum for us but, because we don't have that services offset that a lot of people in the room do, we have to be a very low-cost provider.

If there is a very big logistics model with economies of scale that work in our favour, we will use that to deliver what we hope is value to the vendor community. It is getting harder at that end of the market so we have jumped on the services bandwagon.

MB: We rely heavily on distribution, particularly Ingram Micro. Our customers order one of three boxes from a particular vendor's range and those are the customers we are looking for. We don't do build to order stuff because the generic, off the rack suit seems to work for most customers.

MH: I think it is too easy to make yourself a reseller these days. If you have been a consultant for three days it seems you can get access to the old Tech Pac [TechLink] system and that drives prices down - having access to information as a registered reseller is useless if your client has the same information. It makes it very hard to justify your margin.

We get clients asking what margin we are making and suggesting what they think is agreeable. I think it is far too open and that is a real issue in distribution. As Steve [Evans] said earlier, the market is absolutely saturated and, for the good health of the industry, it's time that was wound back a little bit.

SE: We need to consolidate.

CM: I think if we had some indication that it [consolidation] was going to happen, it would give us all a bit more confidence to invest more.

BC: Who has to make that happen?

SE: It will be driven by the vendors but also by larger resellers who, to some degree, have the power to force change.

MH: The reseller industry in Australia doesn't have a collective voice yet but there are a number of people saying it is probably about time that we did. Otherwise, the vendors might just get what they wish for and end up in trouble. We have clients that will order 1500 PCs in a year but will place 1100 orders to get them. That's not what the vendor-direct model is about.

MB: Surely Ingram Micro has the greatest ability to do that [consolidate reseller numbers] with its control of credit. There are so many resellers out there that are making $500 on a sale when they should be clearing $5000 on a high-end product. To them, it's $500 for something that took an hour.

MH: Has anybody ever had a client tell them they have access to the Ingram site and the buy price they have struck with a reseller is that plus 3 per cent? That is an appalling state of affairs.

MB: Not only that but you can take a data feed from any distributor you like and plaster it all over the Web with a 2 or 3 per cent margin. If you run it from home, it's quite a viable little business. There are a lot of them out there. That's what I think is driving the downward pressure on pricing. The more that get online, the easier it is for them to bastardise the price.

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BC: In terms of establishing an industry body, how serious are these conversations among larger resellers?

SE: There's a groundswell, certainly. The larger resellers will act as one to move the industry back into profitability.

MH: It stands to reason that if 3 per cent is an average return in the core hardware space, people will find a way to adjust their businesses and get out of it - be that telecommunications or just pure services. There will always be somebody else coming up through the ranks but are they going to do a decent job and represent the vendors well?

CM: It [a reseller organisation] would benefit the whole industry and I would subscribe to it.

BC: What would be the next step in making that happen?

DA: I don't think it's going to happen.

BC: Why? What are the barriers?

DA: You can't stop people from opening accounts with Ingram or any other distributor; you can't stop people from approaching customers. It's ludicrous; it's not going to happen. There are some pretty high profile resellers in this room. If we don't have good enough relationships with the vendors and distributors to be able to get better discounts then we shouldn't be in this business. These one-man bands shouldn't bother us at all.

MH: When some of those guys turn up as a consultant at a good client of yours and are happy to make two points on a reasonable buy price, which causes you to drop your pants and destabilise the margin, that's when it becomes a problem, and it is evident.

MB: With some of the industry bodies that are being set up it is Data3#, Volante and all the usual suspects. You can't change an industry in the way the big enterprise resellers want to see it run. There are a lot of good operators out there running small businesses. I take your point that there are a hell of a lot out there that might order one or two products a month and take an opportunistic approach to hammer the margin down. But without hearing those voices, an industry body won't work in my opinion.

MH: Fundamentally, if somebody is buying from a wholesaler it should be for the purpose of reselling. And yet if you are a software developer, you can get an account with anybody. Is that right?

MB: If you are offering services, is that any more of a reason to be given access to product? There are so many different arguments out there.

MH: There are but you have to start somewhere. I think the big disties are certainly prepared to listen. They have got a lot riding on four or five major accounts that would represent 30-40 per cent of their business.

MB: There should be minimum spend or minimum frequency. I thought [former Tech Pacific boss] David Cullen had the right idea but the $1000 mark [per order] was just a bit high. We are probably one of the worst offenders - we haven't stopped a single item in the 13 years I have been doing business. Even if somebody orders a $15 ink cartridge it is still up to Ingram to deliver it. We are certainly not going to stock it, shelve it, price protect it and hope somebody comes along to order it.

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MH: I have definitely seen programs in disties where they have been able to regulate it.

SE: I personally think it's a great thing for a distributor [not to take orders below $1000] because if the transaction cost is any lower, it will kill any margin.

MB: If they put in a sweeping comment saying anybody not spending $50,000 per year will be cut, it wouldn't be hard for the top distributors like ED, Dicker and Ingram to enforce that without any problems whatsoever. But it only takes one of them to use it as an opportunity to service the needs of those small resellers and the whole thing falls apart.

BC: What does the commoditisation of the notebook market mean for the PC channel?

MB: HP, Lenovo, Acer and so on are collectively sending out millions of brochures every month and it seems there are $1000 notebooks everywhere you look. When you see that amount of printed material going out, the marketplace is aware of what's going on. You used to be able to sell against an item but it's getting harder because the high-end specifications are starting to creep down to a critical price point. Why would you sell a three-year warranty when you can just toss it out and get a new one?

SE: The corporate environment wants consistency. They want to know that what they install this month is what they can install next month and the month after. I think a lot of those consumer products vary depending on the price of chips.

MB: But those lines are getting a little blurred too. I would prefer a consumer product on my desk rather than some of the corporate products if we are just comparing pure grunt.

DA: That's what you want from a personal point of view but an IT manager doesn't. He wants to be able to lock it down as much as he can. He wants a desktop to have the same image in 12 months as it did when he bought it. They are the things that excite an IT manager.

MB: We have a very small number of customers with 500 seats and above so we have to understand what makes them tick as well. But we have a lot more customers that are now 20-100 seats and they are motivated very differently to the bigger guys.

When you start seeing that direct mail stuff flooding the market, those customers are so price sensitive that a movement of 2 per cent in either direction is enough to swing a buying decision. Australia is a country made up of small businesses, not high-end enterprise customers.

MH: When a vendor decides that a product is going end of life, you will sometimes see a model you have been selling into corporate at $1400 on a flyer for $900. That is a massive problem and it is poorly regulated by the vendors. It shouldn't happen. You have done the right thing by the client and the right thing by the vendor only for the vendor to unwittingly get rid of its problem but ruin relationships with its resellers that have taken years to build.

MB: We are guilty of doing that and would use it as a door-opener all the time. We don't engineer it that way but the opportunity is there to take the stock and the margins aren't as thin as you think. We can normally clear the stock in a few days.

MH: There's no issue with running something down but it shouldn't necessarily be the same models. If the vendors are really promoting consistency then they should remain on the shelf.

SE: I think some of the larger resellers can influence buying decisions. If we get burnt by one [vendor] partner then we can move that business to another.

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BC: How does everybody here feel about the rise in importance of the mass merchants and the different stock keeping units (SKUs) they get?

SE: I think it causes resellers a problem when there's a machine with similar specifications, albeit less robust, in the market at a cheaper price. That does cause some grief when we are trying to justify a premium product.

MB: We don't find that to be much of an issue. They generally differentiate and I don't think we can label the vendors as ineffective when it comes to positioning retail versus business. I walk into David Jones and see stuff I have never even seen or heard of but it isn't what an IT manager is looking for.

MH: But they do buy them for home and that's the problem. Dell has realised that everybody is a home user and I think that is one thing it has done well.

DA: Let them have it. Go and buy from David Jones or Dell; I don't care because it is less stress for me later on.

MH: The best of the services the channel has to offer is a different value proposition to what is available from a manufacturer. Try and get Dell to manage your infrastructure.

DA: Dell is there at the moment and putting in a big push for that. It is going to be a threat to everybody. Dell wants to do what it is doing with desktops, notebooks, servers and storage in the services space.

MB: The other vendors are starting to do that too. A vendor was in our office yesterday trying to get feedback as to how its resellers could effectively sell more of its value-added services.

DA: That's because you didn't tell them from day one that you are an integrator. We told them straight away that this was our space and we would not be using them. They have never tried to sell their services to us. But it could be good for you to sell those services and make a margin on them rather than somebody else coming in and stealing that business away from you. We do use some vendor services for things we are not really aligned to like high-end storage. But Dell could be a big threat. There's all this talk of vendors trying to help resellers but we have to remember they are also competing against Dell.

BC: Is the channel seeing serious growth in the implementation of thin clients?

MB: It's a threat to traditional desktop PC sales but in our business we have been running a thin client network since the dawn of time. We haven't bought a PC internally in eight or nine years.

DA: We do a lot of Citrix implementations but I am not really keen on this whole thin client thing. I think it is getting a bit more airtime than it deserves - I don't think the sell through is that big. It's good for a small environment, such as a call centre of five people and a receptionist, but nobody will run their whole company on thin client technology. Not any of our customers anyway.

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MB: I think a bigger threat to PC sales is the fact that there are no software applications driving a need for bigger and faster boxes. A few years back, everybody was struggling to get more RAM in a box because Microsoft had released something that would chew it all up. There was a constant push to try to get hardware in front of software. Now these PCs are like super computers sitting on the average punter's desk running Word, Excel and a little bit of email. If you have a look at the load these PCs are under, they are lucky to break 5 per cent CPU usage. Why would you replace it? It's like the days of the TV repairman are gone because the things never bloody break. As an IT manager who is looking for consistency, the best thing to do is nothing at all.

BC: What do you think about the future of whitebox?

MH: It's getting harder all the time for whitebox to differentiate.

MB: Nobody who is running a reasonably sized business is prepared as an IT manager to stick their neck out on whitebox.

DA: The councils do.

MH: In education it is massive still. I think Optima has something like 60 per cent or more of that market.

DA: And then there's Ipex. How much government market share has it got?

MH: Then again, I'm not sure Optima and Ipex are truly whitebox anymore these days.

MB: When pretty basic branded desktops were going for $2000, whiteboxes were sometimes 50 per cent cheaper. They had a voice but that's gone. IT managers will pay a premium for a brand name if it's a few per cent and that's what it has been narrowed to these days.

MH: I think we will see commoditisation of peripherals. Look at other industries like power tools or office products - who would have thought you could go out and buy a circular saw for $49 five years ago? I think we will all go home brand on a bunch of stuff over a period of time. Or at least the disties will. Ingram has already done it in Europe with monitors and there's talk of it happening in Australia as well. That might be a good thing because it will put a bit of competitive edge on the vendors.

BC: What about the shape of distribution in Australia? Ingram is now three times larger than any of its competitors. As a reseller, is that healthy?

MB: Has anybody else heard rumours that Tech Data is coming to Australia?

DA: Acquisition would probably be the only way in.

MB: I think the vendors should be doing more to strengthen the other distributors in the market. There are some weird models around; like Dicker Data not being able to sell HP printers. If the vendors did nothing else except bolster the other distributors so they could compete more effectively, that would go a long way to solving some of these problems. If more distributors enter the market, it will probably just mean that somebody else falls off the edge of the table. The number of distributors is not the issue - it's the quality that is out there.