Distributor Directions: A frank approach to distribution

Founder and managing director of The IPL Group, Stead Denton, is one of Australia’s veteran channel personalities. Five months after selling its Oki distribution business to the vendor, his 27 year-old company is now working on building out its unified communications business and market presence. Denton caught up with NADIA CAMERON to discuss dealer trends and his acquisition aspirations.

How do you see the market at the moment? Stead Denton (SD): We are certainly seeing some activity. We go into the enterprise space because some of our dealers go into that space, but really 90 per cent of our customers are what I’d call ‘smart SMBs’. They might only have 50 staff, but they require the same technology as a multinationals, so they’re the ones we hunt and target. We’re starting to see some activity there. In B2B, I think things are still generally tough. We haven’t gone back to pre-2007 levels, but there is growing activity. I’m not sure if that’s because there was more activity in what we did, or not. I think what the GFC did is focus us all on what we should be doing, rather than what we used to do.

For us, that firstly meant selling the Oki business, because that’s what we used to do and the printer business is mature. The only growth there is incremental and there are more and more players. We looked for growth markets, and while everyone will have different ideas on what those are, we were looking for an area where we had skills. Because of our IP telephony background, we’re seeing emerging opportunities in our sector around unified communications and video – conferencing, CCTV – all connected to the telephony platform. About two years ago, during the start of the GFC, we focused on being good at that and we’re now deriving the benefits. For example, we picked up LifeSize, which was subsequently purchased by Logitech, and which signed an OEM agreement with Avaya taking them into the enterprise space. We’ve got another serious deal coming shortly, which will be a game changer.

Is it better to be a traditionalist or an innovator today? SD: It depends on where you are in the market. Ingram Micro, who is a traditionalist, would find it difficult to be an innovator because of its skill set. If we tried to compete with Ingram on time and place, we’d get beaten everyday. Our job as a value-added distributor is to find the next wave. If we’re not in front of it, then the margins aren’t there. So by definition, we have to be more innovative than a traditional distributor.

IPL has undergone significant change as a result of the sale to Oki in December. How is the new business model tracking so far? SD: For us, it hasn’t been that different. When we sold the Oki business, we’d had a 27-year relationship with those guys, they had an equity stake and were on my board, so people have moved across and that has changed. But they’re renting space in my warehouse, and they still come back to us for information. If there was a big difference, it was that we took on Panasonic. That’s a much more hectic business as it’s a lot more boxes at lower cost. The reason we were attracted to Panasonic was to help move it up the value chain and into the application software business. The old TDM system was about a phone, but in IP it’s all server-based and the only benefit of being on a server is if you have software applications. We have been working with Panasonic’s factory to bring it up to the big guys’ level and we’re about to move forward with that. With printers, we ended up being the wrong shape and colour, because it’s a time-and-place business and we had to sell something that needed value-add.

Has Panasonic seen you make new investments into skills and staff? SD: We probably brought more skills to Panasonic actually. We have been selling Alcatel, Avaya and Siemens since 2000. That’s why Panasonic came to us – we brought that to the table.

The networking market is undergoing substantial consolidation and change. How are you dealing with that as a distributor? SD: It’s a moving target. Particularly with Avaya and Nortel, or HP and 3Com, how do you maintain your channels without conflict? The life of a distributor is not an easy one. With vendors, the better the job you do, the more distributors they’ll bring on. And you can build a business with them, but they’ll decide they want to do in a different direction. You have to be nimble.

Given you have Siemens, Alcatel and Panasonic in your IP telephony line-up, is there room for more? SD: No. That gives us about 300 dealers with various degrees of skill and accreditation. We have eight engineers who do nothing but support those guys. And our investment in all three is too great for us to walk away, and we have a massive installed base of each. I have been approached three times in the last 12 months by vendors looking for us to take on their products, and I’ve said no. I think all the telephony vendors understand now that the game is no longer hardware, it’s in software.

Page Break

How does IPL grow from here? Are there other technology areas of focus? SD: Certainly in video conferencing and UC/convergence scenario, there’s a lot of opportunity and we’ll invest in that heavily. We have also just signed with Netgear, because we needed a partner that allowed us to do the full integration. Up until then, our dealers were buying either Netgear, HP or Cisco from somewhere else and then something for us, and it was hard to know where the support ends. We went into Netgear so we could supply the whole platform and be able to support it, and I think we have more upside there. There’s also the software and services side. I’d like to say in five years that we’ve changed our model and are selling software sitting on a telephony platform with some video content.

Do you expect your mix of partners to change? SD: Our best road to market is through the dealers we have and we’ll just keep herding them into the fray. The good ones do, and are good at it. That’s when you talk about the traditional and the innovative. Ingram and Synnex have a good model for people who know what they are doing and who don’t go outside the square. Our only way of surviving is to bring new things to the table. That being said, we would have had the same conversation 10 years ago. Dealers are never what you want them to be – they are what they are, and God love them, they’re our business. Our model is that the dealer has the relationship, and more than 80 per cent of the time, we do the scoping and work with the dealer on commissioning it. So we’re the dealer’s engine, or back room, and the techs he can’t afford. That’s the value and the glue.

Mergers and acquisitions have been rife in the Australian channel. Are acquisitions of interest to IPL? SD: We are pretty cashed up for obvious reasons, and I’ve spoken to several companies to acquire them. We are looking for someone that gives us critical mass and that has skills in a vertical we play in, and there’s not many. But you have to kiss a lot of frogs to get a prince. When Oki bought the business out, I thought about selling, but what would I do then? Even if you do have money, you need to do something that you’re either good at, or that you like.

I’d like to find a couple of mid-sized companies that are struggling and buy them. The ones I’ve looked at aren’t that strong. We are a treasury and a capital intensive business – we’re talking about carrying 6-8 weeks worth of stock, and providing credit. As a distributor, you need about 25 per cent of your revenue in cash or securities. This is not a business for the faint-hearted, and unlike a dealer who is getting big margins with very little CapEx, we are the reverse. I think a lot of people go into distribution thinking it’s a wonderful world, but it’s tough.

Are you seeing consolidation on the dealer side as well? SD: I think the guys that have survived, will survive. It affected IT more than communications, because many IT dealers don’t sell a lot of after-sales support. Most of the communication guys have annuity agreements which got them through. I personally would like to see dealers consolidate because it would give them enough business to grow. Small businesses spend all their time surviving and not growing. They have just enough tech or sales guys to do what they’re doing. If a few consolidated, they could actually have a plan. This recession was the deepest and the quickest I’ve experienced. We had 10 great years and most of the dealers around for 10-12 years only knew the good times, and how to manage growth or good margins. They didn’t have the skill sets [for the GFC]. We didn’t lose too many though.

What’s the number one thing that lets dealers down? SD: I’d say it is sales/marketing. Few of the dealers we deal with have an active sales and marketing program. Mid-sized dealers are flat-out running their business, and they don’t get the good sales guys. Paying the money for a good prospector and closer is difficult. Dealers are aware and capable of marketing but it’s difficult to attract and retain good sales people in dealer land, or to have the marketing bucks to go along with it.

What do you see as key market trends moving forward? SD: I think consolidation will continue. If I had a wishlist for IPL, I’d like to be able to migrate with our partners up the value chain, particularly in software and UC. If we can do that, and share that knowledge and skills with our dealers, there is a reason for us to be here and we’ll make money out of it. It’s not a great vision, or sexy, but that’s distribution. Frankly, if I was in the Cisco camp, I couldn’t do it because there’s no margin. It’s the same with Microsoft. That’s the reason for us being around – we are the alternative bid. We are experiencing growth in all our new markets, so I think we’re doing it right. We just have to find more vendors that clip on with what we’re doing that don’t compete.