Margin Marvels

Arrow Electronics and Avnet are spearheading the next generation of channel companies by helping a rising number of solution providers sell higher-end products and more complex solutions, channel executives say. To that end, the two distributors are ramping up their partner resources and taking a hands-on approach in helping solution providers penetrate the midrange market.

"We're both in a situation where either you win or you lose together. Our goal is to provide leverage for a solution provider throughout our back office," said Mike Long, president of Arrow's North American Computer Products group, based in Englewood, Colo. "That can be anything from configuration to logistics to software services. We try to use hardware as a vehicle to deliver key services to grow their business."

Skokie, Ill.-based Forsythe Solutions Group is one solution provider that has prospered from Arrow's assistance. The distributor helped Forsythe forge a relationship with IBM that boosted the solution provider's total revenue 10 percent to $700 million last year, said Don McDowell, vice president of server solutions at Forsythe.

In seeking higher margins through the midrange market, solution providers should be prepared to get to know their distributor very well, said Rick Hamada, president of Avnet Computer Marketing, Phoenix.

"We look to get to understand the VAR," said Hamada. "We want to know where they are in their growth cycle and what their challenges are. And if they're building a technology or a services business, do they need talent and can they bring more discipline to their financial operation? You have to individually tailor that based on their history and growth."

Avnet took that approach in helping Intelinet Systems build an Oracle reselling and consulting practice from scratch last year. The distributor provided all the sales training and marketing support plus took some time to understand Intelinet's market strategy, said Ed Miller, director of professional services at the Richardson, Texas-based solution provider.

"February 2001 was not the best time to start an Oracle practice. It was not the easiest thing to do," Miller said, adding that Intelinet's Oracle business has prospered. "Last month, we sold close to $1 million in Oracle [products and solutions. It was our best month yet, and March looks very favorable."

Miller credited Avnet with taking a personal interest in Intelinet's success. "They gave us everything we needed, and they did it effectively," he said. "Their strength is that they know channels and how to treat partners. They have as many as 25 Oracle resellers to train, yet they keep a level playing field. That's their strong suit. They were good at mapping out a strategy with us and introducing us to the right people at Oracle."

Arrow's and Avnet's tight partner ties reflect a market shift in the high-tech channel. Industry executives say more and more solution providers are shedding their PC backgrounds in favor of larger-scale solutions and are looking to midrange distributors to lead the way with higher-end products and related partner services. Even solution providers already selling midrange systems are turning to distributors to help them branch into new and more complex technologies, executives say.

Sporting a broad array of platforms,such as Sun Microsystems, EMC, IBM, Hewlett-Packard, Compaq Computer and Oracle,Arrow and Avnet lead a midrange distribution space that includes companies such as Pioneer-Standard, GE Access, Bell Microproducts and Westcon Group.

"[Arrow and Avnet are becoming the Ingram Micro and Tech Data of midrange and electronic components," said Brian Alexander, an analyst at investment firm Raymond James and Associates. "But the gap is narrower in the midrange space.

Pioneer-Standard is a pretty key player, and GE Access is big."

Arrow's and Avnet's computer distribution businesses are roughly $2.5 billion apiece, compared with $20 billion to $30 billion each for Ingram Micro and Tech Data, Alexander said. Yet Arrow and Avnet generate much higher operating margins, he noted.

"They're at about 3 percent for both companies," Alexander said. "Ingram Micro had 0.6 percent [margin in 2001, and Tech Data's fiscal 2002 [margin is about 1.45 percent."

Vendors also are taking a closer look at midrange distributors, whose deep channel relationships offer an attractive conduit to customers, according to Alexander. "In particular, look at EMC, which authorized Arrow and Avnet as its only two distributors in North America," he said.

EMC executives have said Avnet and Arrow will help it reach the SMB market. "Arrow and Avnet have solution centers where partners can learn our technology hands-on and get to market faster," said Bill Taylor, director of global sales operations at the Hopkinton, Mass., storage vendor. "They address the market we want to reach. We think we can develop a solid base of resellers. We want to make sure we have leads flowing through these guys."

And it's unlikely that solution providers eyeing higher-margin business will have a problem with vendors and distributors looking to lend a hand, analysts say. "That is the nature of the [midrange business because there's more complex configuration work," Alexander said.

Take International Integrated Solutions (IIS). With Arrow's help, the Islandia, N.Y.-based solution provider increased its midmarket sales 500 percent last year, said IIS President John Iacone. IIS has traditionally served the NT server space, but customers were beginning to outgrow those systems and needed more complex solutions, he said.

"In this business, we all know margins are going in one direction,the wrong direction. If you want to stay in hardware, you have to look at your business model," Iacone said.

The company now sells HP and Sun midrange systems. "With Arrow's assistance, we were able to pick up revenue in that midrange space and the consulting business that came along with that," Iacone said.

Forsythe Solutions Group, in fact, got a personal assist from Arrow's Long. The solution provider had a long relationship with HP on the midrange side but wanted to add IBM as a second platform. IBM, however, traditionally has preferred IBM-only partners, McDowell noted.

"We had some significant challenges in becoming an IBM business partner," he said. "One was our reputation. We were known as an HP and EMC reseller. But Arrow and Support Net [an Arrow division have been instrumental in getting us the executive attention at IBM that has allowed us to tell our story."

Long set up a conference call between Forsythe and IBM channel chief Peter Rowley to explain the solution provider's business plan. IBM liked what it heard, and Forsythe is now an IBM business partner, McDowell said.

"When you get that kind of executive sponsorship, it helps all relationships and accelerates our ability to build those relationships," he said.

Arrow also helped Forsythe find the right IBM field-sales contacts so the giant vendor would have a stronger grasp of Forsythe's business, McDowell added. "That move pinpointed the start of our growth again," he said.

Similarly, Avnet armed Venture Systems Source with the necessary training, support and marketing ammunition to refocus its business. Venture President David Traxler said the Jackson, Miss.-based solution provider's transition from a PC to a midrange systems business,deemed vital to the company's growth,would have been tough without Avnet's involvement.

"The biggest challenge is the investment it takes to make the transition. It's incredible. The people, certifications, education and additional resources you need to meet to play in the big arena is intense," Traxler said. "Avnet surrounded us with a marketing team that helped us in almost every aspect. They've assigned dedicated resources to our company. That's been needed."

For each solution provider, Avnet assigns an inside account manager who acts like a quarterback for that partner, Hamada said.

"He or she is the primary contact for all that goes in the relationship with Avnet," he explained. "For example, if you call for an order's status, you may also want to know your credit line. So the account manager hands off to an appropriate expert,for credit, asset management and on down the list."

Larger accounts also have a field manager that tries to steer the solution provider toward business planning and development rather than just transactional business, Hamada said, adding that in response to many partner requests Avnet aims to develop a core competency in business planning services.

"We need to know what's going on with the local marketplace, to make sure local manufacturers' reps know the reseller. Not every account needs that, but that's something we like to offer," he said. "There's more, of course. A VAR's sales team may talk to our technical team daily. There's a lot of parallel contact."

That level of communication came in handy recently for Corporate Technologies. When the Burlington, Mass.-based solution provider needed help with a Wintel customer, Arrow's MOCA division stepped in,even though MOCA is a Sun-focused business, said Harry Kasparian, Corporate Technologies CEO.

"We're not a Wintel reseller, but we needed to show Wintel working on a SAN for one customer," Kasparian said. "MOCA was able to help find the components, all in the spirit of supporting the larger good. They're very open to try to put together what we need. That's one of the keys to a successful partnership. They ask where you want to take your business. If you can answer that, they'll point you in the right direction."