Distribution Shifts Gears

Distributors' revenue is at an all-time high but that's not stopping members of the Global Technology Distribution Council (GTDC) from worrying about where their next dollar will come from. Finding the next generation of products, customers and solutions to drive future growth has become a critical part of distributors' business models these days. Last month, some of the leading distribution executives in the channel sat down with CMP Channel editorial director and vice president Robert DeMarzo and assistant news editor Scott Campbell following the GTDC Summit in Newport Beach, Calif., to talk about how they are shaping their companies for 2008 and beyond. The following are excerpts from the conversation:

It's All About The Solutions
Part of the distributors' growth centers around their ability to transform their business models away from products and toward more solutions and services. Here the executives offer some examples of the success they've had—and how they can help VARs do the same.

Greg Spierkel, CEO, Ingram Micro: Some of the solutions we put together are around [point-of-sale], data capture, HIPAA, transportation, navigation. You have to get specialty capabilities if you want to latch into the sectors with strong growth characteristics. We may bring together disparate pieces [of a solution], like structured cabling. [A solution provider] may have software or networking expertise, but they can't do the rest. We've gone well beyond [pick, pack and ship]. We had to.

Rick Hamada, COO, Avnet: It's no big secret that more VARs are getting less horizontal and more vertical. They know what they're good at. We have found hundreds of millions of dollars in revenue around health care before we even focused on it. We found we could accelerate the channel enablement for health care for VARs interested in a growth strategy. We can help how you play in health care—how you bring in and offer industry expertise, when to call on a hospital, how to work with oncology or how to work with administration.

Don Bell, chairman, president and CEO, Bell Microproducts: Horizontal guys need more help. That's where our guys have to be up-to-speed. We have to be on the leading edge. We are doing early adopter stuff. Our technical people have to be current on today's push products. We have to train the VAR resellers. Once they're trained, then that [technology] becomes more of a commodity. Then we have to move up and do it again.

Bob Dutkowsky, CEO, Tech Data: VARs specializing in networking or unified communications, we can tie them in to what to do when a 10-person law-firm client calls and wants them to also manage their Exchange, or host their BlackBerrys. We try to figure out bundles to take to the market space so the VARs can become very sticky with [their customers]. We don't know how to run a law firm, but we know the value of bundles. The average VAR thinks about selling rack servers. We start them thinking about selling virtualization, cooling and power. They can't worry about it. They look to us for leading-edge trends.

Pssst, Have You Heard About Managed Services?
Managed services have become part of distributors' outsourcing mantra. Why build the infrastructure if distributors have done it for you? It's still a small part of their overall revenue, but the executives expect to gain a lot of traction in the next year helping VARs migrate to an MSP model.

Dutkowsky: Managed services have the potential to re-engineer the whole way the channel works. [Offering managed services] will free [solution providers] to what they do day-to-day. It's an opportunity for our customers to get more tightly intertwined with their customers. It's more of an opportunity for the VAR to say, 'I'm your IT shop.' The typical VAR doesn't have the capacity to build out a complex managed services infrastructure. There's an opportunity for us to bring a managed services component to market, and the VAR can choose how to deploy it. The other dynamic is, as these small businesses use technology, now you're doing e-mail in a five-man law firm. Someone has to monitor that. That's where the VAR of the future will make all his or her money. These service offerings are really critical.

Spierkel: We all try to add more capability so that the VAR as the trusted adviser doesn't have to spend as much money making commitments in technology to run a small business. A lot of small-to-midsize VARs don't have the money to start out [a managed services practice]. We built out a NOC ourselves and we sell that on a fee-for-service structure. It's off to a good start, but it's early days. It's all about stickiness and the capabilities you want to put in place. [Aggregating services opportunities] for Best Buy, that's a service. Here we are leveraging a network we worked hard to develop. We put in a great software tool—that's what led to the Best Buy relationship.

Attract A Talented Workforce
Distributors, like many solution providers, face the challenge of developing their current employee base and attracting new workers. In an industry with paper-thin margins and complex business models, the executives discussed their recruiting tactics and how solution providers can attract talent to the channel.

Hamada: There's no lack of interest in what we're doing, but we've got to have some compelling work. We need to make them feel more entrepreneurs within a large organization. The demand for skilled jobs and the number of skilled [employees] are diverging. These kids will have choices. I was sitting at a dinner with a bunch of [interns recently]. I asked them why did they pick this industry. They were passionate about it. Their equation revolves around what's the culture, the social responsibility profile of the employer. [Social responsibility] has legs. That's important to the next generation. Not every executive drives a Prius, but we have to use non-polluting Styrofoam packaging. They want to know what our packaging is.

Bell: You've got to have the career path. That's one of the biggest challenges. We lose our people outside the industry or to suppliers. Our biggest danger is our [vendor] suppliers [stealing our employees].

Next: Product Innovation Product Innovation
While they may be developing more services initiatives, the bulk of distributors' revenue still comes from products. It behooves them to be on top of who the top innovators are, and whether there is as much innovation happening as in the past.

Dutkowsky: When you look at the industry for the last 40 years, most innovation starts with small companies. IBM and HP are the intellectual foundries. They build the piece parts. IBM holds patents for storage, but EMC took it and built it better. Sun [Microsystems] took some of those components and built better [products]. Oracle was a little company when they built a database product. Now those guys buy little companies. They let the little guy innovate and then snap them up.

Spierkel: Interesting products lead to interesting opportunities. Big companies kicking it right now [include] Google. They're an innovator. Apple has been a phenomenal innovator—a good marketer and a good, good innovator. That's making some of the other players stand up and take notice. Now you see Cisco buying people, HP is buying software companies. There's a lot of innovation going on in mobility software, and that's what other vendors are looking [to buy].

Vendor Consolidation
The industry's bellwethers—Microsoft, IBM, Hewlett-Packard and Cisco—have combined for dozens of acquisitions over the past few years. But has the channel benefited from that consolidation? One plus one doesn't always equal two, the executives said.

Bell: It really depends. Generally, from my perspective we usually don't win. If Company A and Company B merge, and we were very big with both, do you gain? Rarely. If you pick up one [new vendor in the deal], you gain something.

Spierkel: It's a mixed bag. In the first year, you're basically getting the organizations to work [together]. You might see flatness or a reduction because of some overlap of customers. Over two or three years, you'll see the switch flip and then you see things start to happen. For example, Linksys going into Cisco to make low-end products fit better into the communications stack that Cisco has. There might be disruption or lag time, but if a company is good, it can work.

There's No Business Like Small Business
The SMB space remains hot, but are manufacturers—and the channel, in turn—effectively reaching the small-to-midsize business customers? The executives said improvements can be made to make that market more efficient.

Dutkowsky: Turn the clock back 10 years and everyone was talking about SMB. Now they're really talking about it. Have [vendors] figured it out with a set of SMB-enabled products? No. They're working on it, but they're not there yet. Have we come up with an optimal channel deployment model for SMB? No, but we're working on it.

Hamada: First, you have to acknowledge we don't have all the pieces. Who's cracked the code? Nobody has it perfect. But there is better alignment, better compensation models. If you get the same return on one $1 million order than for 10 $100,000 orders, which will you do? The $1 million order, of course. Some vendors have started to recognize that and put rewards and incentives in place for SMBs. But it's an up-front investment for them.

Back To The Future
Solution providers are facing many of the same issues the distributors are facing. CMP Channel asked the executives to sum up what VARs should be doing to prepare for the future.

Dutkowsky: I would say to the VAR, 'Get close to your customer. Spend time with them, understand the challenges they have. Don't worry about managing a plethora of technology coming from 25,000 vendors. We'll do that for you. If you spend time with customers, you will be more profitable and margins will go up. If you try to manage all the stuff with vendors, you will be less efficient. We built that infrastructure; count on us to deliver that.'

Hamada: I would invite customers to challenge us on your pain points, and your customers' pain points. We've been through radical change. With the Access [Distribution] acquisition, we have a whole new anchor line. Associated with that come some wonderful emerging technologies, F5 for example. We are getting better at cross-selling vs. [selling in] silos. Test us. Challenge us to make sure you're aware what's happening in the market. We hear things today like excitement around convergence, IT security. We're making our plans go forward; there's no better feedback than what we hear from customers. If we don't have it, we may say, 'OK, we've heard this from a dozen people. We need to take a look at it.'

Bell: Look at our resources. It's beyond price and delivery. We have much more to add. You might be hardware value-added or software value-added—we can help in the marketing side. We really can contribute, and we have a lot of depth in value-added technical resources for the use.

Spierkel: The comments I hear from VARs are, 'I own the customer.' Partners don't have a feel for what we're trying to do. There's nothing wrong with that. It's how you go about asking the question. There's a lot of things we do to add value. [Distribution] wouldn't be a $100 billion business if we didn't provide a lot of service capabilities to the partners. We know how all the pieces work together. We can provide a lot of capabilities there. That's where we add a lot of value.