Buying Habits

"My objective is to get the whole solution installed and working as quickly as possible," Raynor said. "Since solutions take longer to implement and payment is dependent upon a successful rollout, a poor rollout could kill your cash flow."

In the case of XACT Solutions/XSI, a Colts Neck, N.J.-based VAR that specializes in the relatively new digital imaging segment, that means maintaining direct buying relationships with a number of business-critical vendors, including Xerox, Kyocera Mita and, at times, Fujitsu. To source everything else, Raynor prefers distribution, although there are times, especially when a product lies outside her company's core expertise and she needs it fast, when she turns to Amazon.com or Buy.com.

Said Raynor: "My purchasing habits are simple: Whoever gets me the product I want in a reasonable time at a fair price wins. Period."

XACT Solutions/XSI's buying behavior reflects a larger trend across the channel: As VARs and systems integrators adjust their business models to emphasize selling specialized solutions or services rather than individual products, they are increasingly more creative and diversified when it comes to where they source products. "Any VAR out there or any channel out there is going to source the product from where they can find it," said David Hall, senior vice president and CTO of CompuCom Systems, Dallas, which uses distributors to source "a lot" of the products it uses for just-in-time installations. "You've got to find the product first, then you're going to talk price."

CompuCom's own buying habits have changed over the past several years as it has steadily shifted its revenue mix away from stand-alone product sales: Around 20 percent of its top line comes from services, but these offerings contribute close to 50 percent of the $1.5 billion integrator's gross margin dollars on an annual basis.

CompuCom's services-to-product sales mix is actually low compared with respondents to the CRN 2003 Sourcing Study, being released this week. The report found that services accounted for an average of 51 percent of solution providers' revenue last year. This compares with just 33 percent in 1998, according to other CRN research.

Over this same period, solution providers have added direct relationships with cutting-edge vendors that haven't yet cracked into distribution, while others have shifted at least some of their allegiance to specialty distributors. Still, both constituencies face stiffer competition in 2004 from the broadline distributors: Indeed, the CRN 2003 Sourcing Study shows that eight in 10 solution providers have purchased through distribution during the past year, and many broadline distributors are starting to find success through specialty programs of their own.

"As our business is becoming a service-oriented business, we are more inclined to purchase from specialty distributors, especially in the convergence arena, specifically for the integration services they offer," said Jennifer Wright, owner of Wright Business Technologies, a Houston-based VAR with about 65 percent of its revenue tied to services. "If we can purchase product with a base integration configured, we save our customers money and ourselves the frustration of tracking down which part isn't working. We enjoy working with distributors that take on the warranty of workmanship and guarantee us their integration works. We are more open to integration services from our distributors than we were five years ago."

Grady Crunk, president and CEO of Central Data, a Titusville, Fla., solution provider specializing in wireless implementations and video surveillance, said he has shifted most of his core purchasing to several specialty players, few of which are what you'd describe as household names. "Leading-edge vendors go to these places first, not broadline," Crunk said. "What we've gained the most by dealing with specialty distributors,you're now in the know with some of the new stuff that is coming, now, before it hits."

Other solution providers have found themselves more closely allied with vendors over the past year,some by preference, others by necessity.

"Some of it is that we are hooking up with new leading-edge vendors that haven't even established a relationship with a distributor," said Pat Grillo, president and CEO of Atrion Communications Resources, a 20-year-old solution provider in Branchburg, N.J., that has shifted to specialize in security solutions. Atrion's close ties to certain manufacturers get it better attention when it comes to swapping out products in need of repair, Grillo said. In some instances, it also gets the company better pricing,and access to extra credit.

For Pete Busam, COO of Decisive Business Systems, a $4 million solution provider in Pennsauken, N.J., the decision to work more closely with manufacturers was a matter of cash flow and of his company's need to transform how it approached customers. Virtually every sales call Decisive makes involves its vendor partners. "The customer sees the manufacturer with us all the time," Busam said. "They don't see them at arm's length, they see them there with us. It seems like if we put somebody at arm's length, the customer will feel we are hiding something."

Busam isn't alone. Respondents to the CRN 2003 Sourcing Study, conducted between October and November 2003, reported a marked increase in the percentage of products they sourced directly from manufacturers during the past 12 months: That cut was 26 percent, up from 19 percent in 2002 and 14 percent in 1997. Solution providers bought 49 percent of their products from distributors, down from 56 percent in 2002 and 75 percent in 1997. The percentage of products obtained from alternative sources,including online resellers, mail-order sources, other local VARs or retailers, computer superstores and exchanges,was 25 percent, flat with 25 percent in 2002 and up from 11 percent in 1997.

But despite the top-line trends, solution providers still have plenty of loyalty to broadline distributors, according to both the poll results and anecdotal evidence from the dozen or so interviews conducted for this story. Not only do these sources provide them with more predictable product delivery, the broadline players have become much more savvy when it comes to pulling together all the technologies and services needed to address emerging specialty markets, they said.

"There is a huge benefit from being able to go ahead and purchase multiple components from one source vs. multiple purchases," said John Freres, president of Meridian IT Solutions, Schaumburg, Ill., who said he views his distribution relationships much more strategically than he used to,and vice versa. "The distributors are really selling their services to us more than they ever have in the past," he said.

When solution providers were asked to cite the source they contact most frequently when purchasing products, the top two preferred sources from the 2002 study, No. 1 Tech Data and No. 2 Ingram Micro, held onto those positions in 2003. Unlike last year, however, both gained positive mind share. Synnex, which was third in 2003, also posted a substantial percentage increase in mentions to clinch that spot, as did D&H Distributing, fourth on the 2003 list of top 10 preferred overall sources. Hewlett-Packard, Dell, CDW, IBM, Microsoft and CompUSA rounded out the ranking, claiming positions five through 10, respectively.

Many solution providers interviewed for this story, especially those with substantial small-business practices, said they enjoy the end-to-end attention to an order that broadline players can provide. Ingram Micro and Tech Data, in particular, are shifting to emphasize specialty product expertise, they said.

Bob Whiton, managing director and CEO of Net Solutions, Tustin, Calif., said Ingram Micro and Tech Data provide his team with presales support and configuration advice for complicated security and internetworking solutions, much more so than in years past. "They have set up these specialty departments that work well for us," he said.

John DeRocker, senior vice president of sales and marketing at Nexus Information Systems, Plymouth, Minn., also swears by evolving distributor specialty desks, as well as the long-term relationship his team has developed with their counterparts at Ingram Micro. "When I'm pulling together a full end-to-end solution, sometimes we'll have a dozen manufacturers going into the quote," DeRocker said. "If I can get them all from one distributor, my time to delivery from order to desktop is cut in half."

Steven Harper, president of Hutchinson, Kan.-based Network Management Group (NMGI), said consolidating his purchasing gives him more buying power. "Distribution is earning the margin I pay them in the clout they give us with the manufacturers, the programs they give us," he said. "I want to be a medium-size fish in a small pond."

NMGI, which generates about $7 million in annual revenue, buys 88 percent of its products through Ingram Micro.

But just because solution providers are buying solutions through distributors doesn't mean they are looking for preconfigured bundled solutions. Although the CRN 2003 Sourcing Study shows some VARs and resellers are open to considering bundles, only 23 percent of respondents currently buy them. And anecdotal evidence suggests that many solution providers are leery of them altogether.

"The bundles we sell the most of are the ones that we put together with clients," CompuCom's Hall said.

"Standards are a powerful statement, but bundled solutions aren't always the best approach."

Nor do they bode well for margins. "Bundled solutions from manufacturers or distributors tend to accelerate the commoditization curve," said Don McDowell, vice president of Forsythe Solutions, Skokie, Ill. "We prefer to engineer and certify a solution. This allows us to integrate the best components based on customer need or solution performance."

Net Solutions' Whiton said, when necessary, he works with other local solution providers to assemble turnkey offerings, but he tends to avoid preassembled bundles from manufacturers. And like most other VARs interviewed, Whiton still prefers to take title to the products he ultimately sells. For one thing, Net Solutions is still earning double-digit margins on certain hardware sales, he said. Plus, if an integrator is going to take responsibility for ensuring a solution works, its engineers must get their hands on an entire end-to-end solution. "It's relatively important to us. ... We work with things that we've worked with before: products that we know or have reason to recommend to a client," Whiton said.