Arrow Electronics Looks At SaaS, Networking Offerings

Solution providers aren't the only ones looking for new revenue streams in this recession. Distributors are too, and their job also entails making sure that VARs have the right solutions for this market. Andy Bryant, president of Arrow Electronics' Global Enterprise Computing Solutions group, recently outlined for Channelweb.com editors his management strategy during the economic downturn, new areas where the distributor is looking and where solution providers should also play. Following are excerpts from that conversation.

What are your customers seeing in the marketplace?

We're managing through unprecedented times. The retraction in IT spending started in the fourth quarter. Last year it really was a tale of two markets. Through the September quarter, things were pretty good. But starting in October through December, we began to see 'a significant caution in the wind' is the way to put it. As we closed out the quarter, we did have a year-end budget flush. The bad news is that it did not match prior year revenue streams. One of the things we did see is mission-critical and high-end enterprise [products] may have fared better than commodity products. I say that because what I'm seeing is, if an end user has a large IT project with a quick ROI, or one that is already committed, that continued to roll. But discretionary purchases quickly stopped. 'Do we need printers, PCs, more handheld devices?' The answer is, 'We could probably do without those for a while.'

Where do you see the market now?

Demand is very hard to predict right now. Visibility remains very limited. We're managing 30 days at a time. We're trying not to make predictions and come up with things we can't really see. We're happy that we're able to offer partners a stable financing program. We haven't stopped creating marketing programs for our midmarket push. This year, that is going to be a critical issue for the channel.

Has the size of deals changed?

We still see some sizable deals. There always will be some, in health care, finance. The banking industry surprises everyone. It is in a turmoil in general, but all these mergers and combinations are creating large-scale integrations that will require IT.

As major vendors like IBM say they are focusing on smaller deal sizes, what does that mean for you?

The midmarket is still big for us. We have our Mpower program. We've come out with a shopping cart, where a VAR can get his marketing campaigns online. Things can go quicker. The midmarket is more expensive to call on for a distributor, a VAR and a supplier. But if you create a solution, with an average size of $50,000 to $100,000, and focus it on security, storage management, virtualization, you can create profits for that reseller if you can create volume. A lot of resellers are in the midmarket and the vendors still need help from Arrow to get into that space.

You mention that you don't have visibility beyond 30 days, but your VARs' typical sales cycle can last more than six months. Is that pipeline now being pushed out further, or is it just gone, which is why you don't have any visibility?

There's still a pipeline that goes out six to nine months. Resellers are still touching end users and still talking about potential projects. What's changed is the confidence on whether or not past 90 days it's going to happen. It's like we're all saying, 'Do we know what will happen 90 days from now?' A lot of resellers are more conservative now within 90 days. They have these projects that could happen in June, but what if the financial crisis doesn't ease? What if access to capital continues to be difficult within 90 days?

Your VARs' average sale also tends to be a complex, expensive project, which requires a capital expense on behalf of the end user. Do you see more projects being leased or purchased as an operating expense?

Our transactions continue to be a blend of purchase and lease. Leasing and the financial way VARs are doing transactions has come to the forefront. The sales cycle is led more by financing than technology right now. There's a lot more calling on CFOs and directors of finance to make sure they're willing to spend the capital, or whether they want to take it off the balance sheet and lease. We're doing a lot to help that. We continue to private label [financing]. We work with our suppliers on their captive financing. You see things like the first 90 days of a lease no payment, or skip payment until 120 days.

Are VARs more optimistic or pessimistic on the year?

A lot of VARs are still optimistic on the year. I don't hear all the resellers talking doom and gloom. A lot of people have projects, including us. We're rolling out Oracle ERP. We brought our IBM business up on it. The Sun [Microsystems] business was brought up about a year ago. There's a project that's been in the works for over a year. It will complete in August and the entire North American ECS business will run on the Oracle platform. That project doesn't stop. There will be some spending around it. A lot of large enterprises are in the middle of rollouts. That won't stop.

Next: Taking Costs Out Of The Channel

How are you taking costs out of the channel?

A lot of studies have been done about whether you are a leader or a laggard. The really good companies, when they see a downturn, they immediately cut 5 to 10 percent of costs. Other companies wait to see where they're going to make their cuts. I'll say we're a good company. We did get out in front. We participated in headcount reduction. That was painful. We tried to cut variable costs to save jobs. But in distribution, 60 percent of your cost is people. The other 40 percent is things we do to provide services to VARs. The boring side of it is we are taking every little spend for now and pushing it out. We're not going to slow down meeting with resellers to create demand. But we are not having meetings that are not specific and pointed. Our suppliers are doing the same thing.

What are you doing around services?

We announced Joe Burke to head up our services initiative worldwide. We have professional services, engineering, managed services, education. Our managed services focus continues to be around vertical stacks we take to market: storage, enterprise infrastructure, security, virtualization.

Managed services is coming from startups -- they almost look like [Software-as-a-Service] companies. They're trying to build a channel and asking, 'How do I get your resellers to sell my managed service?' For VARs, it's an annuity stream and they can leverage more hardware and get more closely tied into the end user. The challenge is, what's the sales cycle and does service match their strategy?

What sorts of SaaS companies and offerings are you looking at?

Security, e-mail, spam offerings. If you're a reseller out selling security, you should be able to say, 'Let's talk about e-mail.'

Several years ago, Arrow and other distributors made a big push into ISV applications. Is Arrow getting into SaaS as the next iteration of that ISV strategy?

A lot of the ISV partnering didn't have an annuity stream. It was, 'Partner with me and you'll enjoy the hardware sales.' This is different in that the SaaS company is willing to let the VAR sell the service, participate in the annuity stream. The big opportunity for the VAR and the distributors will be in solving the issue of who can operationalize this business process, the invoicing of it. You're invoicing the end user on a monthly basis. If they have 50 people, you need to bill that every month and that includes adds, moves and changes.

Does Arrow have any initiatives around social networking?

I think it will be a big part of our listening and it's another vector. We just put Arrow on Twitter. We're starting to get a lot of comments, but it's embryonic. You have to have that realtime feedback, listen to the voice of the customer and the supplier. You may not always hear what you want to hear, but that's OK.

Talk about your vendor mix. Do you have too many or too few vendors right now?

At Arrow, we have a fairly limited line card to start. Our top 10 [vendors] roll up to a very high percentage of our total revenue. What I'm looking at is the phrase, 'Everything over IP.' It's fairly consistent out there that storage is moving to IP. When you look at what's going to converge, networking and storage are heading for convergence. Networking is a key area we're trying to expand around. We're talking with the largest guys, the smallest players. There's the whole virtualization piece in between. The one area we really want to add expertise in is enterprise networking. It's for the stand-alone opportunity, but also for strategically what we believe is convergence in that market. We have a really good mix. We're doing well over $1 billion in software. Storage has become a huge part of our revenue stream. Services. We've really got our mix where we want it.

In hindsight, why didn't you get in on networking earlier?

Some of it was channel evolution. We weren't at the forefront of it. The whole networking boom through the dot-com era we missed. Since then, we've looked at what part is truly enterprise. We're quietly selling a lot of enterprise networking equipment through OEM relationships today with [Hewlett-Packard] and others."

Cisco is obviously the networking giant and it doesn't have a distributor in the U.S. focused solely on enterprise solutions. Is your goal to get them?

We're all asking questions. We are a high-end storage supplier. We're extremely good in virtualization capability. Our VARs are calling on the data center today. That's the biggest reason that perhaps a supplier like Cisco could say maybe we could reach that opportunity faster [through Arrow]. For now, in the OEM area, we are selling a fair amount of product.