The Enterprise Customer: A Growth Path For Distributors?

Though debate persists on whether distributors are planning to sell products directly to end-user customers, industry players agree on one thing: Enterprise clients would be the first target.

'For a period of time, the corporate reseller owned the enterprise market. The fact that there are few national corporate resellers today leaves a vacuum that needs to get filled.' --Tony Ibarguen, ICG Partner & Former Tech Data President

A direct move into the enterprise space makes sense for two-tier distributors, according to some industry analysts and current and former channel executives. For one, they said, solution providers have less access to those accounts because direct-sales initiatives by vendors have neutered the two-tier channel in the corporate customer space.

"For a period of time, the corporate reseller owned the enterprise market. The fact that there are few national corporate resellers today leaves a vacuum that needs to get filled," said Tony Ibarguen, former president of Tech Data and now a partner with venture capitalist Internet Capital Group (ICG), Wayne, Pa.

"How will midtier peripheral manufacturers sell into corporate accounts? You can't have 50 or 60 companies selling direct to [enterprise] end users," said Ibarguen, who also was vice president at corporate reseller Entex before moving to Tech Data.

One possible answer to Ibarguen's question: through broadline computer products distributors like Tech Data and Ingram Micro, said Robert Anastasi, a longtime channel analyst and senior managing director at investment firm Raymond James & Associates.

	Large corporate accounts present distributors with an enticing sales opportunity, industry executives and analysts say.

"There aren't that many corporate resellers left. I can see [distributors] in the major account space. Not only is it possible, but it would be smart. They do logistics extremely efficiently," Anastasi said. "Distributors wouldn't directly compete with the channel. They'd compete with OEMs there [in the enterprise]. That's fine, because OEMs are competing with them in the SMB space."

Not only do two-tier distributors see a market vacuum in the enterprise arena, but they're also under pressure to unearth new revenue sources amid a sluggish business environment and heightened competition, analysts said.

The largest distributors,Ingram Micro and Tech Data,saw year-over-year revenue declines of $1.8 billion and $1 billion, respectively, in their most recent quarters. At the same time, direct marketers like CDW Computer Centers and Insight Enterprises saw sales gains of 5.5 percent and 3.5 percent, respectively.

Though CDW and Insight's combined revenue is just a small fraction of either Ingram Micro's or Tech Data's total sales, industry observers say the direct marketers' hybrid business models are catching the eyes of distributors seeking a sales spark.

"They're going to have to look at new and unique ways to increase sales," said Janet Szilva, president of The AJS Group, a Bridgewater, N.J.-based consulting firm for small VARs.

If a distributor were to attempt a direct play to end users, it would be into very large enterprise accounts, said Steve Raymund, chairman and CEO of Tech Data.

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'There's a piece of that [enterprise] business that could be filled by distributors that would not have any impact on resellers. It's not a direction we've chosen to go. Our goal is to market through resellers.' -- Mike Long, Arrow Electronics' North American Computer Products
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"There aren't a whole lot of resellers these days actively calling on those accounts," Raymund said, stressing that Tech Data has no plans to go direct to enterprise customers. "The one case someone could make a legitimate argument would be in whatever segment existed where resellers had been pushed out. Then the channel conflict issue goes away."

Even if two-tier distributors wanted to sell products directly to enterprise customers, they probably don't have the ability to do so effectively, Raymund added.

"Most distributors don't have much in the way of field sales forces or the ability to provide a range of supplemental services an end user might demand from its channel partner," he said. "We're set up as logistics houses, not service shops. The success factors for each are somewhat different."

Many Fortune 500 companies have IT departments that are, in essence, resellers themselves, said Mike Long, president of Arrow Electronics' North American Computer Products Group.

"There's a piece of that [enterprise] business that could be filled by distributors that would not have any impact on resellers," he said. "It's not a direction we've chosen to go. Our goal is to market through resellers, to give them more value-add."

Some enterprise business is likely to go through distribution, Long said.

"But it's not going to be across the board," he added. "It's easy for resellers to get concerned, but there are a lot of programs out there to grow by going after business they haven't gone after before. As far as us setting up a direct-sales force, I don't see it as a possibility."

At least two distributors,Avnet and Pioneer-Standard Electronics,already sell to enterprise end users through one-tier divisions that are run separately from their distribution businesses. The companies avoid conflict with their solution provider partners by serving large enterprises that typically don't use solution providers in the first place, executives for both distributors said.

"There are strange bedfellows, and the question is how are we all going to collaborate and survive in the supply chain. We are not trying to disaggregate our VARs," said Andy Bryant, president of Avnet Computer Marketing Group.

Alliance Technology Group, which buys storage products from Avnet/Hall-Mark and sells to Fortune 100 companies, didn't even know that Avnet had a solution provider arm, said Hope Hayes, president and CEO of the Hanover, Md.-based solution provider.

"I have not seen that at all. I've never seen them in our area," Hayes said. "We don't have a problem with distributors. We have that problem with manufacturers. They're the ones that yell, 'I was in there first,' and they'll underbid you any day of the week."

Pioneer-Standard, a distributor of computer and electronic components, distributes IBM midrange servers through KeyLink Systems and has an Enterprise Sales Group that sells to end users. Solution providers say they try to trust that the two arms remain separate.

"Account confidentiality is extremely important in this business," said Steve Sells, president and CEO of SourceOne, a Boise, Idaho, solution provider. "And when Gordon Dickens sold Dickens Data Systems to Pioneer-Standard, that became my biggest concern. We do not want to compete against a distributor, period."

So far, Pioneer-Standard has left SourceOne's customers alone, Sells added. "Pioneer-Standard has engaged in some accounts direct. They also turn over some accounts to partners," he said. "They said they would not chase small, mid-tier deals, and they would maintain larger accounts. If they do prospect and find that another Pioneer-Standard or KeyLink partner is in the account, they have been instructed to back out. It has worked out."

Any direct play by distributors eventually could be accepted by their partners as a natural mutation amid a constantly evolving channel, observers say.

"There's no doubt about it happening over a longer period of time," said Ibarguen. "Those channel relationships evolve consistently to that [direct model] if you break down the bundle of services from one end of the channel to another. If there's economic pressure, they have to get broken up."