As IT Spending Slows, Distributors, Vendors, VARs Come Together

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In the past, economic downturns often meant that vendors would focus more on their direct initiatives and less on their channel relationships, under the belief that the redirection could save them more money.

Now, as IT spending growth slows again, the opposite is happening. More vendors are strengthening their channel commitment to attract new partners, increase sales and save money at the same time, according to research from the Global Technology Distribution Council (GTDC). In turn, solution providers should see improved service and better terms from vendors due to the tighter partnerships between vendors and distributors, executives said.

Today's two-tier distribution model has gotten so efficient that vendors—and just about anyone else—can't duplicate the economies of scale and advanced logistics mechanisms that distributors have, said Dan Schwab, president of D&H Distributing Co. Inc., Harrisburg, Pa., which joined the GTDC this month.

"No one vendor can match the costs of how distributors go to market," Schwab said. "Distributors have really become incredibly efficient and have added value to resellers. We're not just about pick, pack and ship."

As an example, Schwab cites how distributors can ship directly to end users with a solution provider's logo on all the paperwork. "We do that at no fee to the VAR. There are dozens of tools and programs [for VARs] that vendors could never touch."

Display vendor AOC Monitors is convinced. The Fremont, Calif.-based vendor has seen sales through its biggest distributor, Tech Data, increase by more than 50 percent in the first half of 2008, compared to the same period last year. AOC's sales through Ingram Micro Inc. more than doubled in the same time frame.

The difference, said Jorge Vizcaino, director of sales and marketing for AOC, is due to the vendor's decision to step up its own marketing efforts to resellers but also to have distributors handle all the sales and logistics.

As efficiency experts, distributors have also helped AOC figure out how to become more profitable, an accomplishment considering the small margins often attributed to display OEMs. "Margins are so little in our business, even the lowest of the sales guy has to be a logistics expert," Vizcaino said.

Other vendors are finding similar success. Cisco Systems Inc. has been a strong distribution partner for several years, but until recently it also dealt directly with many SMB resellers. The San Jose, Calif.-based vendor discovered that distributors are closer to many of those partners in question, often speaking to them daily. It simply made better sense for Cisco to support the distributors' efforts versus utilizing a third-party support call center, according to D&H's Schwab.

Outpacing The Market
The GTDC's 16 members saw their collective revenue increase 14 percent in 2007, compared to 2006, according to the organization. The companies' financial reports suggest that sales growth in the U.S. is not that high, but it's nonetheless clear that sales through the channel continue to outpace overall IT spending growth, which most analysts believe to be a single-digit percentage.

"I have vendors growing 200 percent, 90 percent, 70 percent through the channel," said Tim Curran, CEO of the GTDC, which added D&H Distributing and ScanSource as new members this month at the GTDC Summit in Newport Beach, Calif. One of the reasons distributors are outpacing the overall market is they continue to help vendors reach a broad market, Curran said. "Vendors continually enter the distribution arena because they can get to the market, particularly the SMB market."

Along with revenue growth, distributors also have gotten leaner. GTDC members have reduced their SG&A costs to 5.8 percent of sales in 2007, from 6.8 percent in 2003. "That's 100 basis points at the same time as growing sales, adding capabilities and services," Curran pointed out.

As a result, GTDC members' operating margins have increased to 2.4 percent in 2007 from 1.4, according to the organization.

Distributors' making money is great—if you're a distributor. But those companies have also helped both vendors and VARs become more efficient, a result that becomes more important as the economy staggers.

At the recent GTDC Summit, Curran presented a report to more than 50 vendors detailing how—and where—distributors can save their partners money.

The GTDC identified the costs of doing business in about a dozen different criteria and only two, market development funds and price protection, were higher in vendors' relationships with distributors than if the vendors went direct to end users or direct to solution providers. For every other criteria, including shipping, handling, warehousing, managing warranties and returns, accounts receivable and financing, vendors' costs were lower if they utilized distributors. Overall, the study proves that distributors save vendors money, Curran said.

"When you aggregate it all, distribution is still the most efficient route to market for B2B sales," he said. "As you look at the softening of the market, manufacturers are discovering that the key word is collaboration with a distributor. They're finding ways to reach a broader market at a lower cost."

Next: Bucking History

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