Westcon's Chairman Reflects On 25 Years In the Channel

Westcon Group celebrates its 25th anniversary this month and founder and chairman (and former CEO) Tom Dolan recently spoke with CRN’s Scott Campbell about the company’s beginnings, growth and what to expect going forward. The following are excerpts from the conversation.

Let’s start at the beginning. What was the genesis of the company? What were you guys focused on back then?

It was 1985 and we were all about PC networking. Companies like Novell and 3com were blazing new paths of PC networking. Our objective was to get into that business. We functioned as a VAR for about a year, focused on anything around that technology. At a certain point, we were landing some larger opportunities and one of our manufacturers asked us if we could take care of some small dealers that wanted to buy five or 10 network interface cards at a time. We said sure, we’d do that.

We had left our last employment and we got paid with a system in lieu of compensation. We walked away with what would called today an ERP system. Then it was an order processing system and as we got into the business of taking care of small dealers, andwe had a system to handle it. It was easy and efficient. We liked working with dealers from day one. We liked being closely associated with technology that was driving the business. After 18 to 24 months, we made the strategic decision to spin the end user business off to a couple of dealers and focus on wholesale.

What was the name of the company you guys had come from?

Access Data Products. It was a small VAR, focused on the data point, mini-computer environment and the PC market. Data point went the way of Wang, Prime, Digital Equipment, with all the big mini computers.

How long were you there?

Personally, less than six months. The other [founders] were there for a while. We wanted to divert the business’s attention to PC networking. The rest of the company was of another mind.

What was Westcon’s big break, what was the turning point?

We were originally called Westcon Associates. We did nicely. We had a nice small business and had some good customers. Then one day I read in LAN magazine, about Ethernet over twisted pair. That was the big break. We realized being in the New York area that we had unlimited opportunity for that product. We marshaled all of the resources we had to get an order into a company called SynOptics. Our first order was nearly $1 million. When it arrived, we had boxes everywhere. It covered our floor.

When you received $1 million product, how much of it did you have sold in advance?

We had no run rate, no open orders. We had to make that commitment to get the line. It was a risk that we took but it worked. We had year-over-year geometric growth and revenue. Then with the launch of the Internet in the mid-1990s that created lots of business for us. By 1996, we had offices around the U.S., Canada, Australia and in China.

We realized that we had to arrange more access to capital to maintain the growth. Interestingly, distribution’s use of capital was not as efficient as it today. In those days, your inventory was not turning as quickly. You really absorbed capital as a group. We were fortunate a company called Datatec had a synergistic vision with us. They were right in line with what we wanted to do. By 1998, when that acquisition happened, they bought the majority of the company and we had the support capital to support growth and acquisitions and built Westcon into a worldwide company.

Next: The Wild, Wild West Days Are Over

You said distribution’s use of capital was not as efficient back then. What happened to improve that?

For all of distribution, since Sarbanes-Oxley, manufacturers are more concerned with compliance and transparency in the distribution channel. It used to be more of a Wild West in terms of procuring product at different price levels, procuring in one country, selling in another. As a wholesaler, you wanted to provide product at the lowest price to put on a shelf. A lot of that washed out of the process through stronger contracts. Revenue recognition is extremely important to the vendors now with compliance. The Wild West activity of the ’90s has really disappeared. The focus now is on finding and training new customers, developing new opportunities for the product. There’s much less attention on creative procurement. That and the capabilities of delivery service companies have improved. Distributors have fewer warehouses but they have the ability to backup inventory. In the ’80s, if you shipped by UPS and the box did not arrive, you had to wait four or five days and then mail in an inquiry.

Over the years, have their been any technologies where you bet big, but the market never responded like you thought it would?

We did make an effort in open source. That never panned out the way we expected. It’s still a very interesting market but very small. We felt that it would grow to become much bigger player in SMB than it is.

Why do you think that’s the case?

I can’t put my finger on it. Sometimes it just doesn’t get the momentum. We’ve also made investments in video and video did not grow at the rate we thought it would. A point of that is declining price points in the products and the availability of other [cheaper] options such as Skype, WebEx. Those technologies provide a different level of service though.

Are there any technologies where, in hindsight, you missed out, that are bigger now than you thought they’d be?

We’re making a big effort to get into storage now but in perfect hindsight we would have done so five years ago. We’re making significant investments in the data center but we’re playing catchup on the storage side.

Looking forward, what are Westcon’s next big bets? Where are you placing your investments for the future?

Our strategy is to have structured expansion of our line card and a systematic expansion of our geography. We continue to expand around the world. This fiscal year we opened in Vietnam and Thailand and we greatly expanded into Malaysia and the Philippines. We’ve scaled up efforts in Mexico and Czech Republic. We feel good that the regional leaders can expand and take point opportunities. In terms of the BRIC countries, Brazil, Russia, India and China, we have a strong company in Brazil. We have a small joint venture in India that can grow. We continue to monitor BRIC and will expand when we can do properly.

As far as the product line, [CEO] Dean Douglas has that strategy. I’ll let Dean explain that at some time. I don’t want to steal his thunder, but strategically we are expanding into data center areas that customers may already be involved in.

What do you see for the future of the VAR market? Will there be consolidation, with fewer but larger VARs? Or more specialization or generalization of selling technologies?

When you look at the distribution of customers, large, medium and small, multiregional vs. local operators and general VARs vs. [those with] a specific niche, it remains quite constant. There was a heyday in, say, 1999, where someone was selling LANs on every corner. After that Y2K retrenchment of our business it cleaned out the hobbyists and it’s a serious business now. VARs have strong leadership with business plans and financing. In this particular recession, there has been some fallout but nothing like the 2000-2001 period. I think the landscape has remained pretty stable. There’s a certain number of large customers, lots of middle-sized customers and whole bunch of small ones.

Next: Cloud Is Coming, But Expect A Battle

How about the future of distribution? Do you envision a time when distributors could make more money from services and other non-product revenue than from the products themselves?

More revenue is not associated with the box. I don’t know that it will become a majority, but it will be a larger portion. At a simple level, in the early days manufacturers would ship to an East Coast distributor who would ship to customers on the East Coast. Now that manufacturer might ship to a global distributor who gets it around the world. The reliance on distribution [for selling products] is much higher. The sophistication of the relationship is much higher. One area that all areas have made progress in is licensing and renewals. That’s not associated with a box, but it’s a transaction and over time distributors have developed stronger capabilities to resell annual contracts than the average vendor has.

Do you think a distributor might eventually glean more profits from non-product revenue then?

It’s a scale issue. Something greater than 75 percent of profits, not specifically Westcon’s but in general a high portion comes from product. That will always be an important and anchoring part of the business.

What do you think of cloud computing, and what role can distributors play in bringing that technology through the channel?

I don’t see a huge adoption [of cloud]. There’s some adoption and some efficiencies in the cloud. Our own company has implemented some cloud technologies in our own data center. But it’s our data center. I certainly don’t see the ramp, scale and geometric growth in the enterprise for core services. In the greater context, I think there will be a consumerization of it. That is when you’re an employee of company, you go home and use consumers services. Why can’t I use that kind of service in the office? That pushes more companies to consider using Google mail as opposed to our own e-mail system. There’s tremendous resistance in the professional IT community to give up control of what they have now and allow some of these services to move to the cloud. It’s a battle that will go on for another three to five years.

If I’m a VAR, is cloud an area you would recommend to get involved in?

The answer would be yes. [Determine] what cloud services are appropriate for your customer and be prepared to offer them. We’re pleased to offer Microsoft mail, Communicator, Infocenter, Shareware. We distribute through our customers and the end user pays a per-seat, per-month charge. For the dealer, there’s still a lot of work to be done to help that company integrate their InfoCenter with other internal information, for a full directory for the company. It doesn’t really change the services that a VAR can provide, but it eliminates the service of setting up a server and selling a server.

What vertical markets and other technologies do you think VARs should be focused on?

Certainly government is an important vertical market. Government is behind in IT investments in certain areas. In terms of technology, look at smart phone integration, cloud, ways to reduce costs into an ongoing monthly or quarterly expense of IT infrastructure.

Next: Mobile Apps Will Lead To Big Channel Opportunity

It seems smartphone integration into an existing IT infrastructure is an interesting area and one where I don’t hear VARs doing a lot of talking about, especially as more business-focused Web apps come to the market. How much opportunity is there for VARs?

It’s a developing area. One of the valid concerns we had two years ago was that the smart phones were there, they have power and connectivity, but you didn’t have the stable environment from a software perspective. No player had a large market share. As a developer, if you invest in one architecture, you have to do four or five architectures. Today, there’s BlackBerry, Google, iPhone. Three strong players. You can invest in one of those and find real groups of customers that you can serve.

Do you envision the Oracles and SAPs of the world being able to run their software, or utilize their functionality through a smartphone on a grand scale?

I’m not connected to any of those vendors, but I certainly believe that will happen. Banks have released a lot of app clients that allow you check your account, make transfers, etc. I can’t imagine why other software players would not follow suit. Why wouldn’t an ERP vendor want to provide an app to create greater stickiness? It’s a greater revenue opportunity for them.

Do you think smartphones might eventually replace laptops or PCs in a lot of corporate environments?

If you look at what’s gone on, it’s the consumerization of technology. The corporate road warriors are hauling around a PC that has a significant level of power to it. Then Netbooks came out and started to really grow because the [road warriors] figured out you don’t need to haul all that power around, the smartphone fits in under the Netbook. What happens is you and me and the road warriors three to five years from now, we won’t travel with a PC anymore. If you watching TV programs or movies is the last reason you carry a PC, that will disappear because the netbook or smartphone functionality will overlap it.

What do you use your smartphone for?

I certainly use it for e-mail, calendar, IM, Skype calls, especially for international calls. I use WebEx on it. I can see presentations on a smartphone.

Is the reason you don’t use it for more sophisticated business functionality a case of you not being ready for that, or the technology not being quite ready yet?

It’s very close. If I’m in Europe, I take a PC because I may have to type several pages and you don’t want to do that on a [touchscreen]. You want a keyboard. That happens frequently. But that will be resolved, that will move forward pretty quickly.

Finally, with all the things that have changed over the last 25 years, what has stayed the same?

In the earliest of days, we got excited to make customers more competitive, more successful. Twenty-five years later, we’re still doing the same thing, only now it’s in dozens of languages, dozens of countries. It’s a philosophy resonating well and I’m excited to see where it goes.