Q&A: Tech Data CEO Bob Dutkowsky Talks Tech And Ever-Changing IT Industry

Exclusive: Tech Data CEO Bob Dutkowsky

Following his company’s fourth-quarter earnings call, Tech Data CEO Bob Dutkowsky spoke with CRN about the year the distributor has had and where he sees the Fortune 500 company going. Aside from that, he shared some insight into the biggest challenges and opportunities he sees solution providers facing today and what they need to do going forward. Additionally, he emphasized the importance of being able to adapt to an ever-changing IT market.

Here are 15 questions with Dutkowsky.

What stood out to you the most about the past year at Tech Data?

The company really had a strong and balanced performance. We had double-digit growth in earnings, ... but our sales only grew 3 percent. In the world of Wall Street, that’s called leverage. When a company of our size can get leverage, 3 percent sales growth equals 10 percent improvement of profit. That’s a very good performance for a company of our size. …Tech Data has more than 60 percent of its revenues … in Europe, so the softness of the exchange impacts Tech Data even more than many [companies]. Even with that impact of the euro, Tech Data still delivered that kind of return. … That’s the highlight of the year from our perspective: We’ve transitioned from one, to the next, to the next very successfully.

Your margins were smaller this quarter than they were a year ago. What is driving that down?

It's just the mix of the products. When you mix together $27 billion worth of products, and let’s say there is more software in the mix one year versus the other, where margins are lower, it doesn’t necessarily mean that the business is bad, it’s just what the market offered. …

If you look at just one element of a company’s performance, it could go up or … down. … A well-run distributor has … three metrics that they manage. … Those metrics are revenue -- you have to sell a set of products and services; you have to measure the operating income that generates -- both the number of dollars and the percentage; … and all of that creates return on invested capital metrics.

What kind of investment are you making in emerging technologies?

Remember, we’ve been in this business for 40 years now. Think about the number of times technology has had major changes in the way it works. We started out way back when the mainframe was the primary computing environment, and then the PC came along and the client server market emerged, … [then] the Internet, mobile computing and now the cloud. If you just look at the cloud, you’d say, "Oh my god, that’s a big change to deal with!" but if you look at it in terms of ideas transitioned over a long period of time, … it’s a core competency of Tech Data to deal with these new computing environments. We’ve transitioned from one to the next to the next very successfully over time.

It was mentioned on the call that there is an opportunity in the U.S. in VARs that are not Tech Data partners. What did you mean by that opportunity?

Even though we are one of the largest distributors in the U.S., there are still thousands of customers that we don’t do business with today. It’s either that we haven’t historically had the products that they want or we don’t have a relationship with them. One of the things we actively embark on in the U.S. is to reach out to many of those resellers that don’t do business with Tech Data today and to try to understand how we can serve them. We won’t gain all of them, but there are a group of customers out there that we have targeted that we want to make sure that over the course of the next year we form a business relationship with.

What areas are you seeing the most demand from, and conversely, where are you seeing a dip in demand?

Over the last year, the strongest demand was in the PC segment. You look at HP and Dell and Lenovo, they all had good PC years partly because of the Windows XP expiration, but also they’ve all come out with neat new products, and that’s created market opportunity.

Therefore, probably the weakest segment was the data center, particularly in the server space. Storage did OK, and networking did OK, but the server space didn’t grow at the [level of] expectations that we had, nor did it grow at the [level of] expectations of HP or IBM or Dell, or the companies that are really the leaders for the server space.

So when you said during the call that demand in the U.S. was down, were you talking about data centers specifically? Or were you talking about a wide range of products?

The one that had the largest miss against our expectations was the data center. As an example, the tablet market shrunk over the course of the year, but the PC market and the laptop market [were] very robust. People decided that the tablet didn’t do everything that they wanted it to do, and they bought more laptops. That’s the beauty of the Tech Data model. … If one piece is down, chances are another piece is up. … The breadth in diversity of our model really shines through because of that concept.

What do you want the balance to be in your portfolio with these emerging technologies?

We don’t break out that split, but we’re going to reflect what the reality of the market is. If the market didn’t want tablets but it wanted laptops, then Tech Data is going to have lower sales of tablets and higher sales in laptops. We don’t make the market, we just respond to it. You could step back from the whole IT spend and Tech Data is going to look like what the IT spend is. I think today groups like IDC and Gartner say the cloud spend is about 5 percent of all tech spending. In five years or so it might be 10 to 15 percent of all IT spending. It’s safe to say that Tech Data is going to look something like that.

On the call, you mentioned you are trying to 'be more nimble.' How are you doing that?

If you look back, … there was one person who had responsibly for the VAR opportunity, for the big national resellers like a CDW, for the retailers, for mobility -- it was all in one place. … We broke that … up. … Now there is one sales organization that is focused on the VAR channel and resellers. Another is focused on mobility and retail. Another on the supply chain initiatives. … We broke the big element up into smaller elements that are a little bit easier to understand, where we can put resources where we may have skill deficiencies, where we may need to recruit new vendors to strengthen our offerings. … When you get big, you break big things up into smaller pieces.

What can we expect to see from Tech Data over the next year?

We’re not focused just on the top line. We’re focused on balance. I would look for us to have another year like we did last year where we grew sales at one rate, but we improved our profit at a rate that’s higher. We improved on our return on invested capital metrics at a rate that exceeds the rate that our sales grew at. That’s that leverage concept. … Look for Tech Data to continue to strive to deliver that kind of leverage back to our shareholders. In order to do that, we have to bring different products and different services to the market that have different profit profile, and those are the places that we continue to invest and to grow.

What are the biggest opportunities for solution providers going forward?

Many of the solution providers are very narrowly focused. … So if they sell desktops and laptops, there is opportunity for them to move into the data center. If they are data center resellers, there is opportunity for them to move into the end-user devices and secure those with mobile device security offerings. If they’re a retailer, there is opportunity for them to add more product lines. …There [are] all these opportunities, and another reason why Tech Data is so attractive … is because we have all of those offerings. We’re able to talk to these solution providers that maybe have a narrow focus and expand their horizon into selling more. … The concept is a larger share of wallet.

Where are solution providers asking for help?

They all want help in building the skills that are necessary to support these different products. Our vendors are constantly investing in innovation and bringing new products to the market. The resellers turn to Tech Data to get the skills to sell those new products. … I’d say another … is they have much less interest in handling hardware and more interest in adding value through services and support and cloud implementation. … Many of the resellers are turning to Tech Data to say, you help me with the hardware. I don’t want to worry about hardware. … You can help me configure it, and you can ship it to my end-user directly, … and then my people add value to it through services capabilities.

With it being in the news this week, how do you view industry consolidation?

We’ve been at this for 40 years. We’ve watched customers grow up and become big. We’ve watched customers fall upon hard times and shrink and disappear. We’ve watched businesses combine. … We’ve watched divisions get spun off. When you have 115,000 customers around the world, something is happening like that all the time. … That’s why it’s important that we have good relationships with these customers because as they combine, … if a Tech Data customer and a customer from another distributor come together, well, suddenly there is an opportunity. … We pride ourselves on the relationships. … We invest heavily in making sure that we serve them so when these transitions happen, those jump balls are things we want to make sure we win.

What kind of opportunity does Server 2003 present for you?

There are literally millions of servers out there that are running on that Windows version that will become unsupported in the summertime. … Some of them will be replaced. Some will be replaced with one big server that has lots of virtual servers underneath it, so a bigger server with products like VMware will be installed there. We sell that. Some of them, the application will move to a mobile device. We sell laptops, tablets and smartphones. Some of those applications will actually move to the cloud. We sell offerings from SoftLayer, an IBM cloud offering. … As the Windows Server 2003 support expires, we’re in a great position to help lead our VARs and their customers to a solution that works for them.

Is it important for a VAR today to move to an MSP model?

For some VARs, it makes a lot of sense, and they’re making or have made the transition. … It’s a daunting task for a VAR to suddenly wake up one day and be a profitable MSP. … I don’t think you’ll see the vast majority of VARs become MSPs. I think you’ll see some become MSPs, just like the way you saw some VARs that resold PCs become VARs who sold products in the data center. Some VARs who sold hardware become resellers who sell more software and services. It’s just a transition that constantly happens in the IT space. The well-capitalized and nimble businesses make those transitions pretty effectively, and the ones that are not well-run and not well-capitalized struggle.

Any closing thoughts about the position of Tech Data today?

We just completed another year in the business. We just celebrated our 40th birthday this past year. The strength of our company is our ability to adapt and adjust to an ever-changing IT market. Through partnerships with the right vendors and the right customers, we’re successfully navigating this dynamic and unique IT market, but for us it’s not like a revelation -- we’ve been doing it for a long time. We know how to do this.