ScanSource Continues Convergence Push

After years of being pegged as a small niche player in the unglamorous point-of-sales and automatic identification data capture (AIDC) markets, ScanSource rose to new heights in 2004. The Greenville, S.C.-based company reported strong, double-digit sales growth throughout the year, including a 31 percent year-over-year revenue jump in the first quarter for its fiscal 2005 year. While its POS/AIDC business grew respectably, much of ScanSource's success last year was attributed to the company's new ventures in networking and telecom.

But how will ScanSource continue its emergence as an elite distributor in 2005? Through its Catalyst Telecom division, the specialty distributor is looking to recruit 300 resellers to offer Avaya's voice-and-data IP office solution to the SMB market, according to John Black, president of Catalyst Telecom. The company plans to help its existing voice resellers as well as new data VARs move into the convergence space by softening their front-end monetary outlay.

"Initially, they won't have to make a big investment in salespeople. Our company and Avaya will provide design support and tech-support training. Avaya has certification programs," Black says. "We will give them a P&L and show them that this is what their margins will look like."

Both Black and Mike Baur, ScanSource's CEO and president, believe these voice-and-data VARs will need to play in the convergence space.

"How long do they have to get into it? That's the question," Black says.

ScanSource, with $1.2 billion in annual revenue, is Avaya's largest distributor, Baur says. Catalyst Telecom started in 1997 and partners with 1,200 resellers nationwide, primarily involved in voice solutions. The company's aggressive recruiting campaign is part of its plan to make telephony an even bigger part of ScanSource's business--and to give the channel a whole new value proposition for customers.

"Who will be successful in the converged space--the data resellers or voice resellers? It's a bigger departure for both than either thought," Black says. "It's a different margin model. And there are different implementations; voice can take a month to stage, while data implementations typically take a shorter time. You also have to do a network analysis to make sure it performs."

He also points out that end users think voice never goes down. Black believes, in the end, that customers will go with solution providers who know the industry--including the regulations--not just the solutions. Baur says the number of Avaya channel VARs grew approximately 20 percent this year, roughly the same amount Avaya itself grew. The CEO expects similar, "if not slightly higher growth from the channel in 2005," he says.

At the recent Raymond James IT Supply Chain Conference in New York, ScanSource officials touted the company's growing telecom operation. According to Jeff Bryson, vice president of administration and investor relations at ScanSource, telephony products now account for 44 percent of the distributor's revenue.

In addition, Bryson told attendees at the conference that ScanSource will continue its Solution City program, which includes a series of road shows for solution providers that offer training and education for emerging technologies, such as VoIP and RFID. ScanSource teamed up last month with Alien Technology, an RFID hardware manufacturer, as part of the distributor's RFID Edge program, which guides VARs on the new technology.

Bryson added that the company is also expanding internationally and said there is potential in a few years for as much as 40 percent of ScanSource's business to come from outside North America; currently, international sales account for approximately 9 percent of ScanSource's overall revenue. And on top of that, the company continued its expansion by launching a security division last fall that will focus on security hardware and surveillance products.

In a display of how strong the demand for VoIP is, Catalyst held a boot camp for the Avaya IP Office in Herndon, Va., the week between Christmas and New Year's Day--not typically the best time of year to hold a training event. However, IP telephony and digital convergence are two of the few areas that are attracting IT investment and exciting customers year-round.

To be sure, competition will be high for ScanSource. Not only is the company competing with heavies such as Tech Data and Ingram Micro (which acquired Nimax last year) in the POS/AIDC space, but distributors such as Westcon Group are also aggressively growing their convergence and telephony businesses; Westcon Group's Voda One division, in fact, specializes in Avaya exclusively. ScanSource, however, believes there will be enough IP telephony business for many distributors to enjoy.