Distribution Walks A Fine Line

This is not the distributor of five years ago. Traditionally, distributors played a distinct role in the channel. At the most basic level, they provided pick, pack and ship services to resellers, and at the most sophisticated, they offered configuration and back-office support. Regardless of where they each fell within that spectrum, distributors always remained the provider behind the curtain—mostly invisible to the customer.

But the role of the distributor is changing, particularly in the government channel.

"I think that [distribution] is reacting to revenue pressures, trying to grow their business in markets where they can turn a buck and still accommodate the channel relationship," says Augustine Riolo, COO at Virginia Beach, Va.-based Knowledge Information Solutions. "No harm, no foul yet. But they know that the channel is resilient. If we see this going away from us, we are going to make a converse move—lots of individual moves by hundreds of VARs away from the perpetrator. The distributor will lose control of their customer base, and it will impact their bottom line."

Next: Moving Out Front Moving Out Front
Virtually all distributors that do any substantial amount of business in the government market offer programs that fall outside the box of standard distribution services. And resellers generally value those programs, according to GovernmentVAR's Government Satisfaction Survey of 300-plus solution providers that target the public sector. While results originally published in December 2006, satisfaction ratings for distributors were not released.

Of those surveyed, 38 percent said they were very satisfied or extremely satisfied with their primary distributors for public-sector solution providers. On a scale of 1 to 9, nine being extremely satisfied, solution providers gave an average score of 8 to their primary distributors. No vendors included on the survey came close to earning as high of a mark.

High satisfaction among channel companies is largely due to custom support services offered by distributors. Now more than ever, however, the specifics of programs differ greatly from distributor to distributor. Avnet's Government Market Expansion Program, for example, aligns resellers with vendor sales managers and procurement specialists from government IT market intelligence firm Federal Sources (FSI) to identify opportunities that best match their core competencies. Avnet's government team helps resellers pursue those opportunities, tracking progress and providing necessary support.

Compare that to Tech Data's recent announcement of new benefits offered through its TechEDG public sector program, including integration services that provide VARs 48-hour turnaround for all federal solutions and custom packaging that meets specific government contract requirements. Tech Data prepares the material inspection and receiving report, also called a DD Form 250, which is required with all orders under NASA's Solutions for Enterprise-Wide Procurement contract. The distributor then drop-ships the products at the customer site, saving resellers the trouble.

And Westcon Group, which launched its federal program in 1995, works directly with partner Nortel to provide the support needed for small disadvantaged businesses to win prime contracts. They accompany the resellers to networking events and demonstrations with customers.

"We, too, get in front of federal end users, because the power of three is better than the power of one," says Stuart Schwartzreich, director of federal programs at Westcon Group. "We want that small business to look like a General Dynamics."

Other initiatives are a bit bolder. Synnex and Westcon Group's Comstor division are among the distributors that hold their own GSA Schedules, which resellers can leverage as agents to sell to federal agencies. Ingram, Tech Data and others offer pass-through programs, managing the schedules of manufacturers by providing letters of supply, certifications and GSA pricing to resellers.

Through Ingram's Prime program, which was first launched in November 2006, state and local government, and education contracts are bid on directly and managed by the distributor, who divvies the workload to resellers. The theory is that Ingram acts as a facilitator of public-sector contracts, while members of its GovEd Alliance program act as the sales and services team that manages the opportunity. Perhaps treading gingerly, the distributor has yet to announce any major contract wins resulting from the program. It also has no plans to bid federal contracts direct, due largely to complex acquisition regulations that would require substantial adjustment to back-office processes.

Similarly, under an outsourcing initiative announced by Synnex, resellers can subcontract engineering and IT services to the distributor on government contracts. For example, if a small business gets wind of a set-aside opportunity with the Department of Homeland Security, it may tap SAIC to provide technical services, General Dynamics for information assurance solutions and Synnex for IT integration. The small business pays a fee for service to Synnex, which may be rolled into the opportunity or offset through aggressive pricing for hardware, said Eddie Franklin, associate vice president of government programs and field sales at Synnex, when the strategy was announced in March 2007. By making Synnex a player in the opportunity, the reseller theoretically has more options available to adjust the bid to meet the customer's requirements.

Next: Servicing The Channel, Or Overstepping Servicing the Channel, or Overstepping?
As distributors step out, are they and the customer getting too close for comfort as far as resellers are concerned? Both Synnex and Ingram say no; the new models simply make small and midsize businesses more competitive in the government market.

"We're getting into management of contracts and program rollouts," says Bob Laclede, vice president and general manager of Ingram Micro's government and education business. "The opportunities are not small anymore. Mega contracts and purchase orders—worth $5 million to $20 million each—have to be shipped to hundreds of locations here and overseas. For small and midsize VARs, it's hard to maintain the resources. A distributor can handle it. This is not about going around them; it's about empowering them."

Some solution providers agree.

"Yes, distribution is moving closer to the government customers for direct business," says Terry Castro, vice president of Tampa, Fla.-based American DataComputer Products. "But by developing these channel programs, they are also taking us with them. These programs only enhance our image, capability and presence with our customers."

Knowledge Information Solutions holds its own GSA Schedule, but relies on the contract held by Synnex for the generic products the company doesn't carry. The distributor's market power and available resources provide the ability to negotiate letters of supply that most resellers would never be able to get, Riolo says, and to take on the onerous, time-consuming and expensive task of managing a GSA Schedule. Synnex picks up market share by providing a service, and resellers focus on selling.

But not everyone is comfortable with distributors inching closer to the customer—particularly when their names end up on contracts. The trend has actually split the distribution market in two, with some viewing a direct-contracting strategy as the latest value-add to make resellers more competitive, and others asserting the importance of a three-tier model that keeps the resellers in the driver's seat. Performing services directly associated with contracts may make one reseller more competitive on a bid, they say, but it also claims revenue for a distributor that would otherwise go to another reseller.

"Every point you take out for yourself is one less the channel can play," says Mike Atlee, director of Avnet's government business. "It's fine to say, 'We'll take this piece on because you don't have the capabilities,' but if I formalize that program, I own it and take away the reseller's opportunity to learn and grow their business. We could be representing a number of vendors on the GSA Schedule, but I don't think that's our job."

These companies also tout huge credit lines, full portfolios of products, relationships with major vendors and industry knowledge; to some, access to contracts could be that dangling carrot that tempts distributors to compete head-on with resellers. Both Synnex and Ingram insist this will never happen, but perceptions alone can be damaging.

"Where this is bound to turn negative—though I have not seen this yet—is in direct bids by distributors against their channel partners," Riolo says. "My reaction [would be], 'Not in my backyard.'"

Next: The Heavy Hand Of Vendors The Heavy Hand of Vendors
Distributors might not be solely responsible for programs that increase their profiles with the end customer. Vendor partners often influence distribution strategies by handing off channel services—even if it's not in anyone's best interests. With revenues a driving force behind their decisions, vendors are trying to win government business without leaving money on the table, Avnet's Atlee says. Distributors are left to either comply or push back.

"[Take] pass-through programs where [distributors] give out GSA letters of supply for many manufacturers," says Robert Deitz, president and CEO of Shingle Springs, Calif.-based Government Technology Solutions. "Distributors have thousands of customers. Some are pretty good at what they do, some are not. But the temptation to try and lock someone in for their business must be pretty great for anyone in sales—so letters of supply [go] out to people that are damaging to the respective manufacturers. The wrong [strategy]—intentional or not—can stop a manufacturer from being considered by a federal agency. Manufacturers are playing with fire here."

Ultimately, distributors may be the companies that suffer most from initiatives that, perhaps, save the vendor money and effort, but overextend distributors' own resources and inch in on margin that could otherwise be passed on to the reseller. Chances are, some will be short-term plays. Distributors will launch initiatives, the channel will react negatively or walk away, and distributors will bury them with the vendor's blessing. But in the meantime, all channel players may be impacted.

"This is another case of vendors trying to be creative in expanding their piece of the pie," says Reza Zarafshar, president and CEO of McLean, Va.-based Advanced Computer Concepts. "This confusion does not at the end of the day help the customer, it certainly does not help the relationship of the distributors and the VARs, and I doubt it makes any money for the distribution channel, which runs their business at about 2 to 3 percent profit margin.

"All these new programs and directions are adding unnecessary headcount, which is going to shoot expenses way up," he adds. "Besides, the distributors are going to be in for a rude awakening when they see how cutthroat the government business is. They'll find this out when they have burned lots of cash. I doubt anyone in this business can say that the model of being both a reseller and a distributor is worthy of emulation."