Tech Data: Where It's Going, Where It's Been

Tech Data Chairman and CEO Steve Raymund is leading the Clearwater, Fla.-based distributor into its fourth decade. Raymund recently spoke with Distribution Editor Scott Campbell about Tech Data's first 30 years--and its future. Here are excerpts from the conversation.

CRN: Let's start with a big question: How will the channel change over the next five years, and how will Tech Data's revenue change in the next five years?

RAYMUND: Channel changes will be a function of two major factors. First is technology and its evolution. We'll see a lot of innovation and new technology produced by our suppliers. Some will be more complex. Some will be more commodity-oriented and create opportunities for both ends. The next point, we will continue to see evolution in different business models, with growing strength among those resellers that specialize in vertical segments. You'll see more fragmentation and segmentation in the customer base in accordance with technology.

CRN: Where do you see Tech Data five years down the road?

RAYMUND: Five years down the road is way beyond my limited ability. You can look at some faster-growing areas in our existing portfolio. I can comfortably say that we foresee growth in those segments. Some might be storage solutions, IP telephony, mobile communication, POS/data capture. Security, obviously, is an area of enormous investment and focus by the OEMs, which accordingly will mean significant opportunities for VARs that practice in that area.

CRN: What do you look for when you are considering adding a vendor?

RAYMUND: Our current strategy is to focus on digital technologies. Anything that goes digital in the information technology world is fair game. If we stray too far out of that range, I fear that the industry-specific requirements would be more difficult for us to meet. We see lots of volume technology opportunities, more for our DMRs or retailers, to sell flat-screens, surround-sound systems. At the same time, particularly for higher-end homes and businesses, integrating diverse pieces of technology into user-friendly solutions will require the assistance of a VAR. We try to build our capability and product portfolio around that.

CRN: Have you put any of the new technologies into personal use?

RAYMUND: We're building a new house on the beach. Just this afternoon I'm going to meet with the reseller that we've used successfully in the past to review the new solutions out there, with the inclination to specify technology distributed by Tech Data. I'd like our house to be a showcase for products by our own vendors.

CRN: What does the channel need to do to prepare for the future?

RAYMUND: I'd like to see [the channel] aggressively embrace new technology opportunities. The tendency we all have is to fall back on what we know best and fear what we know least. This will require a shift outside our comfort zone. It requires a lot of learning and effort in areas [such as] IP telephony, the digital home and IT convergence. I think those offer the greatest growth opportunities. That means a transformation of many of our customers from what they have been doing successfully into a different business model with a different set of core competencies. It requires a big investment to create the infrastructure to serve customers in those emerging segments.

CRN: Can you build a business that is initially unprofitable?

RAYMUND: It's a constant struggle to reconcile the need to deliver good earnings performance to shareholders while also providing investment necessary to guarantee our future. A lot of newly emerging technologies require a greater investment up front than we are used to making. Until two or three years ago, our investment was characterized more by increased capacity and productivity. We would find ways to sell existing products more efficiently and at a higher volume. Going forward, the investment we make has less to do with capacity--although we continue to emphasize efforts to improve productivity--than it has to do with the competency to support customers in new markets. We have to acquire the products, recruit new salespeople, get more technology support capabilities. To really launch a good [business], we won't see traction for between 12 and 24 months.

CRN: How far out do you plan your business?

RAYMUND: It depends on the category. There are certain areas that we make investments for a much longer time horizon. In Europe, we're spending two or three years upgrading our IT systems. That should be completed in a year. That's not an 18-month project. That is a span of more than three years, at end of which we should have a foundation that should last 15 to 20 years. It's a very different investment needing to upgrade our core infrastructure to support the business.

CRN: What are some key moments for the company in the last 30 years? I would think getting IBM authorization and the Computer 2000 acquisition were big.

RAYMUND: When we got into selling hardware, around 1984 or 1985, we were a small company late to the party behind the titans of the time like Micro D and Softsel and Microamerica, who were 10 times larger or more. Plus, you had the franchises like MicroAge or [Intelligent Electronics] Connecting Point.

Other milestones were going public and all of the recognition and change that accompanied a watershed event like that. My own shares become liquid and valued in a public way. I wasn't used to that. The local press made a big deal, and CRN make a big deal, of the total value of the shares. Learning how to live in the public eye from that standpoint was uncomfortable at first. But after a while, one grows accustomed to it. It was not a huge price to pay for access to the capital that we sorely needed.

CRN: How much did you raise with the IPO?

RAYMUND: We raised about $10 million to $12 million for working capital.

CRN: What did you use the money for?

RAYMUND: In those days, as the business grew, our working capital requirements also expanded, usually at a rate greater than our ability to fund operations through attained earnings. Ultimately, in the first few years, we reached the limit of the bank's appetite to support growth requirements. We were borrowing so much money and exceeding our ability to lend. Every year for four or five years, we were forced to switch banking partners or issue more equity because banks were unwilling to fund the growth we were achieving in the market.

CRN: Why would banks get nervous when you were growing?

RAYMUND: They get nervous that we might trip up. Then we would be unable to service the burgeoning debt load we were carrying. It's a logical concern, and it would come to the fore with any recession.

CRN: Was Tech Data the first company to become a national broadline distributor?

RAYMUND: Softsel and Micro D were national players, along with Microamerica. At the time, they were demarcated by hardware and software. Eventually, all the products were available under the roof.

CRN: When did you realize the company was really poised for growth?

RAYMUND: The first major left turn that represented a clear departure was the decision to move into strictly wholesale distribution of our same products. That was in the 1982 time frame. The next major shift was when we expanded our product portfolio with hardware in 1983 to 1984. Then came geographic expansion concurrent with all of that. Step by step, we added [distribution] centers around the country to fill out coverage. We opened warehouses that tied in electronically with our headquarters.

At the time, we also kept our sales and marketing here in Clearwater, relying on field sales and a warehouse to provide the local support coverage. We didn't replicate sales and marketing and other front- and back-office functions at each location. They operated strictly as warehouses vs. branch offices, which proved too costly to support. We started that in the mid-1980s after going public in 1986.

CRN: How about picking up IBM?

RAYMUND: We were acquiring some of the PC product lines like Compaq and IBM, initially to sell to the VAR base that at the time was unserved by the aggregators. Subsequently, companies like IBM and Compaq moved away from regulated distribution, the Medallion model, into more of a free market. That foreshadowed the demise of aggregators, who were unable to transition to the new environment, companies like Inacom, MicroAge, Computerland, [Intelligent Electronics]. None of those companies survived. They either went out of business or were acquired.

CRN: You've seen a lot of customers come and go in the last 30 years. What have the survivors done to last this long?

RAYMUND: Sometimes, it's a question of execution. For others, it was adaptation. Adaptation always is the most important reason. Some companies adapt by sticking to their knitting, continuing to operate a basic model but doing so in a more sophisticated, low-cost fashion. The best example is the [direct marketer]. I've known [former CDW CEO] Mike Krasny for more than 20 years. For many years, they were on the sidelines of the major action in the PC space. But they and others like Insight and PC Connection worked diligently to grow and evolve their basic model into something that is extremely powerful. They started on a model, and the market moved to them. They also invested in perfecting the operation of the model. Other companies started out as retailers, became horizontal VARs and now they're into a third or fourth iteration of development, by way of specializing in a particular vertical niche.

CRN: What vendors have stood the test of time, and which ones did you think would last but didn't?

RAYMUND: It's the innovator's dilemma. You build around a particular technology that works well for a while, but then better technology comes out and you have to find a better way to manufacture or distribute it because it leaves the incumbent in the dust. Some have been better than others. Years ago, we had stars such as Novell, which was a huge networking player. They're still alive but not with the same profile in the business. Cisco came almost from nowhere to a position of dominance they now enjoy in the industry. They changed over time, relying more on resellers for 90 percent of their revenue, which is the inverse of their channel strategy eight or 10 years ago, when 90 percent was direct to the end user.

CRN: Are there any technologies or vendors you thought should have made it but didn't, or were ahead of their time?

RAYMUND: Lots of companies had first-mover advantage but for one reason or another missed out. The classic example [of a benefactor] is Microsoft, who is a winner in so many different markets, even though they were often a later entry.

CRN: Who has surprised you that they didn't make it?

RAYMUND: What surprised me in our market, at least in first 10 or 15 years, was that Asian companies didn't make a stronger play and make greater success. The industry ended up with large American companies, particularly in hardware. Guys like Sony and Panasonic are major players with PCs elsewhere, but only recently here. But that is changing. The world continues to turn. You see manufacturers shifting dramatically into Asia, and you see emerging companies [from Asia].

CRN: Are you looking more closely at emerging vendors out of Asia?

RAYMUND: As a wholesale distributor, our role is to provide our customers with a broad assortment of technologies from the best possible sources. We endeavor that they buy from us regardless of the nationality of the OEM, either the manufacturer or the branded product. As it happens today, the majority of hardware components originates outside the [brand] name today.

CRN: Who are some examples?

RAYMUND: Two significant brands in Europe are Fujitsu/Siemens and Acer in PCs. They have strong positions in Europe.

CRN: How do you envision your role changing over the next five years?

RAYMUND: It remains to be seen. I'm enjoying what I'm doing now. I'm working with the strongest team we've ever had. The team will continue to develop and jell into a more cohesive fighting force. We're more of a global company these days, and I'm more involved in governance, strategy and communications, and less [involved] in operations and implementation than in the early days. Those areas are fortunate to have more adept people than I.

CRN: What do you think of when you look back over the last few decades here?

RAYMUND: It's been a great ride. I've met a lot of brilliant, famous, wonderful people. It's also been incredibly satisfying working with the extraordinary team here at Tech Data, hanging around with a bright group of guys and gals. It's incredibly rewarding to be part of this when you look at where we started and where we are today. It was made possible through human capital, which walks out the door every day. They make things happen every single day. It's an extraordinary thing.