CRN Exclusive: ScanSource CEO On How Consolidation Is Impacting Distribution

Consolidation And The Value-Added Distribution Business

ScanSource, the Greenville, S.C.-based value-added distributor, has in the last 21 months acquired Intelisys, a provider of telecom services through master agents, and POS Portal a distributor of point-of-sale services for SMB merchants. In addition to expanding the breadth of product offerings that ScanSource provides its channel partners, the distributor has also expanded the company's channel to include traditional solution providers, telecom agents, MSPs, and ISOs (independent sales organizations).

But even as ScanSource's product and channel breadth increases, so does the level of competition. Broadline distributors like Tech Data and Ingram Micro are also making acquisitions that are bringing them increasingly into the valued-added distribution business that has been ScanSource's focus.

Mike Baur, ScanSource CEO, recently sat down with CRN to discuss his company's business and changes in the distribution arena that are impacting all of his company's peers. Turn the page to learn more about how consolidation is impacting the value-added distribution business.

Broadline distributors seem to be pushing into the value-add distribution market that has been ScanSource's' mainstay. In the last half-year or so, Tech Data acquired Avnet's Technology Services business, and Ingram Micro acquired The Phoenix Group. Are you seeing more competition from the broadline distributors?

When I look over the 25 years that ScanSource has been in business, we've always selected markets that have been underserved by traditional distribution. [As we] entered new markets, even when we entered Latin America and Europe 16 years ago, and when we bought Intelisys two years ago, we have a track record of entering growth markets ahead of other traditional distributors. And that's really why we started ScanSource, to go after underserved markets for distribution. And it requires a different agility, a different distribution model, than the one that you would normally find at the broadline distributors.

How so?

[Our] model brings higher growth margins, but also higher SG&A [sales, general, and administrative expenses]. And that's been the history of ScanSource. We have higher margins, but we also have higher costs to serve. And this particular quarter, with the additional cost to serve, we've added even more resources ahead of some of these growth opportunities paying off because we believe they're leading us down a path of better returns and better results for our investors.

Of the six growth opportunities you talked about on the conference call, one of them is point of sales, which is the focus of Ingram Micro’s acquisition of The Phoenix Group. Did that acquisition push ScanSource to focus more quickly on new opportunities for channel partners?

We have always led the way. We acquired POS Portal before Ingram Micro acquired The Phoenix Group. So we were very cognitive of the potential competitive landscape when we acquired POS Portal. In fact POS Portal was competing with The Phoenix Group for many, many, many years. So really nothing has changed there. We believe that when a broadline player enters our space, this validates [that] it must be a great opportunity. And we always look at that as, 'Hey, we definitely made a good decision if these guys are now going to put their investment dollars there too.'

Why would broadline distributors target a market like point-of-sales equipment?

The reason they come into these markets, they being the broadline distributors, is because they want to make higher margins. And so why would we be worried about someone wanting to make high margins? It’s only when they want to come in and make low margins to dominate a market that we worry. But it’s not those markets that we are in. So we think it’s exciting. It means that the marketspace must be growing and valuable. So it’s a good thing.

But don’t you see increased competition negatively impacting margins?

I’ve been doing this for 25 years. And if you look at our gross margins, they’ve been unaffected by new competitors for 25 years. I don’t want to sound arrogant, but we believe that customers at the end of the day choose the distributor they buy from based on value received. And we recognize that it takes an investment in SG&A that leads to a higher margin expectation by the customer. New competitors is something we have been used to for 25 years.

How has the Intelisys acquisition impacted channel evolution at ScanSource?

At ScanSource, you have all of these various channels, all these various routes to market. So with Intelisys, we picked up an agent channel that was new to ScanSource. The overlap between ScanSource VARs and MSPs and integrators and with Intelisys was [limited]. When we bought POS Portal, again, very little overlap with their ISOs and ISVs.

It’s interesting that there is sometimes competing and other times separate channel routes to market that exist, and we don’t spend enough time as an industry talking about it. We’re saying we’re trying to compete in the same channel as other distributors where, in reality, let’s go find some new channels where there is no distribution. That’s let us make some of these acquisitions where we are not only acquiring a new offering but we’re also acquiring a new channel. And that’s what’s really exciting about what we’ve done. We’ve got new customers that were not existing ScanSource VAR customers.

How easy is it for a company like ScanSource to expand into new channels?

One of the things that’s a lesson learned for us over 27 acquisitions is, we don’t go in to try to create synergy’s when you make an acquisition. Creating synergies means you go in and fire a bunch of people to make them revert to a model that already exists. We take the existing successful companies that we’ve acquired, and we always buy successful companies, and give them more resources, both financial and in some cases expertise. But in the case of these two acquisitions we’re talking about, POS Portal and Intelisys, the management teams are still there. And in fact with Intelisys, in two years we’ve almost doubled their employees that are focused on Intelisys. And so we’ve learned that you have to allow them to run the business with the same go-to-market, the same team, that’s working with customers. And then we provide back-office integration and access to financial resources to allow them to grow even faster.

Over the years have you seen your competitive environment change because of acquisitions like Intelisys and POS Portal?

Really, the same competitors are there. In Intelisys there are these master agents, and Intelisys is the largest and fastest-growing company in that space still, even with other companies like ScanSource looking at this space. And so the reality is, the market itself is growing faster than any new competitors coming in and affecting our growth potential. So our growth potential is not affected by new competition.

Looking forward, do you see your VAR channels and agents converging or staying the same or moving further apart? What are the dynamics of your channel?

Being around the channel for a long time, one of the lessons I’ve learned is that these companies, whether they’re called VARs or agents or ISOs or MSPs, these are all independent business people. And I’ve learned you could never count them out even when a supplier or vendor tries to change the channel programs that puts pressure on them or when there is financial pressures in our marketplace like the recession of 2008. These independent people find a way to make money. And whether they’re called a VAR or an ISO, what we're really finding is they can get just as excited about recurring revenue as an agent. And an agent can also get just as excited as a VAR about selling some hardware to create a total solution to satisfy their end-users.

What does that mean for ScanSource?

I think the dominant theme that we operate under is, let’s assume that [these different channels will] all survive, and let’s find a way to let all of them grow. And so our goal at ScanSource is to help all of our channel grow, and assume that they’ll all survive, and let’s find a way to let all of them grow. And so our goal at ScanSource is to help our channel grow. The first question I ask a partner today is, 'H ow can we help you grow?' And that gives us guidance as to where we need to make our investments.