The Clouds Begin To Part: Where Do Distributors Fit After The Storm?

September 24, 2009 at 11:25 pm Leave a comment

A View on the Vendor/Distributor Relationship from the GTDC Annual Summit
By Beth Vanni – Director, Market Intelligence

Top channel support functions that distributors help with to increase ease of doing business for vendors' partners (Amazon Consulting Cost of Complexity Study)
Top channel support functions that distributors help with to increase ease of doing business for vendors’ partners (Amazon Consulting Cost of Complexity Study)

At last year’s Global Technology Distribution Council (GTDC) most of the conversation was about access to capital and credit.  The bottom of the recession was looming straight ahead and the fear about IT product demand drying up was very palpable.   Fast forward 12 months.  This year’s event is decidedly more optimistic.  The major distributors have undoubtedly had a tough year, along with their major vendor partners, but by all indications of average selling prices, unit sell-through and pipeline forecasts, the major distributors think we’re all climbing out of the bottom of the trough.

During this time, the normally cost-vigilant and operationally efficient distributors have battened down the hatches even more.  Average operating expenses as a percent of revenue for the GTDC members (the who’s who of global distributors) have fallen a full 100 basis points from 6.8% in 2003 to 5.8% in 2008.  Return on working capital numbers have peaked (~17%) and gross margins haven’t fallen by much.   Inventory turns are at an all time high, and the distributors are watching every penny of their costs.

But with only 3.5% sales growth year over year since July of 2008, the distributors are now actively searching for the next big growth market around which to manage the supply chain.   Netbooks, smartphones, next generation wireless networking and virtualization remained the buzz of this conference.  No surprises there.  Paul Otellini, CEO of Intel, stated his company’s goal to be in the business of producing billions of units of converged mobile computing devices, at an avg. end-user selling price of about $100 within 5 years.  Wow, if that kind of volume market doesn’t appeal to a distributor, nothing will!

But, high volume commodity hardware and software has always been the stable of distributors’ focus.  There’s nothing new about that, other than the fact that distributors have the lowest cost structures and the greatest operational reach they’ve ever had to move products to broad markets.  What is remarkable, however, was that most of the future high-growth markets discussed at this conference don’t necessarily have a play for distributors.  At least not the distributors of the last several decades.  Most of the vendors sitting in this conference were traditional volume hardware companies – Xerox, Philips, Sharp, Lexmark, HP, Cisco.   The emerging leaders in cloud computing, SaaS-delivered applications, and managed services weren’t represented.  In fact, there were very few software publishers in the room.  Yes, there are some early models maturing around distributors taking a role in automating the billing, financing and agent models for some vendors’ MSP programs.  And the more innovative distributors are building their own managed services capabilities (think Ingram’s Seismic platform).   There’s no doubt that keeping the transaction and money flowing even in these new product delivery models is very important.  Someone’s still got to be the plumber and bank, even as bits are built and consumed in the cloud and IT shops increasingly manage their equipment off-premise through an SLA.

Clearly, every distributor at this conference has a variety of services directed as the sales, marketing and technical competency of its solution provider customers.  “Services” directed at better channel partner enablement, business planning, co-marketing support will always need to be done by someone in the IT channel food chain.   As distributors have become increasingly sophisticated here, vendors are more willing to defer to these services to their two-tier partners.  But, the model where distributors build their own network operations center (NOC), own or lease equipment as a managed service (think Synnex’s PrintSOLV offering) or deploy their own certified engineers to supplement resellers’ own staffs isn’t very well understood, or visible.   The majority of vendors in the GTDC conference were still wrapped around the basics of unit shipments, margins, returns management and marketing programs.

The future of “smart” distribution as I see it has everything to do with two things:  a) how the sell-through transactional data is used to anticipate market needs and build multi-vendor solution offerings with/for resellers, and b) distributors finally convincing vendors to totally outsource core partner enablement and support functions like certification training, help desk management, deal registration management and license and configuration tools.  Most vendors are using a small fraction of many distributors’ current capabilities – and, by the way, frequently complaining that they’re spending too much with the distis for those services.

Today’s multi-billion dollar distributors have the capital and reach to totally change the economics of working through two tier distribution.  We’re at a critical inflection point, as we begin to come out of this recession.  The vendor, distributor and solution provider can redefine who does what in the food chain, and how each can focus on their core competencies. If this shift to leveraging the resources and capital invested by distributors more fully doesn’t happen in the next 3-5 years, I predict we’ll have a “back to the future” model.  Distributors will be selling $250 netbooks by the millions and complaining about the margins.   Let’s not miss the huge services development and deployment opportunity inherent in this next wave of technology innovation.  There’s plenty of services for everyone, as long as each group focuses on its areas of expertise and pays others in the food chain to manage theirs.

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Entry filed under: Industry Perspective, Live from Events. Tags: , , , , .

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