Of Movers and Shakers

If not the ‘shakers’, IT distributors are definitely the ‘movers’ of
the IT industry. First tier companies including broad-based national
distributors like Tech Pac, Ingram Micro, Redington, specialized national
distributors like Rashi Peripherals, Aditya Promoters, Compuage, Neoteric, SES
Technologies, Wellwin, and some region-focused distributors, together account
for over Rs 10,000 crore worth of IT products being ‘channeled’ into the
hands of a multitude of resellers throughout the country and eventually reaching
the end-user.

Are these folks needed? Why aren’t these products directly sourced from
vendors? After all, you have Dell Computers selling directly to the end-user
eliminating even the reseller. And the Dell model is touted to be the most
efficient way to be in the computer business. Yet how many Dells exist?

The truth is that the Dell model does not always work with vendors. This
model would require vendors to adopt a different mode of operation altogether.
It would entail a different approach for functions like sourcing, manufacturing,
support and product management as well as alter business dynamics like scale,
global reach, product mix, price sensitivity, and others. Without having the
distributor stocking up on finished goods, everything we buy from original
electronic manufacturers (OEMs) or vendors would either be forecasted orders or
products delivered just in time. This would substantially lengthen delivery
time. Distributors thus impart speed to the business.

Knights in Shining Armor Using a distributor’s network could work better for everyone–the vendor, reseller and the end-user Distributors impart speed to the business Broad scale IT distribution is the most cost-effective way to reach your customers A broad-based IT distribution model gives you the ability to manage a large customer base and yield efficiencies from the supply chain Distributors help vendor organizations with active working capital support Distributors play the role of information purveyors Distributors ensure value-adds like tech-certified manpower, presales, and post-sales support For resellers, distributors assure easy availability of products so that their investment in inventory is low Distributors share high quality information and knowledge and logistics support Resellers and solution providers can substantially cut down on procurement costs using distributors

Says Tech Pacific India CEO K Jaishankar, "The Dell model apart, broad
scale IT distribution is the most cost-effective way to reach your customers as
it is based on the theory of economies of scale". The power and value of IT
distribution comes from leveraging cost efficiency over multiple brands and
products combined with physical access to wide markets.

A mature IT distribution model is the hallmark of the development of an IT
market. A broad-based IT distribution model gives you the ability to manage a
large customer base and yield efficiencies from the supply chain. Systems and
processes further add value to the supply chain. And the advantage for vendors?
Distributors take over the risk by buying and stocking up on their products and
clearing their inventories. In other words, it helps vendor organizations with
active working capital support. Apart from this, distributors play the role of
information purveyors to the IT reselling community. Without the distributors in
place, this exercise would not only be difficult but impossible in many cases.
Add to this, specific value-adds in terms of tech-certified manpower, presales,
and post-sales support.

For resellers, distributors assure easy availability of products so that
their investment in inventory is low. Distributors share high quality
information and knowledge like product roadmaps, selling aids and solutions
configuring tools for each of the product categories. The entire spectrum of
activities that falls under transaction management, (essentially answers to
questions like - what happened to my order, when am I getting it, can I get more
of it, can I get it at various stations, at what prices?) is tackled by
distributors. Logistics support follows where products are delivered in the
required format and configuration within the stipulated time. Avers Jaishankar,
"What happens here is that a lot of costs associated with a reseller
closing an order with the end-user, are taken off by the distributor so that
they can focus on business acquisition". Large systems integration
companies have purchase specialists in areas like networking, software, storage,
and others. The need for such specialists is obviated when distributors can take
over the function. Resellers and solution providers can therefore substantially
cut down on procurement costs.

Resellers’ businesses largely run on the credit support provided by
distributors. Says Jaishankar, "We customize the credit policies for
different resellers depending on their business focus areas…Policies differ
even between products." Hence a 30-day credit period is given to a
corporate PC while a home laser printer gets only 15 days. For typical systems
integrators, the policy is ‘pay as you go.’ That is, one need not buy the
cable, the router, switches, and other gear all at once because all of these are
not required at the same time.

The entry barriers to a full-fledged national broad-based distribution
company are fairly high because of the investments required in building up the
channel, warehousing, working capital, and putting systems and procedures in
place. A good mix is a portfolio of volume products that help get cost
efficiencies and value products that contribute to profitability. The
distributor’s infrastructure is used to deliver other types of fulfillment
services like delivering training content in the form of CDs to students
attaining technical certification.

Says P G Kamath, VP-marketing, Ingram Micro India, "One cannot compare
national distributors and regional distributors. Each has its strengths and both
need to coexist. The slowdown in the industry impacted distribution as well.
Says Kamath, "When revenue is coming in, people go on a rampage to sell.
Only in a downturn do we see all the facets of a business." It is easy to
commit mistakes that weaken your operation when resellers try to push topline at
the cost of bottomlines. That’s when credit policies that were set to define
optimum profits and sales are transgressed and resellers are saddled with both
huge inventories and recoverables.

Channeling, the Linux Way  How does one pass a product which is in the ‘push’ mode? And that too, something like Linux? Here’s how Red Hat pulled it off... All of Red Hat’s channel partners understand the Linux technology and are capable of adding  a lot of value to the sales process in terms of information, availability of products and solutions and providing services such as installation, onsite support etc, which the customer expects locally. Partnering with Red Hat, Linux delivers a lot of benefits to it’s channel partners: When a Red Hat channel partner positions Linux as a technology with a tremendous price /performance solution to any IT manager, he gets an instantaneous acceptance and entry as he addresses critical concerns like saving huge costs, robust, scalable and universal technology etc. He is viewed as a consultant by the customer and gets into a fruitful relationship very quickly. Once the customer adopts Linux, the channel partner gets additional opportunities of up-selling high end products from Red Hat like Red Hat High Availability Server, Red Hat Database, Red Hat Interchange etc with bigger product and service revenue opportunities from the same customer. Red Hat also offers additional revenue opportunities on Red Hat services like support and training to its channel partners. One of the highlights of Red Hat’s channel partnership is G T Enterprises. Starting as a channel partner and  recently being appointed as a distributor, GTE, Bangalore has build a very innovative and successful business model through the Red Hat relationship. Defying the conventional VAR model of handling multiple products from multiple vendors, GTE has focussed only on Linux as a technology over the last seven years in business. Apart from products, GTE also partners with Red Hat through its affiliate Linux Learning Center (LLC) for training and certifications for Red Hat Linux for individuals and corporates. By building such competencies and a portfolio of services around Red Hat, GTE has been the pioneer in inventing a new and innovative model in the competitive channel business, which could be role model to replicate.

In that sense, it is the distributor who tries to manage and rein in the
business that is going on an outward spiral. Here, he plays the role of the
shock-absorber. Vendors have different approaches towards distribution. Vendors
who attempted to dabble in distribution did not succeed. This is simply because
OEMs are not used to playing the classic distributor functions of demand
creation, order-taking, product fulfillment, support and service.

Distributors and resellers share a sweet and sour
relationship. Interdependent as they are, expectations from both quarters are
high. Resellers have the common grouse that "distributors often don’t
reveal their strategies." Responds Kamath, "We cannot give the same
deal to all. We always have the vendor’s interest in mind and act accordingly.
Therefore, very often our thrust areas come across as conflicting to the
resellers. More importantly, this issue is never raised during a business
upswing. It is only during a downturn that the distributor’s strategies
questioned."

Resellers also feel that the distributor and vendor together
take away all the margins leaving wafer-thin advantages for them. Kamath
responds, "I would say, a reseller has to take the call. He stands to make
a profit when he takes the right quantity of stock at the right price and
manages his business fundamentals well. He explains that distributors typically
don’t push any product down the reseller’s throat. He also feels that
resellers are now taking efforts to reduce credit risk, do value adds, and limit
the size of their business in a healthy manner.

Storage, software, security, networking, and convergence
devices are the high growth areas identified by distributors. These areas are
expected to remain profitable for the next couple of quarters. Distributors feel
that resellers on the whole, do a poor job of forecasting their business, though
there are some who can do it well with a fine level of granularity. This, when
compared to the supposedly sophisticated forecasting that distributors do, leads
the market into divergence. Distributors also exhort resellers to engage in
value addition but haven’t been able to figure out the right pitch yet.
Distributors can organize a lot of resources like training, certification, CIO
interfacing, technology roadmaps and the like, to help resellers’ brace up to
doing the value add. Says Kamath, " The challenge is to get them interested
in the first place".

Web-enabling the distribution business has been done to a
limited extent by major distributors like Tech Pac, Ingram Micro, Compuage, and
Rashi Peripherals. But it is definitely not the dominant medium for business
interaction. A reseller still feel that if he calls up and speaks to the
relationship manager, he will get a better price. Some lessons from the global
distribution industry could be of help to Indian distributors. The year 2001 saw
a shakeout in the global distribution arena. The economic recession and
turbulent developments shook the bearings of the industry. The third largest
distributor, Merisel had to shut shop and so did Pinacor, another strong player.
But the stronger ones like Tech Data, Ingram Micro, and Arrow got into the
creative whorl and experimented with new markets and services. For example,
Ingram Micro tested the market for an ASP offering in which a two-level program
was drawn out to select resellers who could become ASPs without incurring the
infrastructure investment. And Ingram is said to have made money reselling
hosting services by giving ASP applications and training the reseller to sell
ASP services.

Similarly, North American Computer Products came up with
initiatives in which solution providers teamed with ISPs and ASPs for selling
hosted applications in the SME space. Ingram Micro spotted the opportunity to
team up with e-tailers by providing logistics support. Some distributors like
Tech Data and Ingram Micro got into providing outsourcing services for their
resellers and solution providers for a fee. Such services included end-user
billing, recoveries, and call-center services to handle the entire transaction
process, from order to fulfillment.

Apart from this, leaders in the distribution industry were
ruthless in cutting costs and staff. The global market witnessed a peculiar
problem- with the shutdown of many dot-coms who had invested heavily in
technology, computer equipment was available in plenty and this filtered into
the channels via the gray market. The result was that the forecasts made by both
distributors and vendors got skewed. The community immediately swung into action
by forming an ‘Anti-Gray Market Alliance’.

Tech Data, the global leader is reported to have managed its
overheads very well. The company exhibited remarkable prudence in staying away
from opportunities that depleted cash. For instance, it desisted from buying out
a Unix mid-range company that was on offer, delayed plans to expand into new
territories, preferred to forego the putting up of new warehouses. And it had a
strict eye on the bottomline aided by activity-based costing (ABC) by which
P&L was drawn up for every customer and the price was set accordingly.

Ingram Micro was more adventurous…raising its prices in the
midst of the recession. The logic: competitors would not imitate this move and
there will be temporary loss of market share. But with continued investment in
enhancing value proposition in terms of specific services, the lost share would
be gained back. It happened exactly that way. These examples call for a simpler
distribution market. It would be good if these lessons are learnt in preparation
of not-so-good times that may arrive again.

Easwardas Satyan,in
Mumbai