Living With CDW

That's the mantra driving solution providers as one of their biggest competitors, CDW, increases its strength with last week's acquisition of reseller Micro Warehouse's North American assets.

"CDW continuously sells below my cost and has certainly eroded a lot of my product sales," said Leonard DiCostanzo, vice president of business development at Emtec, a New York-based solution provider. "CDW has always been a competitor, and they're a more formidable competitor now."

Through the acquisition, CDW gains about $940 million in revenue, thousands of new customers, deeper penetration into government and education accounts, and increased buying leverage with manufacturers, said CDW CEO John Edwardson. Also with the deal, CDW becomes Apple's largest reseller, gaining business from Mac Warehouse, a division of Micro Warehouse, Norwalk, Conn.

About 75 percent of Micro Warehouse's customer base is new to CDW, Edwardson said.

While CDW, Vernon Hills, Ill., will cut overlapping administrative positions, it will retain "the bulk of the sales force" at Micro Warehouse, Edwardson said. The Micro Warehouse name will eventually become CDW, sources said. Jerry York, Micro Warehouse chairman, president and CEO, will not work for CDW, they added.

"I think this clearly strengthens CDW's competitive edge in the market," said Frank Vitagliano, IBM's vice president of distribution channels management. "It's not so much CDW's ability to get a better price but, frankly, they bought a competitor, so they pick up significant share in the market."

Driven by strong marketing and sales engines, widespread name recognition and volume buying power that allows it to sell products at lower prices than most solution providers, CDW has steadily crept into solution providers' small and midsize accounts over the past two years.

Knowing they can't compete against CDW on price, many solution providers have ceded those sales to CDW and retained higher-margin services sales. Several said they hope to achieve a happy medium by partnering with the company through services deals. Although CDW boasts of strong technical support and customer relations, solution providers said the company is limited on both and can't match what they offer on a day-to-day basis.

"As far as I'm concerned, CDW can expand all it wants," said Scott Schaefer, president of Techknowsphere, a New York-based Apple reseller and solution provider. "It means I won't be selling as much hardware, but we'll be doing tons of repairs. What they don't do is what we have to do."

Pat Grillo, CEO of Atrion Communications Resources, a Branchburg, N.J., solution provider, said he picks up a lot of services business from clients that buy products from CDW. "Go ahead, [buy it from CDW], and when you can't make it work, call us up and we'll charge you $225 an hour and we'll make it work," Grillo said he tells customers. "If IT people have more of a say, CDW is not an issue nearly as much because they know they need the support and services we bring to the table."

Still, solution providers are frustrated with CDW's buying power, which many say will increase with the acquisition. They are especially irked that CDW can purchase products from distributors and resell them at the same or a lower price than what most solution providers buy it for from those same distributors.

"CDW is taking business left and right," said Tommy Wald, CEO of Riata Technologies, a solution provider in Austin, Texas. "Tech Data and Ingram Micro are putting themselves and their partners at a disadvantage."

As CDW grows, solution providers said it's up to vendors to reward loyal partners, particularly those that spend time building a sale only to have the customer buy the products for a cheaper price from CDW.

"Customers don't go online unless someone like me has already done the legwork," said Annette Raynor, president of XACT Solutions, a solution provider in Colts Neck, N.J. "Vendors have an obligation to offer us the same price as a volume distributor because we have demonstrated the fact that we have supported them."

Still, solution providers must win clients and retain customer loyalty through services and fully integrated solutions.

"I don't mean to sound insensitive, but we all need to come up with the right value model to engender the loyalty of our valued customers," said Steve Raymund, CEO of distributor Tech Data, Clearwater, Fla. "If you're a VAR, you have to find your value proposition and do what CDW can't. I can go to a TechSelect [Tech Data's specialized VAR community] session and find 10 of our customers that are growing faster than CDW, all based on finding a specialty and fulfilling a need that has gone unserved in the market."

Raymund said the disparities between what CDW and solution providers pay for product is a fact of business that Tech Data will continue to combat by helping its customers develop services-enriched business models. "The market is a big, nasty place, and we all have to find safe harbor in it."

Given CDW's increased size and threat, several solution providers said partnership opportunities would create the calmest harbor for them and CDW to sail on. While CDW partners with some solution providers on services, it has not expanded the program in the general commercial market. Edwardson did say the new customer base could present possible services opportunities for solution providers, but he did not offer specifics.

Mike Healey, president of TenCorp, a solution provider in Needham, Mass., fulfills services for CDW but said the giant will have difficulty competing against smart solution providers that drive and expand their core competencies.

"Everybody has to find a happy medium," he said. "We have to concentrate on what drives our businesses. For CDW, it's selling and delivering product. Ours is services. If we can partner so that both our engines drive each other, that's great."