Distribution Executives Forge Tighter Links

There's a new era in IT distribution, and it has less to do with beating Dell onto the UPS truck and more with building the processes that allow managed services, vertical market solutions and new technologies to solve the most complex business problems.

These are the areas of focus now under scrutiny by the top two-tier partners in the world.

CRN editors recently gathered seven executive members of the Global Technology Distribution Council to talk about the future of IT distribution: how they'll get there and what the changes mean for solution providers. The conversation marked a dramatic turn from previous gatherings as the executives enthused about new investments, new partnerships and new opportunities.

Participating in the discussion were Pete Coleman, executive vice president of the computer systems division at Agilysys; Fred Cuen, president of Avnet Technology Solutions; Jim Illson, COO and president of the Americas at Bell Microproducts; Ken Lamneck, president of the Americas at Tech Data; Anna McDermott, CEO of Access Distribution; John Paget, president of the Technology Solutions Division at Synnex; and Greg Spierkel, CEO of Ingram Micro. Here are excerpts from the conversation.

MANAGED SERVICES
Distributors, like solution providers, have spent the past couple of years examining the managed services market. More specifically, what role can they play in that market? Can they add value, and how do they build that business? The companies have taken diverse tracks to get there, from building their own MSP infrastructures to partnering with third parties, with the hope of becoming a differentiator in the market.

FRED CUEN: We became involved in the managed services play for two reasons. One is we were approached by the manufacturers to participate in this area. What was more interesting was the partners thought that this would be a great place for them. The market was saying we would like an opportunity to acquire managed services vs. a platform, and we were able to create that environment. We've created a pretty interesting business from zero to about $20 million over a 24-month period.

I really think what all this boils down to is everybody is saying what are we going to focus on? What are we going to be experts on? If you want to be a generalist, that was OK when there was a lot of money around. But as things start to tighten up, if you don't have expertise and don't deal with complexity, I think you're not in the right place.

JOHN PAGET: We filed a patent on something called Printsolv, which is an application that allows us to read all of the intelligence on the output device on a network. We can read meters, toner levels, alarms and so forth, then transmit that information through the firewall with no security issue. What that has allowed resellers to do, then, is to do fleet management in a very different manner. And also, it allows them to do leasing on a cost-per-scan, cost-per-print basis, and data VARs didn't do that very well. Copier VARs did that well because they had a lot of feet on the street.

When we think about managed services, there's a whole market here that data VARs certainly want to be in because the market's moving, but you have to create a tool. In many cases, I think managed services is a concept of creating tools, enabling people to figure out how to do that, and then the tough job is to take this heterogeneous type of tool to an industry that likes to be vertical, like Xerox and [HP] and so on.

KEN LAMNECK: What is important is the creation of the tool because what we have to all figure out is how do you monetize it? It's taken a lot of effort. We spend lots of time saying that's great, who's going to pay for that? How am I going to make money on that? Who's going to benefit? Today, our focus is on listening to our resellers and saying what do you really need and what do you need us to do? We're spending lots of time understanding that piece, but the monetization is the part where we start to struggle when we figure out how that is all going to play.

SERVICES VS. PRODUCT REVENUE
How much of a distributor's revenue actually comes from services, and how much could it become? The seven GTDC members said 30 percent of total revenue isn't out of the question, but defining services isn't as cut and dried as product revenue.

ANNA McDERMOTT: You could be talking marketing services; you could be talking managed services; you could be talking software as a service. One of those services we do is pick, pack and ship product.

Now, we have been paid historically in discounts off of title transfer, but that's changing and evolving, too. Vendors are trying to drive to a pay for value. They've started to understand the value opportunity that lies within their distribution partnerships and they want to pay for that value, and that's an increase in rebates, based on specific initiatives, etc., and in specific services. JIM ILLSON: This year we subtitled our annual report, "From Design to Deployment." The point was, we actually mapped out a report in which we offer a continuum that goes from design on the front end to deploying and maintaining on the back end, and there are four or five stages in there. Only one of those is what you would think of as being a traditional distribution route and shipment. Our goal in terms of helping people focus on storage solutions is really to look at how we can add value to what happens and how we can generate a revenue stream for ourselves, but also to add value to our partners by bundling our services into what we do. I see that percentage increasing.

PAGET: I do think the vendors believe that [we are services companies]. I think they struggle more with how to monetize that than we struggle on how to monetize that. What we provide them is a repeatable process, that is sustainable, that they have some confidence in, that builds a rapport and a respectability in a marketplace they want to go into. The actual product itself is not what they do business [with us] for because there are too many places you can get the product. They continue to do business with us because we provide them value that's greater—our value is certainly greater than what it would cost them to build that same kind of capability.

CUEN: I even think professional services is another example where everybody has either too much bench or not enough—usually too much. So, there's another opportunity for leveraging bench strength that could be augmented by a distributor or by the partner network that they have as well. Everybody's looking at what I would say is duplication or redundancy within the channel because I don't want to have everything. If I have a trusted partner, I can go to them and be able to do a managed service play. If I need a storage deployment, I can go to my trusted distributor to get help on that because it's out in Louisiana and I don't have anybody there.

GREG SPIERKEL: [Services] is going to be a bigger part of everybody's businesses. I think the more you can do to develop a revenue stream outside product attach or software attach, the more interesting it's going to be for all of us. Frankly, there's no clear way. There are pieces of the puzzle, but they're evolving. The interesting part is how do we create that value and continue to differentiate ourselves vs. other alternatives? So, from that point of view, I'm expecting over the next five years—you have to take a longer perspective—that service will be a bigger part of our business in the pure service sense. But, today, our service revenue really is our margin, our markup.

'VENDOR' CAPITALISTS
Part of being successful is making sure that your customers have the right solutions to sell. That means distributors are constantly evaluating new vendors and new technologies to bring to solution providers. In many cases, dedicated teams are responsible for not only finding best-of-breed products, but for figuring out where they play in a multitude of solutions and then convincing the vendors to sell through the channel.

LAMNECK: The successful company is the one that's really focused on their competency and figuring out a way to get somebody else to do [the other things]. Some of these new vendors are coming to us in the early stages. They really want a partner, and so you get a limited or exclusive distribution, and you build a lot of their pipes so they don't have to duplicate that. A good example of that is XenSource, where they're saying we want to build this around you and they're asking will this work?

McDERMOTT: We get the voice of our partners who are on the leading edge of things and uncovering business opportunities or business problems that need to be solved, but a large percentage of our partner base look to us to help them make decisions about what new markets and technologies to invest in. Then they look to us to help support them. We also have some very technical partners that will say here are the business problems that aren't being solved right now, and here are the technologies we think can do that.

PETE COLEMAN: We have an emerging technologies team that looks at opportunities. VARs are looking for opportunities to grow their own businesses, and they depend on us to be the counselor back to them, then they say how sure are you on this bet? Can you bring a profitable line to us? Are you sure that you can support it? And what's the return going to be on the working capital?

These people don't have an awful lot of capital. They want to make sure there's no impact on inventory, a good return so they can collect the money quickly and pay their suppliers slowly, which would be us, and the same thing goes for us, too.

McDERMOTT: [New vendors] are hungry. They want to get momentum in taking their product to the market. If they find a distributor that they can partner with that will show them the way, they're excited, they're interested in diving deep because they know that you're going to help them. It's all about speed and brand identity because a lot of these new guys don't have a brand in the marketplace. Distributors have very strong brands. They look to attach to that brand, they need your speed, and they want access to your partner base. That's the fastest way for them to get momentum.

SPIERKEL: Most companies when they're nascent are going to go out and sell directly. It's not an unusual phenomenon. But if they've got a low price point or a relatively limited approach to market, they're going to start considering us. Of course, if we reach them at the right time, we can get them to change their thinking. Part of our objective is to go create the awareness in these companies of the value we bring.

I'm working every day in front of individuals or companies that have nothing to do with our channel, but I know they could. Whether they just don't see us, don't believe in us, or have a misconception about us, that evangelizing and time is well spent. There's not as many new ones as you'd think. Clearly, there's always new innovative stuff but, if anything, you hear there is less innovation and less new companies in the past three or four years than there were in the mid-1990s when there was more money available.

CUEN: We've worked with some [venture capitalists] that are very interested in new technology. I think there is some innovation going on in certain segments of our industry and, in these particular cases, these VC folks are very focused on what they're delivering, not wanting to build a whole bunch of extra stuff because they don't have the money to really do so. So, their willingness to partner with these new product sets, I think, is better. And I think that they're looking for different routes to market than direct.

ILLSON: We've seen some cases where a vendor actually really consists of some people who have a neat idea. They may have some venture funding behind them, but it becomes a nontraditional relationship. What they look for from us is not to just promote and sell the product, but also to manufacture the product for them. They bring a good idea and what they think can be quick access to the market, but they don't want to invest in infrastructure. That's not their core competency. And they can leverage us.

We source the components and assemble it and turn it quickly. When they scale, they're successful, they may go to a full-blown contract manufacturer, but we can help them with time to market.

PAGET: I think all of us are looking to the future and what's going on, and one of the best places you can go—there are some very significant technical VCs. You can create relationships with them very early on as you start to look for what's going to happen in the marketplace in two years, in three years. I think that's just part of being of a student of the industry.

COLEMAN: We're Agilysys—agile systems. You do have to be agile and smart about the lines that you pick up. You need to make sure that you make that bet, you make it right, and you make it on the long term. We're also looking for companies and for suppliers that are going to come out and be large, quick, predictable and, again, a value to the solution providers that we have.

ATTRACTING NEW CUSTOMERS
Each year, distributors and vendors spend millions of dollars to recruit new solution providers. They all have the same goal—to increase their solution provider base—but the process to get there can be quite different from each other. And in some cases, a refocus on existing customers can be just as fruitful as a list of new leads, the executives said.

LAMNECK: We'll sell in a given quarter to 57,000 different resellers in the United States. So, some of the issues are really more do we understand the real dynamics of those 57,000 partners, not trying to find 3,000 or 10,000 more.

To get to the point about the new emerging ones that we may not know about, the easiest way for us to do it is through the product lines. If we get into a differentiated new product line, again, it always amazes us to say, where were these people before? That's the easiest way for us to do it vs. trying to really go out and try to canvass it through all different sorts of telemarketing campaigns.

SPIERKEL: I think you never lose sight that it's not all about new customers. You get more return and a better return by developing and exercising the relationships that you have. So, you're helping them transform with solution sets so they can grow, they can split up their businesses: Instead of being infrastructure only, I'm infrastructure and security, because they start getting more confidence and they grow. We've got a key role to play in that—introducing them to new technology, but also getting smart enough to help them understand that there's pieces of the solution they could be adding with their own capabilities.