The value added distribution model is in vogue today. Some of the players are new, some are hybrid and some are established. A look at the current dynamics of this space!
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In today’s channel market there is high pulse of new technologies moving into the mainstream of value business. From an eagles perspective these include Cloud, storage, data management, mobility, security, unified computing, virtualisation to name a few of the prominent ones. There is also the high pulse of existing distributors rearranging their divisions to take advantage of new opportunities and scaling down legacies of the past. One of the recent appearances is the spin-off of value divisions from mainstream broadline distribution operations and raises the questions of suitability.
Global value added distributor Westcon, manages a five pronged product portfolio to assess the suitability and acceptance of new vendors into its stable of value based services. If the vendor is not a good fit into its information convergence technology umbrella and further into its security, convergence, mobility portfolio, the distributor does not pursue further engagement. “For any green field technology you have the opportunity to add value and over a period of time before everybody starts developing their skill sets around it. Then it goes off and you need to move onto something else. Our objective is to find the right mix of products and play in each of the segments where we can add value,” says Venu Menon, Sales and Marketing Director, Westcon Middle East. Hence the starting point for any vendor relationship is to find the right vendor technology profile and the right stage of the product life cycle, where a value added distribution model works as a win-win for all sides.
Another reason why the profile of value added distribution business has gone up many notches in the last few quarter, is the increased responsibility and business development investment being funnelled into the budgets of distributor partners. “With vendor resources getting scarce, they are depending more and more on value added distributors to do lot of front line work on their behalf in the commercial and general business, from A to Z,” explains Menon.
A typical market span of a tier-one vendor crosses service providers, enterprise space and the small and medium market segment. With contraction and longer lead times in the first two segments, the vendor driven, distributor total accessible market has been growing consistently. “The SMB business is substantial, more controlled, more measurable and is being left to value added distributors. That is why there is a lot of interest from broadline guys to get into these spaces.” Also with extended periods of payments from the government and public sector end user organisations, the stability of some of the tier-one partners has been affected. Since business with tier one partners has become risky from a credit point of view, vendors want to put as much of the risk into value added distributors who understand the local terrain much better.
While the opportunity for value added distributors may be growing with the increase in distributors total accessible market share, there is a flip side to the Westcon approach of addressing the market with five pillars and only five pillars. “If we were end to end we would be a broadline distributor. So it is a very conscious decision that we want to keep this value distribution space and keep speaking the language of the reseller. The unfortunate side effect is we will lose business opportunities,” explains Steve Lockie, Group Managing Director MENA, Westcon.
Hence the strength of a value added distribution model is its closeness and relationship with the reseller community; however because of the inherent nature of specialisation it does mean that it cannot address all possible opportunities in the market. Notwithstanding this shortfall, the value added distribution business model has some other very important riders built into its success.
Other than assessment of vendor suitability and corresponding value support by the distributor, the next most fundamental aspect is assessment of the product life cycle stage. When a technology product is in a nascent stage, the skills knowhow rests only with the vendor and as such it has minimum reach into the market and minimum sales volume. As the requirement of disseminating skills knowhow into the market increases, the appropriate distribution model also changes. It moves from a direct engagement model to tier-one, value added and finally into broadline. Hence selection of the most appropriate distribution business model depends largely on the product life cycle stage and the current and projected sales volume.
On the flip side, the knee jerk reaction of distributors spinning off value divisions does not imply their basic business model is flawed or obsolete. “Broadline is a very viable business and it is an essential part of the supply chain. You should not be embarrassed about being a broadline distributor, instead celebrate it. You need to be focussed on what you are good at. The challenge is doing the job that needs to be done for the margin that is available,” remarks Lockie.
The other critical success factors for running a successful value added distribution business are the right set of skilled manpower and resources and close relationships with the partner community.
While quality of people are important everywhere, it is immensely more important in the value added business than in the broadline business. “Ultimately people do business with people and that only happens over a period of time. The quality of people you use to engage with the partner ecosystem can make or break you,” says Menon. For every business opportunity raised by a partner into a value added business, the qualitative aspect of the engagement is the one the partner carries forward into the relationship. This can include joint presales meetings, time spent over the proposal and BOQ, credit lines, proof of concept, project management, technology skills training and adherence to commitments, amongst others. The weakest link is usually always the partner relationship and requires a high level of continuous quality engagement from the value added distributor’s sales team.
A show case example of the close engagement between a vendor and its value added distributors is EMC’s relationship with its regional distributor partners. EMC uses nine value added distributors across the region and works very closely them. The level, depth and intensity of the engagements it has with its distributor partners are as if the teams are from within EMC itself. “We treat them as one family. We listen to them, tell them our strategy and set the expectations on day one,” says Havier Haddad, Channel and Alliances Manager, TEAM Region, EMC. Meetings are held on regular basis, with reviews of the previous period and considerable planning and details into the upcoming period. Both sides come up with their targets but the final target is put down together. “We plan together; we set the expectations and then come up with a joint target. We will go into details about who will do what. Once we have done the joint planning, the name of the game becomes execution,” continuous Haddad.
Amongst its distributor partners it appears to have the best synergy with Computerlinks that operates across the region excluding Saudi Arabia and Egypt. “Computerlinks is a blueprint of a value added distribution model,” concedes Hadad. Amongst the impressive traits the distributor has demonstrated with its vendor partner is its flexibility to EMC’s tactical changes as well as its readiness to enter jointly into any operational investment. “They are flexible to change whenever we need any change and we do not feel the resistance. Whenever we are investing they are investing together, without waiting for any returns,” he says.
From a Computerlink’s perspective, it puts down its success to an indepth understanding of what EMC requires. There is considerable transparency at the management level and the high quality of sales and technical talent at Computerlinks has helped to strengthen the relationship. “We are seen as an extension of EMC’s sales force, so that partners use our resources in the market for the whole sales cycle. At the end of the day we are one team and we are flexible in our approach,” says Kieran Hernon, Sales Manager, Computerlinks. His biggest challenge is to find good sales, business development and presales talent in the storage arena.
Another example of the importance of partner skill levels is from Sourcefire that provides cyber security solutions for the global top 2000 organisations. “The Sourcefire product is an extremely sophisticated product. If you do not implement it correctly it is not going to work and the customer will not be happy. We would not sign up a transactional partner for this; that would be a disaster. They would not know what to do with it, how to install it and not be able to integrate it. Sourcefire business is all about quality, not quantity, says Anthony Perridge, Channel Director EMEA, Sourcefire. Across the region Sourcefire uses FVC and Secureway Networks as its distributors and has four reseller partners.
From Westcon’s point of view, the services its partners rate of highest value is the assurance of being offered the most appropriate solution that meets their end user requirement. “While buying the right solution the risk is sanitised by Westcon,” says Menon.
Another fundamental difference between the two types of business models is the profit margin structure. A broadline distributor usually operates at margins from 1% to 4% and works on volume turnover rather than margin gains. The motto is always pile them high, move them out fast and it tends to be a fulfilment business. “For a value added business, if you are doing business at 4% margin you will not make it,” says Menon. The recurring cost base of value added business is much higher than a broadline business and includes a team of skilled technical resources, investment into proof of concept centres, investment into continuous product and technology training and longer lead time for orders. Going into the market and selecting a piece of technology overnight does not complete the transition into a value added distribution model. “If you have a great piece of technology and put it in a catalogue and send it out to 3,000 resellers, it is not going to sell itself. You need to educate the market and you need to train and support the resellers,” explains Lockie.
The two business models are so fundamentally different that most players in the field reject the possibility of a broadline distributor migrating to a value added distribution model. Some of the measures being taken in the field today are half way, down the road initiatives, to access products that are in between a value added model and a broadline model. “You can dress yourself up to be a bit more value added than the guy down the road. You can pick up products pre-commodity, give them special treatment and over time take them through mid value distribution,” explains Lockie about some of the initiatives in the market today. “But it is a long and arduous process to make the transition,” concludes Menon.
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When a technology product or solution is nascent, the skills knowhow of how to deploy the product is virtually non-existent in the market. Only the vendor approaches the market through direct end user engagement. Progressively the vendor engages with tier-one partners and system integrators, the availability of skills in the market begins to increase and sales volumes start rising. During this progression, tier one partner and system integrators begin to appoint sales partners to help resell the product and are referred to as distregtors. The next stage is to develop technical skills amongst partners on a wider regional scale. This skills enablement is managed by a value added distributor. As partners and end users get conversant with the technology behind a product it gets commoditised and competition amongst partners becomes fierce with minimal margins. Volume is the name of the game and this is best managed by a volume or broadline distributor.
