Unlike many IT industry trends, outsourcing took a long time to become popular in Ireland. But just as Irish businesses are now starting to see the benefits of having certain functions fulfilled by a trusted third party, Irish resellers can now avail of additional services from the distributors that have been supplying them with products for years.
This is a recent development. Traditionally, distributors have been able to operate very effectively by providing local stockholding of IT products, backed up by logistics and credit facilities.
Current industry conditions have forced a rethink: profit margins are mostly in single digits and the rush to embrace more efficient product manufacturing models means that inventory is considered to be the enemy of a good supply chain.
‘Distributors are offering services because they are being forced into it,’ says Maurice Cohen of Emcee Distribution. The traditional role of distribution is still required, but to remain competitive and win business from resellers, distributors now also have to shoulder much of the responsibility involved in shortening the supply chain that runs from the product manufacturer through to the end user.
In effect, the channel has compacted: distributors are now doing some of the work that was previously the job of vendors on the one hand and the job of resellers on the other.
Brian Honan of Osmosis points out that it’s not just distributors who have to work hard in the current market conditions. ‘Resellers are getting more squeezed,’ he says. ‘We’re passing on services and the idea is that the more money a reseller saves, the more they will use us. We need them in the food chain.’
Dropping value
One of the main value added services that many distributors provide is drop shipments, where a wholesaler delivers products directly to a reseller’s customer, complete with paperwork, such as invoices or labels, that is customised with the reseller’s company name and logo if necessary.
As a result, to the customer, it looks as if the reseller has delivered the products. This may seem to be a routine job, but in the past it wasn’t considered vital for a distributor to provide it. Many resellers liked the comfort of knowing they had products on standby at their own premises. Times have changed however: stock rotation and price protection terms are not as generous as they used to be, as increasing competition has seen vendors try to take unnecessary inventory out of the channel.
‘Now it’s our problem to deal with issues like obsolescence, product loss or price protection,’ says Clarity MD Adrian Foley. He adds that Clarity has managed to estimate the cost of these factors and can compensate for them in its own business — alleviating another headache for resellers.
Between 35 and 40 per cent of the deliveries that Clarity makes are drop shipments to end-users and many other Irish distributors report that it is a growing part of their day-to-day business.
As Foley sees it, this option removes many of the inefficiencies that existed before, when resellers had to maintain their own warehouse space with warehouse staffed employed to unload trucks, pack and label products, and then load them back on trucks or vans for delivery.
‘That was a duplication of what we do,’ argues Foley. ‘Drop shipping takes away one element of cost because the reseller no longer needs to physically handle the product.’
Another benefit of drop shipments is that the end customer receives the products more quickly than previously.
Outsourcing and co-sourcing
Contract warehousing or co-sourcing is becoming increasingly popular and there are a couple of variations to this theme. Irish component distributor Memory Bank, which acts on behalf of the multinational wholesaler Ingram Micro, can store stock for a reseller on a short or medium term basis that is typically charged on a cost per pallet rate.
Clarity uses a SAP business process system that allows it to allocate parts of its warehouse to particular resellers. While product lines are physically stored together, individual product items are specifically set aside for particular customers and aren’t seen as ‘free stock’ by Clarity’s own sales staff.
Another function that many resellers are outsourcing to distributors is hardware configuration, such as installing network cards in a series of PCs or loading software images on to systems. Configuration is another job where there had traditionally been a duplication of roles, as many resellers configured systems on their customers’ behalf. However, distributors contend that because they are geared up to handle large amounts of products for multiple customers, the economies of scale involved make it prudent for resellers to outsource this role.
‘From a cost-benefit analysis point of view it makes sense,’ says Sharptext head Paul White. ‘Because we deal in bigger volumes than resellers, configuring machines at our warehouse is easier. There is a charge, but it’s less than what it would cost the reseller to do it himself.’
By outsourcing these mundane, labour-intensive and time-consuming jobs, resellers can free their technical staff to work on more complex roles.
Emcee Distribution MD Maurice Cohen says his company has been offering build-to-order facilities for 12 years, as a result of its license to build Acer PCs in Ireland.
‘We’re winning more business from resellers who once would have been building their own PCs,’ he says. ‘Now they realise their time should be spent offering their customers other services.’
Training is a value-added service that tends to be offered by specialists rather than broadliners, but those distributors that do provide training find that it can be an important source of additional revenue.
Midia has a computer telephony division that trades as a separate company and which provides technical training and certification courses to resellers. MD Tim Farrelly considers this a value-added service, but says that training doesn’t have to be free-of-charge, as resellers can see a return on their initial investment.
‘The reseller can leverage what they have learned and pass it on to their customer,’ says Farrelly. ‘If they can’t install a system, they have to hire a third party instead. By training their own staff, they eliminate that cost and boost their own bottom line.’
Tom Keane, enterprise sales manager at CMS Peripherals, a specialist storage wholesaler, sees training as a ‘necessary’ service, especially as storage systems have become more complex.
‘It’s rare to expect a broadline distributor to train resellers,’ he claims. But he says that as a specialist, CMS has found that sales increase when training is given to resellers.
Consultancy
Training ‘supports our business’, says Keane, who views the sales process as a service in its own right. ‘Our telesales service is like consultancy,’ he says. At its simplest, he says, this involves knowing that a certain product is approaching its end of life and informing the reseller who can make a more informed purchasing decision.
Keane says that the word ‘consultancy’ doesn’t only apply to complex or high-value products. ‘There is a consultancy element in selling a £80,000 storage solution or a 100Mbyte backup device,’ he says, citing the array of options for something as simple as a 100Mbyte unit.
‘You can have a Zip drive or superfloppy – does it have to be portable? What about connectivity — USB, serial or FireWire? What operating system does it need to work with? The consultancy sell works, if you’ve got good salespeople.’
Nothing new
Some of the mid-sized Irish distributors can be forgiven for allowing themselves a wry smile as they watch the large broadliners make noises about offering services such as configure-to-order or drop shipments — they’ve been doing that for years.
Emcee has made a name for itself by providing brands that are less well known than tier one products, but which are keenly priced and readily available. Combined with providing drop shipments to end users, this has previously allowed the company ‘to win business when other distributors weren’t offering it,’ says Emcee MD Maurice Cohen.
‘People had to wait weeks sometimes for tier one brands,’ he claims, acknowledging that the climate has changed. Nowadays, most distributors routinely make drop shipments and most standard IT products are stocked locally by distributors.
Midia’s Tim Farrelly says that his company has provided direct shipping to end-users for three years. ‘It’s that kind of service that has helped us to get to the point we’re at.’
Five years ago Midia was a £1m a year business — now its turnover is £24m.
Specialist distributors tend to class themselves as value-added providers, but their reasons for offering these services have more to do with the kinds of products they supply than any external market forces. Many complex technology markets such as IT security and data storage are still served by distributors who focus on these areas alone. But their presence in the market does appear to reinforce the old distribution adage ‘get big, get niche or get out’.
In broad strokes, the demarcation appears to be that broadline distributors do much of the work that was previously fulfilled by resellers, whereas specialist suppliers tend to behave as extensions to the vendor’s own sales force in the market. The services they provide have more to do with developing a channel than taking orders for large quantites of products.
‘We see ourselves as a distributor that introduces new technologies to the country and we try and stay away from things that are run rate,’ says Michael O’Hara of Data Solutions. Modems — a classic ‘run rate’ item — were once the company’s stock in trade, but it no longer distributes these because modems have become a commodity product. The company’s current flagship product line is application serving software from Citrix.
‘We’re totally different to a broadliner. We sell products on in-depth expertise,’ says O’Hara. ‘To get the most of the technology, resellers can bring in the expertise that we’ve built up.’
Data Solutions conducts a lot of direct marketing to end-users to stimulate demand, although it has a strict policy of supplying products only through resellers. Whereas broadliners usually supply products from manufacturers that everyone has heard of, niche distributors tend to carry products from companies that are less well known. ‘It’s part of having to deal with cutting-edge technology,’ says O’Hara.
Manufacturers who have little or no presence in Ireland may rely on local distributors to promote and evangelise their products, in addition to stocking and selling them. This is especially true of distributors that focus on certain areas of the market. ‘You may have a broadliner selling commodity product, but where it’s more complex you need to be driving that business yourself,’ says Keane.
‘A lot of the vendors that CMS Peripherals represents don’t have local offices. Distributors in Ireland have to take on the mantle of representing the manufacturer, proselytising about the product or encouraging the vendor to spend time in Ireland and we work with them in generating an authorised reseller channel.’
As Paul White observes, there has been no Road to Damascus-style conversion among the great and good of the Irish IT distribution business. The pressures of the market have dictated that cost must be eliminated from the manufacturer to end-user supply chain. No distributor is immune to this, but it begs the question as to how individual distributors make themselves stand out from competitors. Keane comments: ‘Everyone says “we’re differentiating ourselves”, but if everybody offers value-added services, then everybody’s the same.’
Customer relations
Ken Dowd, who is responsible for the SME sales channel at MicroWarehouse, points out that in this scenario, the differentiator will be the personal touch — the way a distributor treats its dealer customers.
‘It is going to be down to relationships: how salespeople and account managers deal with the reseller. Resellers will have to know that they are calling someone who knows their business, their buying patterns and their product focus, and who isn’t just pushing products that the reseller is not going to sell.’
For this to happen, Dowd says, distributors must listen to the dealer and have a better understanding of their business focus and their customer base. ‘It’s about giving relevant information to the right resellers. The reseller wants information that will be applicable to their business and their customer base. If we can be seen as a resource centre for the reseller, then we can add value to them. Many resellers are small operations of 7 to 10 people. Maybe we can generate pull-through for their business if we understand their customers,’ suggests Dowd.
Double realignment
As distributors come to consider themselves as providers of services as well as products, a related development has been that resellers are now aligning themselves more closely with one particular trade supplier. It’s difficult to tell whether this is a cause or effect, but many in the industry agree that it is happening.
The market has matured — in the past, resellers would exhaust a credit line with a particular distributor and move on to the next, or call three or four suppliers to try and get the best price or a sweet deal. Falling margins have put paid to that: no distributor competes on price any longer. Now partnership is the order of the day.
‘More and more, the concept of the one-stop shop is starting to evolve,’ says Farrelly. Broadline distributors by definition will carry most of the components, from hardware to software, required to sell customers an IT system that resellers can install. In a bid to retain customers, some distributors will second source: buying products from other wholesalers in order to provide a reseller with everything they need.
As resellers no longer have to shop around, many are allying themselves closely with a single supplier though, according to Paul White, these agreements tend to be informal.
Where such arrangements exist — for example where a distributor provides virtual warehouse facilities — it follows that this reseller can’t be fickle and buy from different distributors every week.
If resellers are becoming more loyal to certain distributors, that loyalty has had to be earned. Working hard for the money was never so true. ‘If the market demands you do something outside your normal brief, then that’s what you have to do,’ says Tom Keane.
Distributors who can find the right mix of value-added services and good customer relationships will be in the best position to compete for business. Ken Dowd concludes: ‘Now, resellers are in a powerful situation, because they can pick and choose who they want to deal with.’
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