Still making waves
Expected annual turnover: R350 million. Insurance credit cover: in excess of R130 million. Not bad for a distributor that was part of the Siltek liquidation last October. Workgroup has even signed up nearly 90 percent of its previous customer base and re-established relationships with some ten vendors to service the local IT market. As an example of a phoenix from the ashes tale, it`s hard to beat.But Dave Lello, former Siltek CEO and architect of the buyout that has put Workgroup back on its feet, says the dealer channel is still struggling.“Smaller resellers are definitely battling,” he says. “I don`t mean the shops that sell a few PCs a month. They are maybe a little squeezed but otherwise fine. The real shakeout has been the resellers who fulfil corporate deals. I don`t think the small reseller who sells into big corporates is going to survive for much longer.”The dealer channel is having a rough time in South Africa generally. An interest rate hike – the fifth this year – is around the corner. An attack on Iraq by the US will have the dual effect of both weakening the rand, as investors get out of emerging markets, as well as pushing up the oil price. And some of the shockwaves from Siltek`s crash have yet to diminish. But Lello says the events of last October are just part of a larger picture, including a hardening of the market.“Corporate customers are asking: what is the cost of this PC on my desk? Can the smaller reseller who makes a living by knocking on corporate doors – with the lower overheads and lower margins he enjoys – give me the total cost-of-ownership peace of mind I need?“And the answer I`m hearing is ‘no`.”Outsourcing is becoming popular – and corporates don`t outsource to a partner and then insist on buying their hardware somewhere else. That has eliminated many smaller operations who survived by pushing tin into large companies. According to Lello, this kind of reseller did a good 40 percent of the channel business at its height.And what of Siltek`s own demise?“Siltek and 9/11 weren`t changes in themselves – they just accelerated the changes that were coming,” he says. “To say Siltek went bust therefore my business went bust is not true at all. But two major things happened behind the scenes as a result of the liquidation: credit agencies and banks reduced their exposure to IT-related business, and overseas vendors started demanding a lot more security.” Tighter credit termsFigures vary, but most estimates put the amount of credit removed from the dealer channel at between R300 million and R400 million in the Siltek aftermath.For some resellers, lack of credit has been a kiss of death. Without the ability to pay for capital purchases from a distributor upfront – something that more distributors are demanding – larger deals requiring a lot of working capital remain out of reach.And vendors are getting stickier too. Chris Norton, MD of Citrix in South Africa, describes his company as a channel-centric, two-tier vendor in which his distributor has to play a significant role. He says credit and payment terms have become far more important for international vendors.“Our channel is profitable and the role of Citrix comes down to one of supply and support,” he says. “Workgroup was our largest distributor and the liquidation came as a huge shock. Vendors are now more cautious. We were pretty cautious anyway – you needed to meet minimum credit terms to do business with us. Those terms haven`t changed, we just require upfront guarantees now.”Antonio Fourie, CEO of the Connection Group, says many vendors were concerned at the concentration of distributors in the local market in the wake of Siltek.“The result of the upheaval was vendors broadened their partner bases and looked at the basics of credit terms, payment terms and upfront guarantees.”Guy Whitcroft, MD of Tarsus, concurs on the credit problem, but adds others to the list.“There have been three major events to affect the channel in the last 12 months. The first – it has to be said – was 9/11. The knock-on effect in business confidence, and the many industries affected indirectly should not be underestimated. The second was of course Siltek`s liquidation,” he says. “That has changed the channel landscape enormously. Quite apart from the vacuum that had to be filled, an enormous amount of credit was taken out of the IT reseller market which has not been put back.”The third of Whitcroft`s factors is the merger of Hewlett-Packard and Compaq, two of the largest manufacturers of IT hardware in the world. Announced mere days before 9/11 and subject to much regulatory scrutiny and quite a bit of fighting before all went ahead this year, the merger has yet to bear much fruit.“Mergers are always difficult,” says Whitcroft. “Despite this being one of the smoothest I`ve ever seen, it will take time before sales growth gets back to where it should be.”Whitcroft predicts that 40 percent of resellers will go out of business this year.Resellers are not the only ones to feel the pinch in the current unfriendly environment. Distributors themselves are having to adapt their ways of working. Neil Rex, MD of distributor Drive Control Corporation (DCC), says further changes are yet to be felt.“I think a lot of people made a lot of noise about the demise of Siltek, but it was good for the channel. It brought some sense back to costing and price policies. We could see it where we competed in some product lines against Siltek. I think some of their pricing policies were out of kilter and the writing was on the wall 18 months before it happened. You can`t work with three or four percent margins. I think it brought a bit of realism back into the channel.”Rex says the current battle revolves around of customer ownership.“The vacuum has now been filled and good businesses have survived. Where we`ve seen disruption is where vendors have been jockeying for position in the vendor-distributor-reseller chain. Who owns which customer? Right now that is one of the grey areas in the channel.”Part of the reason for such jockeying is that the role of the distributor has changed since 1994.“Distributors used to be the sole vendor representative in South Africa,” he says. “Then vendors came in and opened offices here, so part of the distributor`s functions were taken away. Then in came the multinationals and worldwide supply agreements kicked in. Why should BMW buy from a distributor when they have a worldwide direct relationship with their suppliers? So there`s a bit of coming to terms with that in the channel.”And some of the large integrators that have grown up with the industry now have the skills, logistic and financial aspects of a distributor – making a direct relationship with a vendor a logical choice.“So as a distributor you`re saying: this integrator used to be my customer but now I`m going to have to refocus a bit,” comments Rex.The yo-yoing rand hasn`t helped much either. Lello says the major effect of exchange rate swings have been to cause larger capital purchases to be delayed.“That is a problem for a smaller reseller working on a five-month project. If there is too much delay, then he has to pack up and go home.”Derek Nareen, channel director at networking distribution specialist Westcon, says the rand`s woes are part and parcel of the distribution game.“I don`t think there ever will be predictability – that`s one of the necessary evils of the exchange rate and pricing,” he says. “It`s something we`re always going to have to live with.” Playing to the dealerRex says DCC`s channel strategy is to add value to smaller resellers. “Our policy is to empower them to compete with the bigger guys. An integrator is not going to buy his storage through me – he has a direct relationship. So we`ve set up a technology centre here so we can bring smaller resellers to the negotiating table and they can bring their clients to us to demonstrate solutions as required. If a reseller doesn`t have the staff to support a solution, then we will do the supplying and he can keep his customer.”Nareen says another source of competition is on the horizon for the networking reseller.“The problem with the traditional networking resellers is they haven`t transitioned to voice. And in the long term the voice resellers will dominate convergence technology. They know the reliability sale – selling voice is all about uptime, the maintenance, who will look after you; all of those aspects come into the sale. They`re looking to sell you three years of their time. Networking guys say, ‘You need four more ports. Here`s a box that does it. Goodbye.` It`s a mindset that networking resellers have had for many years now. Voice resellers have annuity revenues over three years – and can provide services. They are the ones that sign a maintenance contract which means they know how to do business.”Nareen says the only thing keeping networking resellers around is that voice companies don`t want to get caught in the perceived rat race of selling PCs.Tony Wilson, enterprise director of Nortel South Africa, agrees.“Convergence is coming – voice and data will converge on your desktop. Voice and data have track records but converting from one to the other is like learning a new language. Businessmen may trust voice networking salespeople more: if you lose your PC, you boot it, if you lose your phone then you boot someone else.“And there are changes in the way big distributors have to approach the market: where do they put voice and data? People still want a blend of technology – including digital, analogue and IP networking.”Wilson says direct sales have changed the channel business more than resellers care to admit.“Ten years ago, resellers did business on the strength of their service book, not the products they carried. Now, after many years of selling hardware at the lowest price, it`s back to services again. Direct to the customerMention dealing direct, and most channel players immediately think of Dell Computer, which successfully pioneered the channel-free model in 1984. But hybrid models – mixing direct and indirect sales – have found their way into the channel, often because of pressure from Dell. Rex says in some cases vendors are asking what the numbers would be if they had a direct relationship with the customer.Rex doesn`t blame vendors for going after the big deals. But he says it makes his job of pre-empting the market a lot more challenging.“Wall Street imposes great pressure on growth figures. Five or six years ago, the channel was very clearly defined. And as pressure built to increase the numbers, vendors took more and more bits of the indirect business.” The futureFourie says any major disruption to the supply chain naturally makes a vendor think seriously of going direct with larger customers.Despite enormous pressures on the channel, it seems there will always be a role for it. Lello says that the reason for that is simple: some technologies will become commoditised, and some won`t.“Microsoft did a very good thing with Plug ‘n Play,” he says. “A lot of peripherals can now be installed easily. But a 100 port network, with firewall, anti-virus and automatic updates is not so easy and requires skill to install and maintain. There will always be room for the channel to add value in those situations.”Financing of IT is also becoming more attractive for resellers. Nareen says it`s a “no-brainer” for all concerned.“The reseller doesn`t have to fork out anything upfront. Westcon will ensure the solution works. We get our money and the reseller gets his share without having to outlay a single cent.”Wilson agrees that channels are here to stay.“The level of required support in the communications market is high and localisation is significant.”
28 October 2002
Expected annual turnover: R350 million. Insurance credit cover: in excess of R130 million. Not bad for a distributor that was part of the Siltek liquidation last October. Workgroup has even signed up nearly 90 percent of its previous customer base and re-established relationships with some ten vendors to service the local IT market. As an example of a phoenix from the ashes tale, it`s hard to beat.
“Smaller resellers are definitely battling,” he says. “I don`t mean the shops that sell a few PCs a month. They are maybe a little squeezed but otherwise fine. The real shakeout has been the resellers who fulfil corporate deals. I don`t think the small reseller who sells into big corporates is going to survive for much longer.”
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