Network channels

Network vendors need strong channels to reach end-users in the Middle East. Channel Middle East looks at the top network vendors in the region and their channel strategies.

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By  Stuart Wilson Published  April 1, 2004

Evolving channels|~|cisco.jpg|~|“When I put someone in Saudi Arabia, he can engage with the partners there and act as an interface on areas such as sales, credit and channel marketing,” says Andrew Elder at Cisco|~|Channels-to-market employed by network vendors are still evolving in the Middle East. New vendors are entering the region and existing vendors are looking to build additional routes-to-market to reach wider customer bases. The competitive landscape is developing fast and the importance of an effective channel strategy is becoming crystal clear. While Cisco remains the dominant brand, its desire to build ever-closer relationships with its most committed partners has opened the door to competitors looking to sign up experienced network integrators and resellers In the enterprise account space, Cisco remains the dominant networking vendor force in the region. With a brand name almost universally recognised by customers and a strong channel of highly skilled partners, Cisco is the company that everyone else — whether they admit it or not — is trying to catch. Yet even Cisco still feels the need to tweak channel strategy to reflect the characteristics of the Middle East market. “When we looked at the flow of product in the region, the import and export restrictions, the time to ship equipment in from Europe and the different costs for landing product in the region, it became clear that we couldn’t use the same model that is used in Europe,” says Andrew Elder, director of marketing and channels, Middle East, Russia and Africa at Cisco. “We decided to look from the point-of-view of the end customer and build a channel that would achieve customer intimacy. This means a channel that meets their needs in terms of product availability, speed, price and technical capability. We didn’t just use the EMEA model and take a cookie cutter approach.” Alongside its distribution channel, Cisco also makes direct sales to global systems integrators (GSIs) such as IBM, NCR, Getronics and HP. “Sometimes these companies also buy from distributors,” explains Elder. “Especially if they need to get product quickly. Most of the GSI work is project-based so we have visibility of what they need well in advance.” Engaging with the largest systems integrators is also a major goal for 3Com. At the heart of its joint venture with Chinese networking vendor Huawei is a desire to drive a greater proportion of sales from the enterprise sector. “There are high level strategic objectives that we pursue,” says Wael Fakharany, regional manager at 3Com Middle East. “These include producing the best products, having the right channel and go-to-market strategy, building revenue growth, positioning ourselves as a Tier 1 company, achieving product and solution leadership and doing this within an efficient cost structure.” 3Com’s desire to be a Tier 1 vendor is backed by a commitment to signing up systems integrators and IT services companies that can make this goal a reality. “There are two distinct businesses inside 3Com: the SMB business and the enterprise sector,” adds Fakharany. “In the high-end enterprise space, many customers are looking for an alternative supplier. When Huawei came into the picture, it gave 3Com the opportunity to enter the high-end market and start serving telcos, large banks and really roll out LANs and WANs in this space.” Finding enterprise partners is not too difficult for 3Com. Cisco’s position as number one has ensured that all the best partners are in its channel structure. This leads to fierce competition and a survival-of-the-fittest mentality that forces some to seek out new vendors. “On a global basis, Cisco has reduced its number of direct partners from some 6000 to 3000,” says Elder. “This gives an indication to the market that we’re trying to be more focused and build better long-term relationships with fewer people. The advantage is that we can cover them better, educate and train them even more and work closer with them.” Even in the Middle East, Cisco has seen a natural attrition occurring in its channel structure. Partners themselves frequently claim that it is lack of margins forcing them out of the Cisco resell business. For Cisco, this process is a mechanism through which the most committed partners evolve and stand out from the competition. “Some will drop out of the networking business because the investment needed by a partner to build skills and capabilities is not small,” says Elder. “If they choose to make this commitment, the return on investment for their business needs to be there. When partners bid for business repeatedly and lose out to more capable partners they have to decide whether to qualify up or qualify out.” The net result of Cisco’s push for closer engagement with its enterprise-focused partners and 3Com’s desire to enter this segment has led to several large partners adding 3Com to their product portfolio. “It is very important to understand that we’re not aiming to convert partners to 3Com, but to add 3Com,” says Fakharany. “There are probably 25 large Cisco partners in the region and we have approached 12 of them and managed to sign high-level partnerships with four: Jeraisy, Ebttikar, Al Alamiah and Omnix. We’re currently in discussions with three more. Partners are keen to balance their business and don’t want to be too reliant on one vendor.” ||**||Building channels|~|WaelFakharany8.jpg.jpg|~|“3Com looks to keep between three and five weeks inventory in the regional channel because of customs procedures,” says Wael Fakharany at 3Com|~|Customers hold similar sentiments to partners. “40% of Fortune 500 companies do not intend to change their existing network equipment supplier,” adds Fakharany. “45% have a dual vendor strategy looking to balance their networking suppliers. From the reseller and end-user point of view, 3Com wants to position itself as the second vendor of choice.” Building channel structures that map closely onto the level of opportunity in each Middle East country is something networking vendors take seriously. Hisham Amili, international sales director Middle East and Africa and GCC at Mitel Networks, says: “Mitel has three routes-to-market in the region. One is direct to PTTs, one is through distributors and the final route is through VARs. There are no longer exclusive contracts in the region but in a country like Bahrain, because of its size, we only have one distributor. Appointing a second makes no sense so the company is effectively an exclusive distributor.” 3Com has declared the UAE, Saudi Arabia and Egypt as its top country priorities. “Saudi Arabia is over 50% of 3Com’s business in the region,” declares Fakharany. “As a vendor we know it is best to concentrate our resources on certain countries and use value-added distributors (VADs) to serve others.” “It is all about having coverage on the ground in the Middle East,” adds Elder at Cisco, “We have a team looking after channels at Cisco and its numbers can only increase. Partners want us there to support them in the market and when we do it is a win-win situation. When I put someone in Saudi Arabia, he can engage with the partners there and act as an interface on areas such as sales, credit and channel marketing.” Other vendors in the networking space accept Cisco’s domination of the market both in terms of channel partners and customers. Network integrators know that enterprise customers will not take them seriously unless they have Cisco certification and authorisation. This balance of power between vendor and partner has allowed Cisco to work on hard on pushing its channel partners to add value to their offering and not rely on simple product margin. “It is an ever changing competitive landscape in the Middle East,” reflects Elder. “A number of niche players continue to come into the market and leverage the distribution channel without building a presence here. We watch them and take on board what they do well and see if we can adopt any of the positive aspects ourselves. New players are less of a worry than traditional competitors like Nortel and Avaya. 3Com-Huawei is an interesting one to watch and see what they can and cannot deliver. The greatest form of flattery is seeing that they are trying to emulate what Cisco has done for many years and build an end-to-end capability.” Foundry Networks has also capitalised by picking up Cisco partners struggling to differentiate themselves from other Cisco partners. “Foundry offers partners a best-of-breed product that allows partners to make margin,” says Andy Palmer, VP EMEA at Foundry Networks. “When we bid into a deal we work closely with one of those partners whereas Cisco probably has five Gold Partners all undercutting each other on price as the only way to differentiate themselves from each other.” Some vendors are starting to deploy deeper resources to the Middle East region as it is increasingly flagged up as a fast-growing market. Bas Baars, marketing manager at Mitel Networks, says: “We’re putting extra emphasis on the MEA region. We’re working on case studies, proof points and building coverage in key vertical markets. Vendors in our space have global channel accreditation criteria. This is positive in ensuring cross-country quality but in terms of required investment in training, service skills and spare parts availability, some adjustments have to be made.” “Channel partner qualification criteria are set at a global level,” says Elder. “There is the odd exception that is made. It would be unfair to expect the same scale in terms of numbers from Middle East partners that we expect in the UK or Germany.” Both Cisco and 3Com operate tiered channel programmes in the region. 3Com has 21 Gold partners, 60 Silver partners, 100 bronze partners and six distributors — three in the Gulf, one in Saudi and two in Egypt. “Gold Partners are typically large systems integrators dealing with corporate customers and the government sector,” says Fakharany. “Then there are Vision Partners that truly understand how we want to revolutionise the industry and receive the highest rebates, strongest support offerings and can achieve the best margins.” Elder at Cisco explains: “Competition between partners comes down to what they can offer the customer, how they present it and sell it. Being a Cisco Gold Partner should give a company some value-add over a Silver Partner when talking to a customer.” ||**||Incentivising partners|~|foundry-palmer-(2).jpg.jpg|~|Andy Palmer, vice president and managing director EMEA at Foundry Networks|~|The discounts that partners receive on Cisco kit are tied into their status. “We look at discounts across the board and map the investment a partner makes in Cisco in terms of the return they get,” says Elder. “This means that end-users may not see those discounts based on whom they buy from, because the idea is that when we reward a partner with a discount, they reinvest that into building a long-term and sustainable business. We want customers to deal with a partner who is capable and will be there in 20 years to support them. If we continually say it is about tiny margins and not about value-add, these businesses will not last.” One scheme being used to encourage partners to invest in their business is Cisco’s Opportunity Incentive Programme (OIP), currently being tested in EMEA. “OIP is about returning money back to the partners for registering new business with us,” says Elder. “We’re looking continually at how we can increase partners’ margins and make them sustainable. OIP focuses on hunting for new opportunities. When you register a new opportunity with us we will give you some margin back once you are successful. The reason we don’t give it as an upfront discount is because we don’t necessarily want it passed on to the end user. The value to the end user comes in the partners’ capability, not in the price. We’re saying we accept you've led with Cisco and we accept you’ve registered this. You have been successful and now we will reward you. Take that money and develop your company.” The ability of other vendors to recruit partners from Cisco’s channel ranks should not necessarily be viewed as a negative development for the networking giant. Rather, it is a process of concentration ensuring that only those partners offering the best skills sets and most prepared to invest most in their relationship with Cisco rise to the top of the channel. While the relationship with high-level integrators and PTTs is the talk of the channel in the enterprise sector, networking pervades the entire customer spectrum right down to home users. Cisco has bought Linksys and 3Com still has a strong SMB sales stream. “Globally 3Com makes a great deal of revenues in the SMB space,” explains Fakharany. “But we're committed long-term to building up enterprise sales and making this 70% of revenues. SMB products are commoditising rapidly and this is becoming a fast moving consumer goods sector characterised by thin margins.” In this low-end space, efficient distribution structures and competitive pricing and incentives hold sway with resellers and customers alike. Cisco is back on track with its distribution partners after dropping Mindware and OnLine Distribution earlier this year. Those two companies now represent prime targets for 3Com to build deeper business links with. “The impact from offering tactical sales out benefits to the channel is profound,” adds Fakharany. “An extra US$1 rebate on a five-port hub can double sales in a week. 3Com looks to keep between three and five weeks inventory in the regional channel because of customs procedures. Below three weeks can be dangerous in terms of availability and over five weeks is risky in terms of product erosion. If distributors report more than five weeks of inventory, they lose one-and-a-half points in rebates.” The wider vendor community continues to play catch-up with Cisco in the Middle East networking market. 2004 will see further channel changes and the emergence of partners with specific vendor focus and a full range of value-add activities. As the market matures, box-shifting resellers will need to consider their value-add plans for the future. ||**||

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