Channel shenanigans

The Middle East IT channel had an action-packed first quarter in 2004. Allegations of SMB Computers’ involvement in the smuggling of nuclear technology and Cisco uncovering rebate and incentive abuse in its Middle East channel operations stand out. The rest of the year promises even more action as the channel matures.

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By  Stuart Wilson Published  April 3, 2004

With SMB Computers still embroiled in controversy and Cisco getting back on track after shaking up its regional distribution partner line-up, the first few months of 2004 were a turbulent time for the Middle East distribution landscape. Expect several more major developments in the coming months.

It is hard not to feel some sympathy for SMB Computers’ plight. Vendors that worked with SMB have expressed their admiration for the company’s skills as a distributor. Despite this praise, they cannot work with a company that tarnishes their brand reputation under any circumstances. Many felt they had no choice other than to find a new distribution partner, or at the very least suspend trading with SMB.

When vendors walk away from a distribution partner, they seldom end up out of pocket. Most distributors pay major vendors up-front for products minimising the latter’s financial exposure. Any credit lines that do exist are kept to a bare minimum. The real problem for vendors when a distribution agreement ends or runs into trouble is making sure that resellers know the alternative sources to buy product from.

The first signs of trouble at a distributor have a profound effect on the payments it receives from resellers — the channel partners it sells to. The channel works on credit and when resellers see problems at their distributor, they frequently do everything in their power to postpone payment for goods received. The theory being that if the distributor is forced out of business, there will be very little it can do to reclaim money owed.

It is doubtful that SMB can survive in its current form. Vendors are walking away and resellers will play the situation to their advantage by withholding payment. In the slim margins of the reseller channel, such an opportunity can be the difference between a good quarter and a great quarter. Ethical? Probably not. Good business sense? Absolutely.

In the western European IT channel, when a distributor falls on hard times, there is a queue of rivals lined up around the block to pick up the inventory sitting in the warehouse, snap up the customer database or even buy the company outright. These decisions normally depend on the disclosure of detailed financial information concerning accounts receivable and debt levels — figures that are not readily available in the Middle East market.

While vendors do have access to financial information from distribution partners, they still need to ask themselves whether it is accurate. This is something that Cisco found out the hard way after launching its channel audit last year. The investigation discovered that its own staff, and not just some of its distribution partners, were involved in a hornet’s nest of dubious channel activity centred on rebate and incentive schemes abuse.

It is time to draw a line under the recent channel shenanigans in the Middle East. The regional channel will mature fast and vendors will exert greater pressure on partners to play by the rules in 2004. What Cisco discovered in its Middle East distribution channel, and the subsequent action it took, are part and parcel of that process. In retrospect, Cisco should have come clean on the precise reasons for the shake-up from the outset, rather than attempting to bury the truth. Now that the real reasons for the shake-up have been established, it sends a powerful message to the channel about the standards that international vendors want to set in the region.

Throw into the mix some major global distributors planning to beef up operations in the Middle East and the scene is set for further channel developments. Several Europe, Middle East and Africa (EMEA) vice presidents at major vendors claim that 2004 is the year when Ingram Micro will really take the plunge in the Middle East. These vendors already use Ingram Micro in Europe, so their statements hold serious credibility.

There is no shortage of regional distributors open to offers should Ingram Micro decide to enter the market through a fully-fledged acquisition. With the exception of a few big distributors, the word on the street from informed channel sources is that everyone else is putting out feelers to potential acquirers.

There’s plenty more channel action to come in the Middle East during 2004. E-mail your views on recent developments in the market and your predictions for the year ahead. We really value your feedback.

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