Ivory tower syndrome

Too many IT vendors are still suffering from ivory tower syndrome in the Middle East. I don’t want to tar all the vendors with the same brush here, but when you start talking to the distributors and resellers working in the channel you realise that there is a huge gulf between the corporate assessment and the market reality.

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By  Stuart Wilson Published  March 15, 2006

Too many IT vendors are still suffering from ivory tower syndrome in the Middle East. I don’t want to tar all the vendors with the same brush here, but when you start talking to the distributors and resellers working in the channel you realise that there is a huge gulf between the corporate assessment and the market reality.

Maybe the vendors are getting ahead of themselves a little bit, desperate to implement the same kind of channel structures in this region that they have established in the developed markets of the world — despite the fact that the Middle East region is just not ready to accept these ways of doing business (yet).

Having just completed the Power List profiling 15 of the biggest distributors operating out of Dubai, I’m left with the distinct impression that many channel players are actually adopting a policy of appeasement when it comes to dealing with their vendor partners.

The vendors demand in-country stocking points, increased channel breadth, better credit lines for resellers and proactive market development activities from their distributors. ‘You’re absolutely right,’ reply the distributors and immediately start polishing their operations to make it look like they are meeting the vendors’ demands while in reality it remains business as usual behind the scenes.

What I’m trying to say is that change is occurring in the channel — but it is a slow process and it is not happening as fast as some vendors would have the market (and their global bosses) believe. For all the talk concerning the value of in-country distribution in the Middle East, many of the major sub-traders and re-exporters operating out of Dubai reckon they have never had it better in terms of business opportunities.

They may have had to widen their customer net a little, developing business relationships in East Africa and even CIS, but according to major traders in the market, they can still offer a level of pre and post-sales service (and credit terms) in far-flung territories that vendors and their authorised distribution partners just cannot match.

The vendors in the ivory towers still seem somewhat out of touch with their channel partners below the authorised distributor level. Just recently, we’ve been inundated with calls claiming that one major components vendor is dropping its prices at a rate of knots and doing everything in its power to push product into the channel to try and meet its quarterly targets. It's channel stuffing and resellers claim that it is hurting the overall health of the channel. The vendor in question merely claims that it has excellent stock availability in the region at present.

I’ve also sat with some major resellers and asked for their opinions on the 15 distributors included in this year’s Power List and it was a real eye opener, that’s for sure.

The great thing about the powerful resellers and traders in the market is that they get to pick and choose which distributor to buy from while simultaneously maintaining very close relationships with the principle vendors. And this puts them in a powerful position when it comes to negotiating prices and also finding out the inside track on vendor-distributor relationships.

Let’s say a vendor has four distributor partners authorised to sell the same product portfolio in a particular territory. Now, if there’s one reseller buying a significant chunk of these products in the market, that’s where the true power lies in the relationship. The vendors can play the distributors off against each other as can the resellers. It is frequently at the distributor level where the real margin squeeze is now occurring — and it is starting to hurt.

According to some very well connected resellers, one major regional distributor has now been on credit hold with HP for a number of months while another distributor, which claimed to be focusing on profitability during the course of 2005, continues to haemorrhage cash at a worrying rate and is having real trouble stemming its ongoing operating losses.

The channel needs to evolve. Distribution margins in the Middle East are probably tighter than in any other region in the world. Bizzarely, vendors seem to be having a whale of a time and the resellers that I’ve spoken to also seem to be out partying every night. It’s the distributors stuck in the middle that don’t seem to be enjoying life quite as much.

Last week’s quick poll makes interesting reading. We asked the Middle East channel community the following question: If you had the choice, which of the following channel levels would you most like to work at — vendor, distributor or reseller?

Only 7.4% plumped for the reseller option with 22.2% claiming that distribution is the place to be. A whopping 70.4% declared that they would prefer to work at the vendor level. Life must be pretty good up in the ivory towers.

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