See no evil...

See no evil, hear no evil, speak no evil. In light of the recent credit crisis to hit the Middle East IT channel, the three wise monkeys (namely vendors, distributors and resellers) would do well to examine the origins of this phrase and understand the part that they all played in the creation of the current nightmarish situation.

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By  Stuart Wilson Published  June 7, 2006

See no evil, hear no evil, speak no evil. In light of the recent credit crisis to hit the Middle East IT channel, the three wise monkeys (namely vendors, distributors and resellers) would do well to examine the origins of this phrase and understand the part that they all played in the creation of the current nightmarish situation.

I’ve spent the last week talking to vendors, distributors and resellers and one point has become abundantly clear: all three monkeys played their part in creating the market conditions that led up to this massive ‘hit and run’ event.

It is still far too easy for vendors to wash their hands of any involvement in this type of affair. They don’t want to talk about their overly aggressive push tactics and illogical rebate and incentive schemes that resulted in a channel stuffed with inventory that nobody wanted.

The problem is, no matter what the vast majority of vendors claim, their sales teams are still driven by aggressive quarterly targets and will do anything to make their numbers and claim that bonus. Now is the time for vendors to take a step back and start looking at the genuine size of the Middle East market — especially in terms of the amount of product flowing through the Dubai-based channel.

Don’t get me wrong; the Middle East IT market continues to grow at a rapid rate. However, too many vendors have over-egged the potential for sales growth and have cut corners to make the numbers, turning a blind eye to the grey and re-export channels they created as a result.

This sort of problem is nothing new for the vendor community — they have been dealing with it for years. The difference now is that the volume of product going through the Middle East channel — and the strategic location it occupies between Asia-Pacific and Europe — means that the unethical channel management policies of some vendors in this region are now becoming visible on a global stage.

Some vendors have started getting greedy and in the process they have become the architects of their own downfall. By pursuing a reckless ‘growth at all costs’ approach they have inflicted untold financial damage on the distribution and resell community below them. Don’t just take my word for it; here is the view of one respected European channel consultant:

“Unfortunately, while technology vendors try hard to eradicate unethical channel management practices within their organisations at a global level, the fact is that at a local and regional level, channels are still managed by individuals with commissions based primarily on sales goals and targets,” explained Alastair Edwards, senior analyst at Canalys.

“Even in Western Europe, where vendors have been championing low inventory channel models and attempting to move the channel from a back-end to front-end led margin model, the spectre of channel stuffing and heavy discounting all too quickly reappears as soon as the market turns sour,” he added.

“If Intel and others are to sort this issue, they must move away from compensating their own people on short term volume metrics alone and start thinking about rewarding elements such as channel efficiency, Intel’s profitability through the channel or the ability to maintain a clean channel,” Edwards concluded.

The question now is whether or not there will be a channel backlash against the vendors that the market holds responsible for the current credit crisis. Honestly, I think the answer is no. You see, vendors are a canny bunch and as destructive as their aggressive channel stuffing is in some cases, they tend to balance this with heavy investment in pull marketing as well. The consumers demand their products and leave the channel with little choice other than to stock them or use them.

If one distributor makes a stand by refusing to work with a vendor unless they change their channel policies, you can bet your bottom dollar that someone else will step up to take their place in the blink of an eye. Vendors play on this, using a divide and conquer policy, playing distributors off against each other. Unless the channel puts on a united front — through an organisation such as the Technology Distributors Association for example — vendors will continue to outsource all of the financial risk to the channel while retaining the vast bulk of the reward for themselves.

I’ve said it before and I’ll say it again. As a collection of individual companies the channel is a weak entity. Together, the channel has immense power and the ability to make vendors change their policies — but only if the partners stand united as one. I have seen examples of this in other markets. Distributors and resellers in India have actually boycotted certain vendors’ products if they disapprove of a channel policy and this type of action can achieve remarkable results.

The phrase ‘see no evil, hear no evil, speak no evil’ is frequently used to describe someone who doesn’t want to be involved in a situation, preferring instead to bury their head in the sand or wash their hands of any culpability. If I had to pick one of the monkeys to represent the vendors, it would have to be ‘speak no evil’. Vendors see and hear the concerns of their partners every day but will never admit the part that their actions play in creating problems in the channel.

Hopefully, the latest channel credit crisis in the Middle East will rectify this irresponsible laissez faire attitude that some major vendors have practised for so long in this region. The channel has started to speak up, bypassing the regional management and contacting senior executives in the US and Europe to vent their frustrations.

As I said at the beginning of this article, I hold all three monkeys responsible for the situation. Distributors have started to hold their hands up and admit that they extended too much credit to certain partners. Resellers too have admitted that they over-extended themselves in terms of credit lines and failed to manage their cashflow properly. The only party yet to stand up and admit their own shortcomings is the vendors closely linked to this whole saga.

This shocking failure by certain vendors to admit a degree of responsibility shows a fundamental lack of respect for the role that distributors and resellers have played in helping them build up operations and significant sales in the Middle East. Sometimes the channel has a short memory, but it is imperative that we do not forget the lessons that need to be learnt from this latest episode of crazy credit shenanigans.

So, in conclusion, Intel is the proud winner of the inaugural Channel Middle East ‘Speak No Evil’ Three Wise Monkeys Award for its complete and utter failure to admit the part it played in creating the current credit crisis that is gripping the Dubai-based channel.

The award goes to Intel in recognition of superb channel stuffing in the first quarter of 2006, creative calculation of systems integration ratios for sub-distributors masquerading as assemblers, establishing ridiculous channel models that allowed resellers to push product at cheaper prices than authorised distributors, and ensuring the late payment of rebates and incentives to resellers. Congratulations to Intel from everyone in the Dubai-based channel.

Next week, we turn our attention to the two remaining monkeys and find out what role the distributors and resellers played in the latest credit saga and how we can prevent this happening again.

As always, your comments and feedback on the latest credit crisis and the channel dynamics in the Middle East are appreciated. Please call +971 4 391 0882 or e-mail stuart.wilson@itp.com.

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