Climbing the value added distribution ladder

The PR and marketing bandwagons behind distribution companies in the IT industry are famed for their overuse of ‘fashionable’ phrases. While most tend to prove little more than a temporary obsession, one term has stayed the course longer than most: value added.

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By  Andrew Seymour Published  January 31, 2007

|~|nicholas-argyrides---logico.jpg|~|Nicholas Argyrides, Logicom|~|The PR and marketing bandwagons behind distribution companies in the IT industry are famed for their overuse of ‘fashionable’ phrases. While most tend to prove little more than a temporary obsession, one term has stayed the course longer than most: value added. Yet for all its ubiquity, the true meaning of value added distribution in the Middle East — not to mention the direction it is heading — remains a bone of contention. Channel Middle East strives to add its own value to a subject matter renowned for splitting the distribution camp right down the middle. Constructing a precise definition of “value added” can be a frustrating exercise for the simple reason that anything — no matter how modest — can be of value if the recipient deems it that way. In the distribution space, the meaning has typically come to categorise wholesalers with far more in their locker than standard logistics, procurement and account management services. Although it is a mistake to confuse value with the word enterprise, the two terms are inherently linked since value added services tend to lend themselves to the implementation of complex enterprise projects. “Value comes from services surrounding the company’s portfolio such as training, marketing support, pre-sales and after-sales services,” asserted Nicholas Argyrides, general manager at Logicom. “It is essentially distribution where a competitive price is not the sole deciding factor for doing business.” Patrick Eichstaedt, general manager at the Middle East operation of Germany-based HP, IBM and EMC specialist Magirus, believes value added distribution is defined by the intimacy of the relationship between distributor and reseller. “A value added distributor complements the skills, knowledge and portfolio of a reselling company in such a manner that the VAD’s customer can enhance its customer base, generate more valuable business opportunities and manage complex business opportunities exceeding its own skill and resource capabilities,” he explained. His view is echoed by members of the vendor community. Ryan D’Souza, product marketing manager ESG commercial business at HP Middle East, said: “Under our Preferred Partner Programme, value added distributors would be required to have much higher internal skills, hold a minimum number of certifications by product group, and specialise in certain solutions, such as datacentre or storage,” he explained. “They would also have the responsibility of developing the reseller channel and must offer a certain level of support to the reseller channel.” ||**||Vendor policies|~|eichstaedtpatrick200.jpg|~|Patrick Eichstaedt, Magirus|~|Compared to other territories around the world — most notably Europe where consolidation among a number of established enterprise distributors has completely reshaped the landscape — the Middle East market for pure value-added distribution remains far more confined and adolescent. Tech Access was only formed six years ago for instance, while Tech Data introduced its Azlan-branded enterprise arm to the market just 18 months ago. Other players with a value added string to bow, including Aptec, Almasa, Redington and Al Jammaz in Saudi Arabia are still synonymous with the volume arena even though they have branched extensively into the enterprise sector. In addition to that, firms such as GBM and SBM retain a hybrid approach that blends first and second tier distribution. One of the primary reasons for the apparent lack of inhabitants in the value added distribution environment is the channel policies of vendors that have moved into the region over the years. Many manufacturers have typically serviced the market through one or two preferred partners, which have subsequently controlled the bulk of the business. Value added distribution only prospers in a world where a vendor operates a clear tiered channel model. If it doesn’t have that and is unwilling to share responsibility for the channel development, then value added distribution is starved of the nutrients it needs to flourish and simply becomes a pure volume play. Furthermore, vendors with a minimal on-the-ground presence are more likely to find it harder to drive their value added channel than those who do since the model thrives on a two-way relationship. “The supplier should sell ‘through’ a disti and not ‘to’ a disti,” argued Argyrides at Logicom. “Unfortunately, not all vendors share our vision for a VAD model. Either they do not have the resources or they are simply not interested to assist. But the ones that do see the benefits of VAD support us with funding, demo products and training.” ||**||Changing dimensions|~|thierry-chamayou---mindware.jpg|~|Thierry Chamayou, Mindware|~|Given that VADs usually carry a select number of brands, establishing a watertight partnership with the vendor is a crucial part of the value added model and one that distributors in the market dare not underplay. “To ensure you provide a strong value added proposition you need a very transparent relationship with the vendor, including full qualified vision on the pipeline, customer and reseller,” said Lee Reynolds, group marketing director at security VAD Fusion Distribution. “Having a healthy and connected relationship with your vendor makes everything run a lot smoother. Overcoming bottlenecks in the whole business process to deliver solutions to the customers involves having the right relationship with the reseller and vendor,” he added. Thierry Chamayou, deputy general manager at Mindware, commented: “Vendors are eager to see people investing in the product, not only carrying stock. Their requirements are about having distributors capable of pushing skills into the channel and investing in the channel.” Although the majority of the region’s largest value added distributors are stationed in Dubai, their prospects are ultimately influenced as much by what happens outside the UAE as within it. However, each market in the Gulf must be judged on its merits due to differing perceptions of the value added model across the region, suggests Eichstaedt at Magirus. “It varies from a point of acceptance because some markets are more mature than others,” he explained. “Bahrain and Qatar, for example, are small, but they are very mature markets. They are probably closer to the way of dealing in Europe or the US than Saudi. Saudi is a market with huge potential, volumes and investment capacity, but the way that trading is done is not that mature. So maybe adding value in Saudi is easier than it is in Bahrain or Qatar.” The dimensions of the value added distribution channel are quickly changing in line with the evolution of the overall IT market. Whereas 10 years ago a value added distributor might have regarded the configuration of a server as a high-end service, most now accept that they have to work a lot harder to earn their title. The skills needed to sustain a value added offering are more extensive than those required for the traditional distribution space with an emphasis put squarely on the ability to understand a reseller’s business model, customer base and requirements. Hanspeter Eiselt, managing director at Tech Data Middle East, claims the main ingredients of a value added model include a close partnership with the reseller, a blue chip vendor portfolio and varied financing portfolio, and an efficient services capability. He is adamant that the consultancy and technical expertise that most VADs offer will blossom into a desired commodity as the reseller channel evolves over the next few years. “There are a number of resellers that are solution centric, but they are limited by the bandwidth of the number of projects they can drive at any one time due to their own scaling,” he explained. “That’s why I see a stronger role for distributors to play in this region. In Europe, the resellers have actually realised that the distributors can act as a systems integration platform, leaving them to go and focus on the specialities of local services, installation and maintenance. For a reseller to say that they can entirely refresh a datacentre and hope to have all the system integration capabilities around that is highly unlikely.” Meanwhile, Tech Access, which employs close to 100 people in the region, maintains that its portfolio of pre-sales, marketing, professional services, and tier one and two support is a major differentiator in a market that still favours volume transactions. “We do all the order fulfillment for the channel,” added Umar Malik, senior VP at the company. “We make sure that resellers are fully accredited and certified, and we sit down with the resellers and vendors to plan which areas and sectors they need to address. I think a lot of people say they are in the value added distribution space, but they are probably just paying lip service to it. We, in the true sense of it, are actually the channel development partners for a lot of our vendors.”||**||Deal mentality|~|umar-malik---tech-access200.jpg|~|Umar Malik, Tech Access|~|While each distributor maintains its own individual flavour of added value, there are common characteristics that bind the wider VAD community together. Highly qualified and technically able staff — preferably with an understanding of project management — are regarded as the most valuable asset to any value added distributor. “A value added distribution sales guy basically needs to be able to sell to the end user on an executive level — but do this through the reseller,” said Eichstaedt at Magirus. “At the same time, he needs to be a coach because he must train the reseller without pushing the guy to learn to do so. Technical people that you provide to the market need to be able to set up a database in an infrastructure at the end user, but they only do it virtually because most of the time they invest in teaching the reseller to do the right things with the end-user.” Dorian Breakspear Coyle, MEA business development manager for distribution at networking giant Cisco, agrees with that prognosis. “It’s no longer a case of just feeding products to distributors to push out to the market — we’ve moved on from there,” he said. “There’s a need from our distributors for education; they are hungry for education. We are expecting them to ‘train the trainer’ with as little delusion as possible. We must make sure that they transfer either technical, marketing, sales and possibly the financial capability through the reseller.” Proof of concept or technological centres have also become must-have tools for VADs. Such facilities give resellers access to a testing and learning environment that they would be unlikely to find in a traditional distribution house. This is all underpinned by a climate in which most VADs have already realised the value of developing a multi-vendor offering that supplements their core offering. Tech Access, for example, has ventured into the security, application management and business intelligence space in recent years, while networking distributor Online Distribution has taken a similar stance. “We have focused on our core competence as a networking vendor distributor when deciding on what technologies to add to our offering and the technical expertise that is required to support these technologies,” said Keith Rich, managing director at Online. “In many cases, these are leading edge technologies. As such there is considerable investment on Online’s part to attain the knowledge to, in turn, service the channel and transfer this knowledge on. This is of value to both our channel partners and the vendors we represent,” he added. Mindware — which works with vendors such as Business Objects, CA and NetApp — is also looking to enhance its value added offering by carefully selecting additional brands. “We are looking at addressing the vendor situation, but we are being very careful about it because it needs to complement our business units,” confided Chamayou. “It has to be an integrated offer so that we become a one-stop-shop for our partners.” While a value added distributor might once have been distinguished by its loyalty to one brand, that is no longer the case. “The actual product portfolio of distributors can be a value add on its own,” observed Argyrides at Logicom. “Offering an array of high-quality products that complement each other always helps in encouraging the reseller to see us as a one-stop shop for all their needs,” he added. There is an argument that the value added distribution arena is being held back by the fact that corporate resellers taking on value added projects are often forced to procure from three or four distributors to get all their bids together. “When I look at the portfolios of all the different distributors in the region, the largest barrier to a solution-centric value added distribution model is that nobody has a complete solutions stack available,” lamented one channel source. Whichever way you look at it, there is no getting away from the fact that the Middle East value added distribution market is still characterised by the desire of several players to pursue a strategy encompassing both value and volume. Pure value added distributors are critical of such an approach and accuse volume distributors with value added ambitions of underestimating the challenges involved in moving from a stock-based model to a project-driven model. They claim that longer turnaround cycles and financial demands make running a value added ship a far steeper challenge than many appreciate. That is unlikely to deter willing pursuers of the value added model however. “What I have seen as a vendor is more and more volume distributors coming to us and wanting to develop a value arm to move up the food chain,” confessed Bruno Haubertin, partner and alliances sales organisation manager at Sun Microsystems. “The reality is you cannot give a CDP opportunity to more than four or five distributors because it requires a high-touch type of relationship and management.” Eiselt at Tech Data — which carries brands such as CA, Cisco and Oracle within its Azlan division — argues that there is room to drive a dual model in the Middle East, particularly with several distributors in the value added space evolving from a rich components background. “I don’t think that you have any chance for survival as a pure value added distributor here because there is this mentality that every component of your project has to be a best-priced deal. The biggest obstacle preventing value added distribution from taking off is the strong deal mentality that we have in this part of the world. Projects are getting taken to pieces and then bidded out at the lowest common denominator. Value added distributors live off the fact that there will be parts of [a project] that are profitable and there will be parts that are selling at cost.” He added: “Another risk is that if you get into multi-tier technologies it requires a lot of credit and I think that is where we see one of the main challenges at the moment. We recently experienced a multimillion dollar deal on a software contract where the reseller which was chosen by the vendor did not have the ability to quickly raise the type of credit it required to actually fulfill that deal.”||**||Inventory and logistics|~||~|Lee Reynolds, Fusion Distribution|~|The future of value added distribution in the Middle East doesn’t just hinge on the demands of the customer, but on how successfully the key players can develop the concept. Tech Data, for example, has been expanding its model by piloting several projects in the UAE based on having pre-sales engineers available and onsite with resellers. Malik, meanwhile, admits Tech Access is constantly evaluating new ways to educate resellers and develop tools that facilitate business. “There is definitely value add in financing or pre-sales, but that is something which is now industry standard,” he said. “You don’t have an edge over other distributors by providing pre-sales, post sales and technical support. It’s about the extra mile that we go to in terms of channel readiness, channel enablement and service attach rates.” Tech Access is one of the few distributors that doesn’t hold inventory, but other players insist traditional distribution functions such as stock management and logistics still have a vital role to play at the value added level. Rich at Online Distribution believes that investment in inventory leads to shorter lead times and projects being completed on time. “Although many say that inventory and logistics is not of value I would argue that it is,” he said. “Coupled with our consultative selling role our sales teams work with the channel to establish project timelines and completion times.” The pace of evolution in the Middle East market prevents most onlookers from daring to predict what the market will look like in a few years’ time. Such is the fine line between success and failure in the VAD space that the current crop of leading names could be joined at the table by a set of new contenders. “To be honest there are a lot of companies popping up all over the place with vendors that are possibly in the lower ranks of being successful in their technology area, or taking on vendors that have no run rate business and are market building worldwide to be the next big opportunity,” said Reynolds at Fusion. “These distributors will either try something else, just disappear, or catch one of the vendors that will take them to the top.” ||**||

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