Computerlinks reinvents distribution model

Mark Norman: The new unit provides our future income and the core unit gives us the finance to fund it

Computerlinks is aiming to shatter the perception that distributors cannot make decent margins with its next-generation distribution model.

Over the next three to five years, the global security distributor has set itself the lofty goal of more than doubling its EBITDA margin from 4.5 to 10 per cent by radically overhauling its business model.

The plan is to become less reliant on its vendors and to invest more in its own intellectual property and emerging technologies outside its network security stronghold.

Mark Norman, chief operating officer at the $800m (£520m) distributor, said gross margins in distribution have halved over the past decade.

“I have been in this business for 17 years and the one thing that’s always happened is that gross margins have declined,” he said.

“Our competitors are all trying to do something different in their own way, it is just that we are trying to do ours differently, more quickly.”

Computerlinks’ recently launched new technology and services practice is a direct response to that trend, according to Norman. Within a few years services will be generating half of the firm’s profit, he predicted.

“We are trying to re-engineer the company using our own IP to balance the vendors’ IP, so we have some kind of self-determination as oppo­-sed to being totally reliant on other people,” he explained.

Computerlinks’ ambitious margin target immediately drew scepticism. Channel strategy consultant Andrew Shepperd, former UK managing director of rival distributor Azlan, said the strategy could require a costly investment in headcount.

“Everyone is looking for services or market adjacencies where they can sell higher, more profitable lines without increasing costs,” he said. “The challenge when you move into services is how to do that without significantly increasing headcount.”

Ian Kilpatrick, chairman of Wick Hill, warned that Computerlinks’ services aspirations might be taken the wrong way by its channel partners.

“Ten per cent profit margin is achievable. But to do this you would have to go for a high services model, which could potentially cannibalise your resellers’ revenue,” he said. “Our model is different in that we maximise training for partners and get them up to speed on products.”

Beneficial to partners

Dave Ellis, who will head up the new technology and services unit, denied Computerlinks was setting itself up to compete with its resellers.

Instead, IT security resellers will benefit from the investment Com­puterlinks is making in adjacent areas such as virtualisation, physical security and cloud computing, he said.

Computerlinks has set up a virtualisation practice in the new technology and services unit, encompassing recent signing Virtual Machine Company. The distributor is looking to add vendors that solve the security issues arising from the deployment of virtualised environments.

Ellis said the physical security unit set up in late 2008 is steaming ahead, with sales in calendar Q1 hitting half of the previous year’s total.

“We are investing heavily so partners can use our skills to make the move into those complementary markets,” he said. “The message is we are not just a security distributor.”

Meanwhile, Computerlinks’ investment in global services will also provide relief to UK resellers in need of help on global customer deployments, according to Ellis.
Norman added: “The new unit provides our future income and the core unit gives us the foundation and finance to fund it.”

Kilpatrick suspected that Com­puter­links is under pressure to deliver more profit from Barclays Private Equity, which bought the distributor in 2008. Barclays holds about a 97 per cent stake in Computerlinks and will snare the remaining shares in June.

However, Norman said that Barclays had been the “perfect investor” and that the takeover has had no effect on Computerlinks’ operational strategy. He also stressed Computerlinks had met all the covenants of the deal.

Computerlinks employs 550 staff and Norman said the new strategy is also about protecting jobs.

“Our staff are very knowledgeable and our retention rate is very good. If margins go right down, we would have to take drastic action and we do not want to be pushed into that position. This is why we are trying to anticipate three to five years in advance and re-engineer a company.”