Is hybrid harmony a channel possibility?

There are many in the channel that think the hybrid model will bring only conflict, but there are some that think it can work, provided that certain fundamental rules are applied. Trevor Treharne reports on the age-old debate surrounding hybrid firms

When reseller AT Communications (ATC) continued its route on the acquisition roadmap by snapping up distributor Rocom (CRN, 21 August), the move opened up the age-old debate about whether a hybrid model – operating both a reseller and distributor – could be successful in the channel.

When a reseller takes ownership of a distributor, it can become a contact point for its rival VARs that previously dealt with the acquired distributor. This can open up a hornets’ nest of potential conflict. Some resellers feel nervous about dealing with a distributor that is owned by a firm it has previously been competing against. The same can be said of a distributor that looks to work directly with end-users to augment struggling margins in the distribution business.

The confidential relationship of a reseller and a distributor (which has access to the VAR’s customer details) is viewed in a new light when operating in a hybrid model. Can resellers trust a distributor that also has a direct VAR business? Are firms attempting the hybrid model and asking for too much trust from potential partners?

When ATC splashed out £17.6m on Yorkshire-based Rocom, it was not the first VAR to venture into the distribution market. Rival VAR Matrix Communications attempted to operate a hybrid reseller and distribution model when it acquired distributors Norwood Adam (CRN, 8 August 2004) and equIP (CRN, 14 February 2005). However, Norwood Adam was folded into equIP (CRN, 10 May 2005), which was then sold to Horizon Technology Group earlier this year (CRN, 6 February). This was a move many channel players claimed was proof that the hybrid model is not an easy line to tread.

However, others believe that, if the firms and their strategies are kept separate, it can be successful.

Alex Tupman, chief executive of ATC, told CRN at the time of the acquisition: “The Rocom business will stay as it is and be run as a separate, individual division. Most of Rocom’s VARs are localised firms that are focused on the small enterprise market. Our direct business will be targeting the medium and enterprise firms. There is not a great deal of conflict.”

ATC operates as three distinct business units: ATC direct sales business, Rocom channel and distribution business and an independent services operation. Both ATC and Rocom have defended the coming together of the two firms.

Richard Carter, managing director of Rocom, said: “Typically, the hybrid reseller and distribution model is not a successful course. However, Rocom had been operating in this way for some time with more than 50 per cent of our historical revenues coming from direct customers. Now we have absolute clarity of focus: our sole business is 100 per cent indirect and is a totally separate company and legal entity to ATC.”

Carter added that Westcon Group is the best evidence in the industry that the hybrid business model works.

“Westcon, which is a distributor of vendors Cisco and Mitel, is part of the Datatec holding group, along with Logicalis, which is a reseller of Cisco and Mitel, and Mason Communications, consultants and analysts,” he said. “So its model is identical to ours.”

Carter claimed that the feedback Rocom has received from its own channel since being acquired by ATC has been very positive.

“The value-adding capability that the service company [Rocom and ATC combined] gives us has already allowed us to close one piece of business that would have been impossible without our new installation and engineering capabilities,” he said.

“We are working on several more bids that our resellers would not have been able to compete for without our enhanced offering to them. Personally, my target is now 100 per cent in-direct. That is how all Rocom staff are focused and our channel partners love that.”

Carter added that Rocom now has a broader reach and capabilities as “an enhanced group”. He claimed that it is a true value-added distributor that is actively increasing market share for IP products and services for indirect fulfilment.

“Confidentiality is not an issue because the indirect and direct businesses operate as totally separate divisions, in totally separate buildings in different cities, with separate IT systems,” Carter said.

Bernie Dodwell, European security manager at Westcon, said: “Rocom is moving from a mixed model to a 100 per cent channel. The challenge there is to successfully manage an organisation with both a distributor and a VAR element to avoid perceived conflict of interest in the channel, but it can work.”

Dodwell added that he has first-hand experience of working in an organisation that ran both a reseller and a distribution business: security distributor Allasso, which was owned by VAR Integralis.

“At Allasso, our ability to develop was seriously affected by being owned by the largest security VAR in Europe, Integralis, with which most of our channel partners competed,” he said. “Eventually Allasso was sold off.”

Dodwell also cited the example of Matrix and equIP, which resulted in equIP being sold after a year.

“Maybe Rocom can buck the trend in the mid-market, despite being owned by a similar organisation to Integralis,” Dodwell said. “But in distribution, channel partners need convincing that their business is not at risk and the proof is in the pudding, not the ingredients.”

Dodwell claimed the Westcon model differs from ATC and Rocom because Westcon and Logicalis are run as separate companies within the Datatech Group, with separate directors who all report separately.

“Westcon and Logicalis are not divisionalised,” he said. “There is no cross-company management representation or shared IT systems.

“Unlike ATC, Datatech does not trade. It is a holding company for a multinational, multifunctional conglomerate with investments in many different, global companies, a lot like a venture capitalist. This is a key difference for us and will be a challenge for Rocom.

“I’d be happy to debate the issues and challenges of a hybrid organisation. It can work, but is not easy and history proves this.”

Mike Rodwell, divisional director at Computacenter Distribution (CCD), the volume distribution arm of corporate VAR Computacenter, said: “We rarely see any channel conflict. We have had a distribution arm for 20 years and resellers are aware we distribute products.

“Would every reseller be happy with this set-up? You would have to ask them. However, we run very separate businesses, and our resellers feel comfortable with the arrangement.”

Jess Thompson-Hughes, managing director of hybrid distributor and integrator React Technologies, said: “The hybrid model works well for us, but it does not work well for all partners if they have an issue with the model. Smaller resellers sometimes feel uncomfortable dealing with firms that operate direct.”

Thompson-Hughes added that for niche early adopter products there is simply not enough volume just to do distribution. This is when firms such as React would go out of business.

“Large integrators wait to see if new technology takes off and then seek to buy direct from the manufacturer,” he said.

“We make the hybrid model work for us. However, the model is not an issue for manufacturers, larger integrators, and new market entries. It just does not work for smaller established resellers. There is a feeling of paranoia from those VARs.”

David Galton-Fenzi, group sales director at networking storage distributor Zycko, said: “The hybrid model works for some companies, but they are usually huge organisations, a little bit like the Datatec holding group, which incorporates both Westcon and Logicalis.”

Galton-Fenzi added that the Datatec set-up works because it operates purely as a holding group for its distribution and reseller businesses.

“The hybrid model can make VARs nervous, but the management set-ups in the reseller and distributor businesses have to be separate,” Galton-Fenzi said.

“Distribution gives you the eyes and ears of market trends, rather than just being an integrator dealing with end-users. It gives firms a vision of the market.”

However, Russell Lux, managing director of VAR LuxTech, said: “I’m not comfortable with the hybrid model. It is just not right if we are dealing with a big distributor and spending a lot of money with it, only for it to then go off and build its own channel to leverage its distribution prices.”

Lux added that resellers invest a lot of money in sales and marketing to attract end-users. They do not want a distributor competing with it directly.

Gary Duke, sales director at reseller LAN2LAN, said: “For the model to work it depends on the product set we are talking about. But as a rule of thumb most honest resellers would have to admit they have a problem with the hybrid model.

“However well you police the divide between the different distributor and reseller sides of the business, you can never guarantee that one part will not talk to the other side.”

Duke added that customers are a reseller’s lifeblood and if they are dealing directly with a distributor, it will have all of the VAR’s customer details.

“This is a competitive game and VARs cannot afford to give customer details away,” Duke said. “It is commercial suicide.”

Alastair Edwards, senior analyst at Canalys, said the hybrid model can work, but there needs to be clear differentiation between the reseller and distribution businesses, because any overlap will see VARs start to question the model.

“You get different situations in different countries with the hybrid model,” he said. “In eastern Europe the model is very common. Firms do everything from resell to retail, and it is more culturally accepted.

“In the UK, the model exists quite successfully, providing the businesses run with a clear Chinese wall between them. Any indication of conflict and the model will go wrong.”

Edwards added that an established hybrid model works better than firms that attempt to move to a hybrid model, because creating such a model from scratch can potentially create greater levels of conflict.

Whether or not the hybrid model works will be an ongoing debate. It can and does work for some firms, but it has failed in the past. It is obvious that some VARs find it difficult to fully trust a company that uses a hybrid model.

There is very little to stop a hybrid firm from exploring the lucrative appeal of tapping their distribution arm’s reseller base for customer contacts. It must also be tempting to use those reduced distribution rates to feed business to its reseller operation.

The future of the hybrid model will much depend on how the ATC and Rocom marriage evolves. If it ends in a high-profile divorce – in a similar fashion to equIP and Allasso – other firms considering the model will be less likely to walk down the aisle.