If you ever want to get on the right side of Ronan McDonald, managingout what he knows best - and that's storage. director of Ideal Hardware, then just talk to him about high-end storage because that's what is most interesting to him. It also happens to be the sector that the distributor is building its growth around.
It was the restructure in March 1998 that saw Ideal Hardware decide to place its focus on high-end storage. While the distributor was known as a specialist for storage products, it was not viewed as dealing with all aspects of storage.
After the revamp, Ideal Hardware has become the distribution business behind its holding company Inter X plc - the name that it trades under on the London Stock Exchange. Ideal Hardware - which had a turnover of £221 million in 1998 - works alongside its two subsidiaries, Ideal Unisolve - the technical support centre - and IT Network, which is due to launch on 28 June as an information facility giving product detail.
Commenting on the restructure, McDonald says research was conducted among its resellers and its results found that one-third of resellers lost business because of a lack of technical resources, one-third found it hard to recruit technical staff and the final third said they would use a service such as Unisolve.
'There are a number of core competencies within the old Ideal Hardware which have to remain independent of the business. We want to develop them as required but give them their own direction,' says McDonald.
So with the restructure, high-end storage has become the strategy that Ideal is placing a lot of its sales focus on. McDonald believes there is a lot of opportunities with selling high-end storage as it is not a commodity item. To reflect this emphasis, Ideal has formed a sales team that deals with enterprise systems. While there are a lot of vendors that sell storage systems at the low end of the market, this business is won purely on price which means there is virtually no margin involved in the sale.
'It is very tough at the commodity end of the market. Anyone can buy a cheap system from off-the-page resellers if they know what they want.
But the high-end storage market is changing - the growth is being driven by 64-bit computing. They are very storage hungry and that is encouraging for us. Enterprise storage helps resellers that aren't specialised to secure the big corporate deals,' says McDonald.
One vendor that Ideal sees playing a key part in enterprise storage is Compaq. Since its acquisition of Digital more than a year ago, the manufacturer is struggling to merge the two massive organisations into one cohesive operation. But McDonald points out that if Compaq sorts out its positioning on storage as well as its Alpha products, then the vendor should be able to capitalise on the market.
'The Compaq/Digital merger was not the best period for either of the manufacturers. The company needs to position products properly and maximise the strong channel partners that Digital had before the merger. Compaq has the challenge ahead of sorting out the skills in Alpha and storage.
While it was strong in its classic business of desktops and servers, the Digital side of the business has been a learning curve,' says McDonald.
He adds: 'Compaq has a very strong channel for high-end storage but some of that business has come from Digital's original channel. If Compaq really puts its weight behind all the issues, then it can open up. The products need to be aligned. Compaq has to understand what it has got, because it now has the whole story from desktops to the enterprise - the traditional Compaq desktops to Tandem and Alpha systems provide Compaq with the scalability for all businesses. Compaq needs to build on its competitive desktop business.
It has the product set to differentiate itself and make storage look like an affordable expense rather than something that hangs around.'
Ideal Hardware became a Compaq distributor through the merger this year, but was a long-term Digital partner having access to the manufacturer's desktops and Alpha boxes. While Ideal was pleased to gain the supply rights to Compaq, the move has not been without its pain. In Ideal's latest results, the distributor admits that its performance was not as good as it could have been because of the margins it earned from Compaq.
As revealed in PC Dealer (17 March), Ideal suffered lower gross margins on sales in the interim as a consequence of being signed up by Compaq to distribute the vendor's entire range. According to the chairman's statement that accompanied the half-year trading period ended 29 January, gross margin fell to 11.9 per cent, down from 14.8 per cent last year, 'reflecting, as ex-pected, the lower margins on sales derived from our appointment as a distributor for Compaq'. At the time, James Wickes, managing director of InterX Group - talking to PC Dealer - admitted that margins were low on Compaq kit.
'We simply make less on Compaq equipment than we do on our storage products.
The fall in margin is mainly due to the high volumes one has to achieve to be a Compaq player,' he said. Wickes added that traditionally, margins would float between 13 per cent and 15 per cent. Excluding the impact of the Compaq business, margin would have been at 13.3 per cent.
To stem this shortfall in storage margins, Ideal is looking to complement its storage business with software sales. It has chosen to work with Computer Associates, Network Associates and Seagate. 'These products are a nice fit in storage products. As applications are more powerful, you need to manage what is happening with your computer systems. These products are an associated growth with storage,' says McDonald.
Another area that Ideal will look to develop is its channel assembly programme with Compaq. It is one of two CIP accredited partners in the UK, of which there are nine worldwide. The distributor has to go through a number of checks to ensure that it meets all of Compaq's satisfaction levels.
McDonald insists that channel assembly is beneficial to the distributor as well as its resellers because the programme allows it to deliver systems quicker to resellers.
'We have more flexibility as far as how much stock we hold. It gives us the option to carry what we want and configure from our own stock rather than wait for a slot in the manufacturing process. We hold different stock than before, as well as actually holding less stock,' says McDonald.
He adds: 'I think that channel assembly represents an opportunity for distributors to demand added value in the channel. Traditionally, distributors had not done this but now channel assembly means you can qualify exactly what added value a distributor provides. Channel assembly has a value if there is a shortage of skills in the supply chain.'
One area that Ideal Hardware pays very close attention to is training its staff as well as resellers. With an extensive number of training rooms at its Tolworth office, Ideal holds seminars and promotion days for resellers to attend. And in a move that is unusual for a distributor, Ideal holds training courses for its staff before they embark on their day's work.
All courses start at 8.30am and the aim is to have staff attend at least one course a week to provide them with up-to-date information on product developments and special promotions.
'We try to encourage a continual process of learning, and that development helps us to gain additional sales. This helps everyone hit their targets as we can work with better briefs than our rivals. You can't survive on price and availability - while there is a place for that, you need to complement those factors with something more,' says McDonald.
He is dismissive of the internet affecting Ideal's business, insisting that while it will take away sales at the low end of the market, high-end storage systems cannot be sold over the Net because of the technical knowledge that is needed to make the sales.
'The distribution market is facing challenges, certainly in terms of sales at the commodity end. Because you can't sell storage direct, resellers will still come to you to buy the systems,' says McDonald.
So the next time you bump into McDonald, by all means talk to him about the pros and cons of high-end storage, but it would probably be wise to avoid the subject of Compaq's margins.
A YEAR IN THE LIFE OF IDEAL HARDWARE
May 1998: Ideal Hardware launches an assurance programme to identify year 2000-compliant products to ensure that resellers can be confident of selling stock without fear of litigation.
June: The distributor issues a statement warning of further gloomy conditions in the storage market. The announcement saw the distributor's share price plunge more than 17 per cent in one day. The share drop followed a statement released by Ideal Hardware on 11 June, which stated: 'The market continues to experience significant product oversupply. This has led to unprecedentedly difficult market conditions.'
July: Ideal Hardware joins the official partner list of Compaq as a result of the manufacturer's merger with Digital. Ideal and Digital had been partners for a number of years.
September: Seagate Software appoints Computer 2000 as its third distributor, breaking up a long-term duopoly between Ideal Hardware and CHS Electronics. Ideal and CHS had been distributing the vendor's full range of network and storage management products for more than three years.
October: Ideal Hardware places more emphasis on the services element of its business as the organisation sets out to operate under three trading names to reflect the changed strategy. The distributor trades as three separate arms - its services business Ideal Unisolve, the multimedia arm IT Network and Ideal Hardware Plc, which will remain as the vendor's product distribution organisation.
The distributor embarks on a staff restructuring exercise and sets up an operational board of directors to oversee the day-to-day running of the firm following its split into three entities. It appoints an operational board of directors and restructures the sales team within the Ideal Hardware arm, which remains as the product distribution operation.
January 1999: Ideal Hardware makes a fresh foray into the motherboard business, signing up Taiwanese manufacturer Soyo as one of its first vendors.
The distributor states that while its core business will remain storage, it is looking at ways of bringing more associated products for systems integrators on board.
March:The distributor sees its six-month pre-tax profit of £3 million, down from £4.9 million previously for the period ended 29 January. The figure includes exceptional charges totalling £1.5 million, relating to group restructuring costs and start-up costs for its IT Network unit. Turnover for the period is £148 million, up 34 per cent from £110 million.
THE IDEAL HARDWARE BOARD
Richard Jewson: Independent non-executive chairman, chairman of the Remuneration Committee and member of the Audit Committee. He is also the chairman of Savills plc and Eastern Counties Newspapers Group Limited, deputy chairman of Anglian Water plc, and a non-executive director of Queen's Moat Houses plc and Grafton Group plc.
John Hancox: Independent and senior non-executive director, chairman of the Audit Committee and member of the Remuneration Committee. He is non-executive chairman of Johnson Service Group plc and Mid-Kent Healthcare Trust and a non-executive director of Martin Currie, Martin Currie Smaller Companies Investment Trust plc, and Gartmore Fledgling Index Trust plc.
Konrad Goess-Saurau: Independent non-executive director and member of the Audit and Remuneration Committees. Co-founder and original investor in Ideal Hardware.
James Becher-Wickes: Chief executive officer
Kevin Harper: Sales director;
Simon Barker: Operations director
Simon Miesegaes: Financial director
Steve Lundy: Risk management director.
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