The SME system builder has a better chance of reaching the growing SME market than big tier-one players, thanks to their levels of service and support. But those that still rely on box shifting must realise that survival depends on understanding customers' needs.
Taking part in the Computer Reseller News debate were:
Gordon Davies commercial director at Compusys.
Stuart Green strategy director at Centerprise.
Julie-Ann Muir OEM group manager at Microsoft.
Jackie Parton UK and Ireland channel marketing manager at Intel.
Seamus Twohig product marketing director at Ideal.
Chris Walmsley sales director at Teco.
Keith Warburton executive director at the Personal Computer Association.
CRN: What are the main challenges facing system builders today?
Warburton: Does the term 'white-box supplier' still have negative connotations? Have system builders moved on from just being box shifters? That only ever applied to a small proportion of them.
The key box shifters are not necessarily adding value to them - companies such as Gateway and Dell come to mind - and the people who have been adding value are the very small system builders. That has been their lifeblood. These guys were never box-shifters.
CRN: How many system builders are there out there now?
Davies: Four or five years ago the channel took somewhere in the mid-30s per cent of their revenue [from system builders] and today it's in the mid-40s.
That paradigm shift has happened for a number of reasons, but it is real. We have never perceived ourselves as box-shifters. We have constantly had to strive for new ways of making profit.
Parton: 'Box-shifter' is viewed as a negative term. There is a small group of system builders that are quite happy to call themselves box-shifters because that's what they are. But they need to differentiate themselves in some way, otherwise they won't stay around.
And you're right, a few years ago the vast majority of our sales were coming from the tier-one vendors and there was this mentality that the channel was predominantly box-shifters.
It's very clear that this is not the case now, and that what the channel can offer is very different to what the tier-ones can provide.
CRN: The major tier-twos are fairly easy to identify, but what about the local system builders sitting on an industrial estate with a screwdriver?
Warburton: There are still thousands of them out there. Pick a number - 10,000?
Twohig: The term 'system builder' is only valuable as far as I'm concerned if they are putting together a solution. Ultimately what all system builders want is profitability, and then it's about your growth plan and investment criteria.
Also, it's a get-out world. Are you going to sell it and pass it on? What do you want to do with that company? If you are not making money it's about controlling your costs and prioritising markets.
Davies: In the past few years we have become very hybrid. IP telephony and consultancy is a big deal for us now and contributing more to our profit, and our customers are expecting us to do all this stuff. You have to keep moving.
CRN: Do Intel's figures mean that system builders are taking more of the market now?
Davies: The tier-ones have been concentrating on winning market share from each other, and that has allowed us to grow. As it gets tougher, they are reaching deeper into our traditional win-space.
Those of us who have responded to that threat by adapting our service and business model can move forward. But you can never be complacent. The channel has grown, partly because the tier-ones' attention wasn't focused on our backyard.
CRN: Are the tier-ones going to succeed in taking more share?
Warburton: Turn it around and look at who is buying. And who do they want to buy from? The busiest part of our economy is SMEs, and they buy from other SMEs.
Davies: Our challenge is basically getting though the door. If a customer has been buying from a tier-one and then we have managed to get though the door, generally they will have a far better experience.
At that point we've won and the likelihood is that we will keep that customer for many years. The challenge for the channel is to position itself to look and be professional, adaptive and responsive to demand. Where the tier-ones fail is on the customer service relationship.
Warburton: They can't afford to be interested in the SME market. What you need is people who will go in and hand-hold. You can't afford that if you are Dell.
Twohig: The challenge will be price point for the A-brand. There is a sliding scale, and at a certain percentage point, you lose [profitability].
Parton: Surely the issue is: what are the customer values? If it's price, fine. If it's service and support, they will go that way. There will always be a place for the tier-one player.
Walmsley: I think we are missing a point; a lot of SMEs buy on the internet now. There is a lot more knowledge and awareness than there was five years ago.
They will use local system builders for a bit of expertise and setting up a server, but when they want a laptop, they will go on the web and buy from Dabs. The bulk of system builder business has come from government and education recently. We see blips every July.
Davies: We have to be careful not to focus too much on the PC platform. Our biggest drivers over the past 18 months have been storage, service, software integration and voice-over-IP.
The box is at the heart of it but the PC is just a way through the door. Then you move up those trust levels with the customer.
CRN: Isn't the logical conclusion that someone else will end up building the boxes and you'll just provide the service?
Green: It's actually about understanding the customer's needs. What is their driver? If you understand that you are always going to have a profitable business. It is as simple as that.
Walmsley: And where they are right now. I know a lot of SMEs and many of them are only just installing their first network.
Davies: But there's your opportunity. We launched a thing called Total Care three years ago for SMEs where we take over the whole IT infrastructure for them. We talked to them about their business and the opportunities for profit if their business grows.
Green: I read the other day that the average selling price of a PC has dropped by 70 per cent since February 2002. Just to stand still we have to do much more, and at the same time labour costs have not come down.
Walmsley: System builders dangerously cost-project at the moment. They do it two or three months in advance, and in some cases on the basis that they know component prices are going to come down. That's the problem. They do not expect any component price to go up.
Davies: The point was made earlier that we are hopeful that the green shoots of recovery are now being seen. Sadly I take completely the opposite view. If this pain carries on for another 12 or 18 months then I will be delighted, because it is still an oversupplied market - from distribution.
Distribution is working on untenable margins, but it's a bun-fight. It is an unsustainable model and it needs to be de-layered. Knowledge has to be concentrated and then you will have value back again.
Twohig: I think the current situation has done a couple of things. First, it has focused people on what their core business is.
Second, those people who have strong customer liaison and added-value will win, while those who want to live on price will continue to win until they are not the cheapest, and then they'll die. There will always be someone cheaper.
Parton: A lot of what you are talking about, though, is innovation and specialisation. If you just stay put then you put yourself in danger.
If you start innovating in directions that are growing, or respond to particular market demands, then you stand a better chance. If you can develop your name in certain technologies or specialisations or areas, great.
Suddenly your brand is starting to become a player there, as people think of your brand together with that sector.
CRN: Is it still a case, then, of get big, get niche or get out?
Twohig: I think 'get big' has gone. It's get local, get niche or get out.
CRN: What's Microsoft's perspective on how well tier two is performing?
Muir: From what we see, the market is steady. We are forecasting something like five per cent growth for next year for the local system builders - tier two, if that's what you want to call them. And for the tier-one guys, we are seeing slightly less growth, but still growth.
So we don't see things being bad; we still see that the market is growing, but we are seeing the players changing. Those that have been successful are the ones that have got a niche, such as education or government, for instance.
The consumer area has been tough for system builders to do well over the past year or so. We see that continuing, and SME or education being the growth areas, and anybody involved in laptops.
CRN: Is it much harder to be in the laptop sector?
Parton: Laptops and mobility have been hugely important to us; we are staking a lot of the company on that. But unless you are a large system builder it has been difficult to get into the notebook market.
So one of the challenges that we have hopefully started to overcome is how we can enable smaller system builders to build or brand their own notebooks.
One of the initiatives we have been running with Microtronica is trying to do exactly that; they can buy smaller quantities and don't need to do the same sort of volumes.
Davies: It isn't particularly difficult to get into notebooks. The challenge is to do it well. Again, if you are going to go out there and fight on price point - we've just seen Toshiba come out with a £499 notebook - that's tough, and if you fight on that basis you are going to lose.
CRN: Surely there must be an opportunity in mobility as more home users take up wireless networking?
Davies: I can only talk from personal experience but 12 months ago we didn't have broadband and my wife probably made one or two online purchases using dial-up. Now we've got broadband it's three or four a day. I think there is a massive market opportunity there that is being led by Microsoft.
Parton: But the key is that, if the channel wants to be in there, it needs to be in there first. If system builders wait around in the digital home arena there are a lot of players now with media-centre PCs of one description or another. If they want to take a big chunk of the market, getting in there first is what's important.
Davies: We have to do the basics better. As Stuart [Green] said earlier, you have to understand your customer. If you look at notebooks, we can all get really excited about the growth there and how quickly they are going to proliferate.
But the bottom line is this: when we talk to our IT managers, customers and purchasing people, they all say: 'Fantastic. It works in theory but what happens when it goes wrong?'
Because, at that point, the customer experience is absolutely bloody awful. Even with tier-one brands it can be 10 days before you get your notebook back. The channel has an opportunity there.
Green: Having the logistics structure and everything behind it is absolutely key. It is not just a price war, it's all about the service.
I am reminded of a guy who sat there with an order for 300 machines and said: 'It's yours on one condition: that you guarantee me I won't have a DOA [dead on arrival].' And I said: 'Most of the DOAs occur in transit, so let's look at the logistics and why it's so important that you don't have DOAs. OK, you've got three teams out there. Now that I understand your logistics, let's make sure that every team has a spare machine.'
That's something you won't get from an e-system or a customer relationship management system. It is simply a case of understanding the customer's need.
CRN: You can do that, but what about the little guys working locally?
Warburton: Those who are successful do it intuitively. It's about dialogue. For too long the industry has been dominated by corporations that believe dialogue is one-way, i.e. 'We tell you what it's going to be.'
As an industry, some of the larger players have pushed product and, because product has been perceived as sexy and because the market has been growing at 25 per cent per annum, nobody had to be very good in order to succeed.
In the real world - not our world, the real world - there are plenty of industries where there is zero annual growth or even a steady negative growth rate. But there are many companies that can exist, profitably and successfully, in that environment.We are part of a juvenile industry. We think that, because it's been around for 20 years, it's mature. It's far from it.
Davies: It's a good point, but we need to come back a little bit on that with regard to vendors. Vendors have been allowed to be arrogant and lazy and unresponsive to the channel.
Today, when vendors walk through the door the first thing I challenge them with is: 'You might have a fantastic product but what's your go-to-market plan? What's your support plan? What are all the criteria that sit behind that?'
Because before, people would walk through the door and say: 'I've got a great product. People are going to buy it. Do you want to sell it? And this is what it is going to cost you.'
You push the challenge back to them. You push all the hurdles back down to these guys because they have to be responsive. And Intel and Microsoft are grinning because there was a time when they really did not have to be responsive to what the channel was asking it to do.
Now both of these companies have got to the point where maybe those challenges will exist. Where maybe if they get to the point where they alienate us so much we'll look in a different direction. Microsoft, to some extent, needs a near-death experience to change.
CRN: So do you think we will get to the point where a lot of SMEs start saying: 'I understand all of that, but I don't need it. I'll take the basic, standard package.'?
Davies: It's happening now. Refresh rates are more extended. At one point you could argue that some refresh rates were as short as 18 months. Now we are looking at four or five years.
The challenge today is when they say that you've got to support this kit for the next five years, you have to answer that.
Warburton: And while the industry and the channel is, quite properly, being asked to support product for five years, a lot of the components you are using, and even the software, is long gone in five years.
CRN: Are you, then, better off building your own boxes, because you know what's in them and you can guarantee the customer that you will look after them rather than rely on a third party?
Davies: You can control your own destiny because a customer asks for a five-year support contract now. Two years ago we would have laughed and told him not to be silly. Today you can't do that.
Walmsley: It depends how confident you are about the components you are throwing into the box.
CRN: And surely the argument could be applied the other way. The customer could say: 'Actually, I would imagine that Hewlett Packard, Fujitsu Siemens, IBM and Dell are able to guarantee me more component consistency than you would.'
Warburton: Which is a fallacy, frankly.
Davies: The whole vendor/distribution/supplier model depends upon a common set of parts. Let's say we buy our memory from Samsung, and Dell buys theirs from Samsung and maybe a couple of others. The memory is of a common standard.
Warburton: It's a global marketplace for components, whoever is building systems, whether it is Dell or whoever.
CRN: But on a level playing field?
Parton: What we have done, because this has been a big issue, is create what we call Gold products that have longer stability, a life-span.
When a customer says they want a product for the next three years or five years, people can get into a position where they say: 'OK, this is when we will upgrade, this is how long it will last for.' Those are the same products the tier-one vendors have.
Twohig: I think the difference between the tier-ones and the channel - or maybe the tier-ones and the non-tier-ones - is [to do with] access to product and in what order people are prioritised.
Generally we find the tier-ones buy more and get a better price, but they also get access to a greater proportion of new technology more quickly. Then there is the time it takes them actually to get to market. I think that is the window of opportunity for the reseller or distributor: to strike early and profitably.
CRN: So is it better to build your own systems so you can give the customer more of a guarantee or not?
Davies: It all depends on everybody's company objectives. Ours are simple: we [try to] keep control of the process - and the brand and customer relationship - as far as anybody ever can.
If we do something badly wrong we blame only ourselves. If we do something exceptionally well and we keep doing it well, then we're going to keep that customer.
So for us, it is just about capturing customers and keeping them. We will have competitive pressures along the way, but hey, that's the nature of business.
Parton: And to be honest, you can take that all the way up to the vendor level. If we just supply the components then that's a pretty sad state of affairs, as it would be if you supplied just the PC.
So the packaging, the solution around it, the relationship, the advice, all the service side, the technical stuff, the reason why your customer goes to you, needs to be the same reason a reseller goes to a particular vendor.
I agree with your earlier comments, that we've been lucky that several years ago those add-on pieces weren't so important. Now they are.
CRN: Do you think vendors will have to work much closer with the tier-two suppliers in the future?
Muir: I hope we've started doing that.
CRN: Has it gone far enough?
Parton: The key as a vendor - as it is with resellers when they talk to customers - is listening to particular business needs. Adopting a one-size-fits-all approach doesn't work.
Trying to look at particular business needs is fine, but getting much more onto a personal relationship level is important.
Green: I think that is one of the most important things. If there is one area where tier-twos can challenge tier-ones, it is the consistency of that relationship.
Dell has a policy of actually replacing an account manager every six months. That means that I have an opportunity, in certain accounts, every six months.
Personal Computer Association
In part two of this special, the discussion focuses on the competitive pressures facing tier-two system builders:
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