Tier-two suppliers need to find ways of setting themselves apart from their rivals in the face of increasing competitive pressures.
Computer Reseller News brought together some of the key players in the system builder community to discuss how they can differentiate themselves.
Taking part in the CRN 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 do you think about Dell as a rival?
Green: It is the most consistent competitor we face in every sector.
The difference is it has a conveyor-belt mentality. It is under pressure - a corporate pressure - to be gaining more and more. It cannot have a quarter without growth. It is a remarkable achievement, but on the other hand, you have to look at its weaknesses when you are a tier-two selling against it.
Wherever the weaknesses are we will look to take advantage, whether in relationship management or service and support issues. We have to be perpetually marching around its moat and looking at areas we can penetrate.
CRN: One of the things that came up earlier was that tier-one vendors have been fighting each other. Are they going to start coming after tier-two?
Davies: Of course they will; it's where their growth's going to come from.
CRN: Will that be a problem?
Warburton: It is a problem. I know of several system builders that built their niches in local authorities and health departments and so on, when along came Dell and slashed the price to levels the incumbents couldn't compete with, to levels that the customer could not ignore. And so they lost the business.
So assume the service levels these users get will not be as good as those they were experiencing, and the customers go back to their original suppliers but say, "I can't justify coming back to you unless you bring your prices down." So where does that take us? It doesn't do anyone any favours.
Parton: I agree price is key, but it's about more than that. Particularly with smaller system builders, the number of times I have conversations with them and some of them say, "Intel, how can you help us?" When we talk about it they are trying to compete on price. For some of them, yes, I wouldn't deny that price is the main thing.
But in other areas, when you start talking about the things that they provide that Dell can't, what makes them different, they say, "Hang on a second. We can't even look at that; price is the big thing." I think people underestimate what they can do as a small system builder, that some of the large players just can't do.
Warburton: I agree. That's why some smaller system builders have gained the business, based on service. It's nothing to do with price.
CRN: But isn't it a problem that there is real pressure to reduce costs now, and customers are still focused on price a lot of the time?
Warburton: We have all this wonderful technology and we're effectively giving the damn stuff away. It's astonishing the quality and the power of what we've got.
Davies: It again comes back to over-supply of the market. And therefore the market has got to de-layer. Companies will have to go bust, vendors and distributors will have to go. Or the system builder community has got to learn to put their egos to one side and say, "I don't have any of these answers. I can either keep fighting until I go belly-up, or I can put myself up for sale, or I can amalgamate with somebody."
CRN: So it's get local, get niche or get out?
Davies: That doesn't work anymore. I'm sorry, that sort of mantra really is gone. Part of the issue is system builders are generally owner-businesses.
If they let their egos get in front of what is a good business decision then they are going to suffer. You have just got to put your ego to one side and say: "I don't have the answers. I'll find somebody else who thinks they've got the answers and who's willing to pay for it."
Warburton: One of the problems that faces SMEs in our industry, where the pace is so rapid, is that you are almost by definition an owner-manager; you are hands-on. You're so busy doing the business that to actually look more than five minutes ahead is almost impossible.
To search out these new opportunities, such as benefiting from convergence, takes an awful lot of your time to understand what the hell it's about, away from your daily product. Maybe it's dropping by one per cent per month, and you think, "Next month will be better."
What you should be doing is saying, "Right, I need to take my eye off that ball while I find out what it's about and bring in some new activities."
Davies: And that's the issue about ego, isn't it, and about having competent managers around you. I spend part of my time figuring out and planning where we are going to be in two years' time, not in two months, and we've made investment decisions based on that.
Warburton: Well, you're almost unique in this business if you've done that.
Green: We've got a real example: we've invested in Wales. You're right, you have to take a medium-term view. We made a board decision two years ago; we knew we were going to meet capacity in our factory, and decided we needed to look elsewhere. We went all round Europe, to the eastern block.
We actually looked at whether we could have better logistics by having part-assembly in the Far East. We looked at all these things and we came back, and yes, the best deal was the Welsh deal. That was having foresight and we made the commitment.
I can tell you how we struggled as a board to sit there, when our turnover was coming down and the profits were reducing, and say, "Now, do we invest our reserves in actually building a factory for the future?" And we did.
I think we're glad now because we exceeded capacity in our current site in March this year, and knew we had to start turning around our new factory. You're absolutely right. If you have a problem two months ahead, it's a blip; if you have a problem two years ahead, it's a major decision.
Warburton: The problem is that so few businesses have never even heard of a five-minute plan, never mind a five-year plan.
CRN: So where are you all going to be two years from now?
Green: Wales, I think.
CRN: It's very difficult to look two years down the road right now.
Davies: Was it any more difficult two years ago to look forward to this point?
Warburton: It's always been difficult, and the pace of change in this industry has always been fast. In fact, you could say it's slowing a bit now and we've got the fall-out, so perhaps it's a bit easier to look further ahead. Finding my partisan flag and waving it again, I'm very pleased to see that 60 per cent of the panel here are current PC Association (PCA) members and everyone else here is well known to the Association.
Trade associations have a valuable role to play. They're about bringing indicators of opportunity to those people who have difficulty taking their eye off their day-to-day ball.
Walmsley: I'd like to see a wider role for the PCA. At the system builder level we're short of product knowledge.
Warburton: That's of key importance to the industry. Trade associations can bring new technologies to the industry; they help disseminate information and help promote opportunity within an industry.
CRN: If you are a system builder that's struggling, where can you go for help in looking two years ahead or in developing skills?
Davies: Again, I'm just going to be brutal. In business you live and die by your investment decisions, by the efficacy of your solutions and the vendor partners you choose to work with. So when I look two years ahead, they're decisions that you have to take.
Your one [addressing Green] was about a factory; ours was about employing a bunch of doctors from academia to do research into high-performance computing [HPC]. Today it's paid off; it's our biggest-growing sector. And how much competition have we got in it? In the UK I can count about two or three players.
CRN: Isn't that a great USP for system builders, to be that close to the customer, whereas the tier-one guys are that bit more removed? One-third of Intel's revenues now are through system builders. The only differentiation now is being close to the customer.
Davies: It's like on the technicals. The tier ones used to play the game, "They're not as technically validated as us." But our products are now Windows Hardware Quality Labs-approved; they are on Microsoft's hardware list and globally visible. All our systems are tested thermally and technically by Intel before we bring them to market.
CRN: Dell has gone into the white box space (in the US). And while it says it has no plans to do the same in Europe, that doesn't mean it won't.
Twohig: Top Config, HP's online PC configuration scheme, is coming. Do system builders expect it to have an effect?
Davies: Any big trumpet-blowing entrance into the market always has a short-term blip. But it's about longevity; it's about stability; it's about all of the things you have to rely upon. If you've done them well then you can resist, in the main, most competitive pressures, as long as your financial house is in order.
We spend a great deal of time making sure that we are as visible to our vendors. We make sure we have Graydon in, the credit research agency, and we give it our accounts line by line.
CRN: Where is most of your business coming from: existing customers or new ones?
Davies: Actually, our new business is probably our weakest point because only about 15 per cent of our growth this year has come from new customers.
Green: I would say 80 per cent are existing customers. I have had one customer for 13 years. It's a council and over the last three years of the contract it has used six different suppliers. Some they ended up sort of talking to and some they ended up talking to in court. Now what sort of a relationship is that? That's the pressure of the value thing.
Davies: That's a really good point because increasingly the activity we are seeing is reverse auctions, and you know it's a pure bun fight on price.
There's no relationship, no value-add, but after some of these exercises, the councils, the education authorities, whoever it may be, are coming back and saying, "Actually this isn't working too well because after we've got the kit we're on our own. And no one wants to talk to us," and we're saying, "Are you surprised?"
Warburton: But what can you do then? If you've lost it and they are coming back to you and saying, "Please talk to us," do you just ask them for some money and then talk to them?
Green: No. The answer is to be there consistently. Whether you have won it or lost it you still have to be there maintaining a relationship and understanding the customer's need, even if it is someone else's kit. We are also not going to sit there and be silly about it.
If they are losing money slowly, the death will be prolonged, but if they are losing money quickly, they'll do a Tiny and be closing the doors and going home very quickly.
Warburton: If you go head-to-head with certain customers, some you will win, some you won't. [You'll win if] you are most appropriate to win that business, and you won't win it on price.
Green: Yes, but where you lose business on price, where you know someone is going in there and trying to buy business, a lot of companies realise what a mistake they made when the tier ones come back for the next instalment.
They suddenly realise what a mistake it was applying a whole contact based on the price on that day. Again, it comes back to the same old thing: get close to your customer. That council contract, we lost that in 1997 and won it back in 2000. All we did throughout those three years was maintain the relationship. We still had kit there and were supporting it, so our field engineers were our eyes and ears.
Warburton: The point is that you [to Green] as an organisation - and Gordon as well - you are not just looking to the short term, you are looking at the medium and long term. But we are an industry beset by short-termism, by quarterly results. If you are a US company you have got to be posting those quarterly results.
CRN: But coming back to the Top Config thing: are you saying that it might have an impact at first but in the long run it won't really affect you because of the relationships you have with your customer base?
Davies: The only way I can answer that is by going back four years when the buzzword was 'e-commerce', and if you weren't in that you were dead. And we sat back and watched everybody spend huge amounts of money on it - and it returned nothing. Now, the smart ones did it over a long period.
They were consistent about it and put the pieces of the puzzle together as their customers started being able to respond to it. So why should Top Config phase me out?
CRN: If the tier ones keep coming up with these schemes and keep pushing, is that eventually going to have an impact?
Twohig: Aren't we being a little but parochial about it? Because I don't honestly think that this opportunity to dig a little bit deeper into four or five per cent of this high-loyalty share is really what an A-brand vendor is looking at. He's looking at a European or a global perspective.
He's got eastern Europe, he's got all these areas where A-brands are less than 10 per cent. They are also going through a growth spurt while northern and western Europe are somewhat more mature. I think their focus is not really on good SME accounts in Swindon, it's on emerging markets.
Muir: In the UK, the share for tier ones has been pretty consistent over the past few years - the mid 60s per cent - while local players were in the mid 30s.
Davies: There is a strange discrepancy here, though. I could never understand whenever I spoke to Microsoft why it said its channel was static, and I've always felt this was crazy when you see AMD doing more through the channel, Intel doing more though the channel.
It's static because there is this whole hidden piracy issue that sits beneath it, where - and frankly we deserve it in some respects - where you've got the hidden piracy of the whole system builder community at the small end where they are just chucking out licences and these guys [Microsoft] don't see the growth. And it's a fact; it's the difference.
CRN: When something like Top Config comes along, doesn't the simple fact that you can offer a complete service, one person to kick, give you an advantage?
Davies: I'm open minded to it but probably remain to be convinced. We have an online survey tool and we are polling our customers every week to understand what their issues and priorities are, what do they expect from us and how we are performing. And every time that something like this comes along that might have an effect on us, we will ask questions on it. By and large I think our response is, "So what?" It's got to pass that test.
CRN: So is the UK market going to be static now for suppliers such as Intel and Microsoft?
Muir: It's who's taking share that's changing. There's consolidation in the multinationals [tier ones] with one taking share off the other. Dell's definitely taking share, and there is not consolidation but changing share in the tier twos as well.
CRN: What about between tier one and tier two?
Davies: I still think we'll see more failures over the next 18 months.
Parton: If there is consolidation at the top level there will always then be an opportunity for more fall-out for tier two. So if the tier-one section is consolidating, that's a great opportunity for everyone else to gain market share as well.
CRN: Do you think that tier twos need to do more to differentiate themselves?
Parton: Differentiation is key no matter who you are. If you're a system builder you need to stand out from the crowd, otherwise you are not going to grow no matter whether you are a tier one or a tier two or what area you get into.
Davies: The real difference is the people: what's their passion? What's their motivation? I would probably say that we have an advantage because, as a smaller company, our ability to motivate people, by whatever mechanisms, and our ability to display our passion can be really quick, so we are really not going to roll over and play dead until somebody starts putting the nails in the box.
When you go to Microsoft and Intel events, the one thing that is consistent is the passion of the companies that attend. They are not the biggest, but what we lack in size is usually made up by the fact that we are willing to get our hands dirty, to fight, and to maintain what we've achieved.
Warburton: I think passion is such an important word and concept. You can go to all sorts of gurus and they will tell you that that is a characteristic of winners: you've got to have passion. And maybe that brings it back to the original question: what is the role of system builders?
If they don't have passion they don't have one, frankly. They need to be committed to their business and committed to their customers' business.
Personal Computer Association
See also part one of CRN's system builder round table discussion: Tier-two system builders fight back
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