SPOTLIGHT - Team tactics

Tech Data's purchase of Computer 2000 has created a massive distribution monolith. But, as Tech Data CEO Steve Raymund explains, merging two very different companies involves much detailed planning.

If you were a loyal supporter of, say, West Ham, you would ardentlyution monolith. But, as Tech Data CEO Steve Raymund explains, merging two very different companies involves much detailed planning. follow the careers of all your favourite footballers, including the arrival and departure of much-loved players. Anyone who takes an interest in the sport knows that the players also feel a certain loyalty to the teams or countries they play for, as well as the all-important support from the fans. Which is why striker Ian Wright's move from Arsenal to arch-rival West Ham was initially greeted with such scorn - no Hammers' fan could bring themselves to support a player they were used to berating.

This was exactly the scenario that Computer 2000 (C2000) found itself in when it was bought by US distribution giant Tech Data. Previously, the management of C2000 had voiced fears that Tech Data was a potential threat to its business if the US company ever entered the UK. As it turned out, this never materialised. Instead, the companies have struck a deal which sees the two parties creating a massive distribution monolith with combined sales of more than $11 billion a year.

In April, the balance of power among the big distribution players shifted when Tech Data threw down the gauntlet to Ingram Micro - spending $395 million to obtain an 80 per cent holding in C2000 (PC Dealer, 22 April).

While the actual purchase did not take the industry by surprise, the timing of the merger did. Why had it taken so long? Indeed, Graeme Watt, UK managing director of C2000 and Steve Raymund, chief executive of Tech Data, have admitted that they had been conducting on/off talks for at least five years.

Whether it took five years to clinch a deal or not, the fact is that a deal has now been done and the two companies are hoping to use each other's skills to dominate the distribution market. Raymund reveals that one of the first things the two companies will seek to implement is a coherent IT structure for the joint venture.

'We will move to common platforms, applications and solutions internally. We are doubling the size of the company, so we need to have an IT structure to reflect this. IT has not been C2000's strength and Tech Data has lacked knowledge in some areas. We have decided on the systems, but there is still some work to do,' Raymund says.

While the internal IT changes will not be that noticeable as far as resellers are concerned, a more obvious change will be the organisational structure of C2000. The European operation has undergone a period of rationalisation over the past few weeks, which has seen important business decisions now being made by seven or eight key personnel, instead of 50 European managing directors attempting to come to an agreement.

The key personnel are backed up by the two company presidents, Perti Ervi and Harry Krischik. With clear-cut responsibilities for each of the presidents - Ervi is now in charge of team development, marketing and strategy, while Krischik will implement country operations - it is hoped that the company as a whole will be able to react more quickly to local issues and present a more united message across the board.

'This allows us to be more flexible, nimbler, faster and react as a team. It is much easier to implement than the previous structure,' argues Raymund.

As part of this new structure, C2000's Watt has gained responsibility for the United Arab Emirates, in addition to his usual UK and Ireland duties. The geography of the UAE is not particularly similar to that of the UK, but maybe the reason why Watt seems suited to the job is because of his connection with Gerry Samure, who previously ran the Emirates operation for Tech Data. Samure knows Watt from his days at C2000 UK.

C2000 is also attempting to prove to its critics that it is not just a telesales operation. By creating what it calls independent business units (IBUs), it aims to be seen as a value added distributor. There will be IBUs for HP 9000 workstations and IBM's RS6000s, to highlight the fact that selling these high-end machines requires very different sales practices than, say, selling Intel, Microsoft and Apple products.

As Raymund says, the IBUs will evolve as the life cycle of products change.

The IT distribution market has been likened to that of Mercedes and Harley Davidson - while both companies are motor vehicle manufacturers, they offer the buyer completely different aspirations. So C2000 is attempting to offer resellers both the Mercedes and Harley Davidson feel.

But Raymund insists that because of the size of C2000 and Tech Data, it is able to do a better job than the specialist resellers and this will be further strengthened by the setting up of more IBUs in the coming year.

One sector that the companies have highlighted as being in drastic need of performance improvements is the disk drive market. Watt estimates that the UK operation generates five per cent of sales in components and C2000 as a group makes 13 per cent. And the one strength that will help its performance is the purchasing power that the combined companies can now command. Raymund predicts that during the next year, Tech Data and C2000 will make $15 billion worth of purchases.

'We want to find some way of leveraging our buying power. Previously we had 30 departments making the purchasing decisions, and that is not the best way to go about it,' says Raymund.

He adds: 'These changes are very new to the C2000 culture. Previously, there was some regional control, but while we will let each country manage its own business - giving it the flexibility to manage local conditions - by leveraging the entire operation we will build a much better business and better service to resellers.'

But Raymund is quick to point out that it is crucial to ensure that individual countries are able to adapt quickly to local conditions. 'It is not enough to take on lots of desks and simply add more staff. We have all the resources in the world and we must use them,' he says.

'It is true that 95 per cent of UK business is the same as it is in the US, but five per cent can wipe you out. We can add a lot of depth and show other regions our experience. We can help avoid the potholes.'

Tech Data's experience of channel assembly in the US should help C2000 get it right. But Raymund is sceptical of whether channel assembly even works. While the US operation is about two years ahead, Raymund says: 'It has fallen short of our expectations. We are going to waste a lot of time.'

Tech Data US carries out channel assembly for Hewlett Packard, IBM and Compaq. Initially, it purely built the machines for the manufacturers, which was both time consuming and hard work.

So recently, the distributor set up what it calls factory direct, which Raymund claims is working well but is still not quite enough.

The factory direct initiative involves Tech Data setting up a factory operation within the manufacturer's own plant - for example Tech Data has an operation in Houston, Texas with Compaq. There, Tech Data adds the components and software to the bare bones of the box and ships the finished product to the user. It takes about two or three days to ship the product - exactly the same amount of time it takes Dell to perform the same action.

'Vendors can improve fulfilment by replicating the Dell model but using the channel. This model is producing some exciting results,' says Raymund.

But what gets up Raymund's nose is the fact that manufacturers still insist that the distributors buy all the components - such as Seagate drives, Iomega storage drives and Samsung monitors - from the manufacturers, rather than source the kit themselves. He claims that distributors are better vehicles to perform these buying purchases than manufacturers because distributors are used to making these purchasing decisions on a daily basis.

'The supply chain is too long, simply because the manufacturers want the margin. It is hurting my business as vendors commit to a dysfunctional implementation of channel assembly. The whole idea of factory direct was to make the whole process quicker, but in fact it has slowed it down.'

He adds: 'The problem is that the industry is always short of components and therefore we are limited by stock availability. Even if I have 50 CD-Roms sitting in my warehouse, I can't use them according to the vendors. They claim that there is a quality issue, but this is just a smoke screen for them to get more margin. This is the reason why it hasn't worked.'

Raymund wants hardware manufacturers to behave more like suppliers in other industries. He uses the example of Nike, which develops its own trainers but has nothing to do with the manufacturing process, which is all farmed out to third parties. To speed up the whole process, Raymund says it would be easier for manufacturers to ship a chassis then allow distributors to source third-party components.

Another example of a trend that the US operation has local experience over its UK counterpart is Web-based sales - Tech Data generates one quarter of its sales through its Website. All the information, such as product number, price and availability, is on its site, which means the reseller does not have to ring up the distributor's telesales operation. Raymund says that the company's sales people have become consultants - although not all of them are happy with the transition.

One reason why the US operation has seen this huge shift towards electronic business is the fact that the American people use the internet as an integral part of their lifestyle.

In contrast, C2000 has found that while customers are using its Website, they tend to use it out of hours to look up product information, then ring up C2000 when they have made up their minds to place their order.

Raymund insists that the UK will see an upturn in its electronic business, claiming that as the system gets more sophisticated, people will be compelled to use the tools.

One fact of life that all distributors have to put up with is low margins, which in turn result in price wars. One rival of both Tech Data and C2000 that has been highlighted as being price sensitive is CHS Electronics.

According to Raymund, the pressure is on for CHS to focus heavily on profit. CHS' share price has recently crumbled to $8, halving the value of the company. This has meant that the once acquisitive company has had to put its buying plans on hold.

Raymund points out that the financial market is extremely sceptical as to whether CHS will, in fact, actually pull it off - only time will tell.

Interestingly, Raymund does not view CHS as a direct competitor - he is more concerned with Dell.

'Dell plays by a completely different set of rules,' he says. 'While Ingram is a well-known enemy, it is Dell that poses the real threat.'

As to the future, Raymund believes that distributors will hold no hardware stock at all, as there will be no need - provided that the channel assembly issues are sorted out. He also predicts that resellers will have no warehouses as they will pass this burden on to distributors, who will hold and ship product direct to users. And he sees yet more turmoil in the market next year.

'The direct model of Dell exposes us. The problem is that when things go wrong in distribution we have no fat margins to cushion the mistakes - a bit like a trapeze artist without a safety net.'

Watt agrees: 'I can lose more money in three months than I can make in three months.'

While West Ham fans try to come to terms with cheering on Ian Wright and not viewing him as a traitor in the midst, C2000 has a similar problem fitting in with the culture and attitude of Tech Data to make sure it is accepted within the global team.

TECH DATA

Founded Florida

Date founded 1974

Founded by Edward Raymund, father of the company's current chairman and chief executive Steven Raymund

Headquarters Clearwater, Florida

Year end 31 January

1997 turnover $7 billion

Employees more than 5,000

Main vendors used Compaq, HP, Microsoft, 3Com, IBM, Cisco, Usonic

Number of resellers supplied to More than 100,000

1983 Started making the transition from reseller to distributor

1989 Acquired a Canadian distributor

1993 Began selling in Latin America

1998 Acquired Computer 2000

COMPUTER 2000

Founded Munich

Date founded 1983

Board of directors Steve Raymund, chief executive; Perti Ervi, marketing; Harry Krischik, country operations; Manfred Gunzel, finance officer

Headquarters Munich

Year end 30 September

1996/97 turnover DM8.2 billion

Employees 3,000

Main vendors used Compaq, HP, Microsoft, 3Com, IBM, Cisco

Number of resellers supplied to 75,000

1996 Acquired US distributor AmeriQuest.