The changing vendor/reseller relationship
Vendors display a variety of approaches to channel management, but the growing emphasis on provision of services and direct sales suggest subtle changes are occurring.
These are tough times in the channel. Pressure on margins, high costs of accreditation, pressure to enter exclusive deals, direct sales threats, market consolidation, the rise of the grey market, channel conflict, e-commerce initiatives, and above all a sluggish economy all represent threats to growth.
However, analysts have identified one key trend: emphasis on services is the way forward.
IDC's most recent overview, in 2002, of IT distribution in Western Europe warned of a difficult year ahead punctuated by a dip in hardware demand and considerable upheaval following the Hewlett Packard/Compaq merger.
The report highlighted concern over direct sales and the difficulty of moving to provisioning services to find new revenue.
IDC predicted that direct sales will increase from 54.1 per cent to 55.4 per cent by 2005, and noted that resellers were looking to solution sales and services provision to counterbalance market saturation and economic malaise.
But it warned: "Very few of Europe's corporate-account resellers derive more than 15 per cent of their turnover from services, and most are financially incapable of investing in the transition to a new value-adding business model."
Brian Pearce, senior analyst for IDC's European distribution programme, says: "The systems integrators and VARs are likely to be the big winners in the years ahead, provided they can agree on a way of working with the professional services activities of the top IT vendors."
The Ovum Market Trends 2003 study, in June, also advised resellers to stick with services in the light of market shrinkage. It predicted a three per cent decline in total revenues this year compared to 2002, to £22bn.
While urging a move into managed services and outsourcing, the report noted that smaller resellers may not have the resources to do so. It also noted that the only important growth area - the public sector - was hard to get into for smaller players.
Not surprisingly, vendor announcements highlight new incentives, new channel structures and accreditation drives. Recent announcements have come from HP, IBM, Computer Associates (CA), Microsoft, BT, and Sun.
CA recently unveiled what it calls a more 'customer-focused' Channel Partner Programme that appears to emphasise software as a utility in line with the likes of IBM's On Demand computing strategy. Most importantly, the scheme includes the 'margin builder' rebate programme which was launched in the US in July.
The rebates allow resellers to earn up to eight per cent on BrightStor and AllFusion solutions and 15 per cent on eTrust products.
A rebate is dependent on a significant sales increase quarter on quarter. In a similar move, EMC has brought a US strategy to the UK. Called the Velocity Channel Partner Programme, it consists of three tiers: Velocity Resellers, Velocity Partners and Premier Velocity Partners.
The UK target is for 40 resellers in the programme to cover regions, vertical markets and application areas where EMC lacks coverage. The company says it now sells half its products through the channel, which it supports via its Channel Express Online service. This gives price quotes and takes orders.
IBM is also bulking up its channel. It hopes to reach more ISVs this year in an attempt to increase coverage in the mid-market with its ISV Advantage Initiative Programme. The programme includes financing, new software, and PC and server products. It also includes support for marketing, planning, sales and technical issues.
Growth of a direct market
In February, Microsoft's Business Solutions division, formed after the software giant's acquisition of Navision and Great Plains, announced plans to expand its number of channel partners under the new unified channel certification programme. The division handles ERP, business management and supply chain software.
Dean Carroll, business development manager at Microsoft Solutions Partner Group, says about 100 partners were inherited as a result of the acquisitions, and that about 20 per cent were already Microsoft partners.
Carroll says that Microsoft has a "compelling proposition for resellers" but is not in the business of aggressively pulling them away from competitors.
He says that 95 per cent of sales are indirect overall and 100 per cent direct at the SME level. He agrees that the main trend today is in leveraging the service business, because "the reality is that up to four times as much business is done through services relating to a licence sale".
Despite its monopolistic hold on the desktop operating system market, the company estimates it has a four per cent share in business solutions and admits that it is as much a way of promoting the .Net platform as the core products in the portfolio.
But in the past two years Microsoft has increased its direct sales through what it calls its Enterprise Agreement (EA) licensing programme.
Microsoft says between 62 per cent and 75 per cent of its largest customers have EA agreements and the company now plans to pay bonuses to most senior managers (around 600) based on the number of customers the company adds over a three-year period, and customer satisfaction.
The carrot for customers is the promise of discounts of up to 30 per cent on volume orders. To reduce the impact on resellers Microsoft appoints what it calls an enterprise software advisor to administer the account in return for seven to 10 per cent of the contract's value.
Oracle is another vendor trying to change its direct sales, which rose by 10 per cent last year. It is adding 25 engineers to its European channel support and is increasing online support for training and lead generation.
In May, Sun made changes to its iForce channel programme by introducing two new categories: Solutions Provider and Solutions Associate. The former are able to sell third-party applications on Sun boxes and may own the intellectual property.
Sun has also made it possible for resellers to sell all Sun products and services under one contract while introducing a simpler accreditation process.
This followed the move in April, when Sun sent termination notices to 70 of its UK resellers as part of what it called "evaluation of the channel".
This cut into the 120 so-called 'systems providers'. The cull related to problems Sun was having with grey imports. Sun distributor Clarity confirmed that some resellers were using their contacts to sell grey-market products - undercutting the legitimate channel.
Through Clarity, Sun has recently signed up six resellers for its new small- office solution, which is seen as lining up against Microsoft's small-business server and Novell's NetWare platform.
In April, HP dumped 30 of its UK resellers as it rolled out PartnerOne contracts to replace pre-merger Compaq and HP contracts. Andy Vickers, channel and business director for HP, says the reorganisation of the channel is going to plan.
"We have between 1,500 and 2,000 active resellers in the UK and 13 Channel Development Partners. We have streamlined our operation and I am confident we can increase sales from $3bn to $4bn year on year."
Vickers says the key changes are: more focus on logistics to ensure orders can be processed efficiently; greater breadth among distributors; and driving incremental business. He also says marketing spend has doubled to $40m this year.
He admits that mistakes were made in the past: "I remember the Compaq 'channels for the internet age' policy didn't go down very well because there had not been enough consultation. As a result it was pulled. Now it's very much about a two-way conversation."
Vickers says rebates are still part of the equation despite the belief of critics that they are being used to drive out poor-performing distributors. So is the channel consolidating or expanding? Opinion appears to be mixed.
"Vendors are making clearer divisions between broadline and value-add distribution. HP, for example, is adopting a two-tiered approach to distribution - rationalising its broadline approach to commoditised hardware and exploring the opportunities with Channel Development Partners for solutions sales," says Dan Belton, marketing director, Hugh Symons Group.
Johnathan Grantham, vice president worldwide channel sales operations at Fujitsu Softek, believes shrinking margins are driving consolidation.
"There is consolidation on both sides. Vendors such as Veritas and Precise, HP and Compaq and now EMC/Legato are all consolidating to win market share and end-user presence," he explains.
"In addition, VARs have also jumped on the bandwagon and are consolidating rapidly, as in the cases of Morse Group acquiring GSA and SSI; and VAD Bell Micro acquiring TTP, Ideal and Rorke Data. Hardware margins are shrinking and there is a need to drive forward value-added services."
Part of the value-add for customers is the option of buying online. Online brokerages were the most horrendous failures of the dotcom era, but there are signs that efforts to sell low-margin products online are coming of age.
Notably, the US-based Computing Technology Industry Association (CompTIA) aims to get UK distributors, including Bell Micro, ETC, Ingram Micro, Interchange and Tech Data, to create common data sets to streamline the IT supply chain.
CompTIA admits it is an arduous task, but claims standardisation is on track. But, ironically, vendor-backed organisations like CompTIA are lobbying against UK government moves to promote open source, which could reduce the costs of e-commerce.
Rattling your resellers
Slimming the channel is always controversial. Gerry Carr, marketing manager at Accpac, a subsidiary of CA, says some vendors are asking for trouble.
"Large vendors are definitely cherry-picking the channel. It's a neat trick if you can pull it off, but it does lead to a lot of disgruntled resellers happy to sell your competitor's products. We are looking to pick up any and all disgruntled accounting and CRM resellers, so we benefit from those vendors that are slimming their channel."
Channel Solutions Europe advises SME vendors on ways to market in Europe. It believes the trend of slimming down and going direct has peaked.
Chief executive Chris Cowan says: "Some vendors looked at increasing direct sales due to frustration at the ineffectiveness of 'push selling', but have come back to using the channel for what it does best: providing numerous credit lines and fast, flexible and cheap logistics.
"The channel has never been good at marketing to the end-user, nor should it be. That's the vendor's job."
Cowan believes more vendors are now putting marketing cash straight into the hands of resellers as a result.
But what are the vendors' common mistakes? First, Cowan believes, they waste money on distributor sales teams when they should be investing in technology to make the sales easier, such as being able to attach sales to other items and allowing dynamic pricing.
Second, he says, many miss the need to appear on the screen of the sales reps. "If it doesn't appear on the screen of the sales rep at the distributor when they are talking to a customer or if it isn't in stock it won't sell. Too many vendors don't do the basic stuff well."
His advice to distributors is to "stop whinging about low margins and sell emerging technologies where the margin is".
Greg Carlow, managing director at Repton, says that fashions come and go and that the key factor is the person responsible for reseller relations.
"At the end of the day, the channel has to sell the same or more for less cost than the vendor can and get into places that the vendor can't.
"It never ceases to amaze me how quickly the costs spiral out of control when a vendor tries to go direct. You can't significantly move sales online because so much of the sale is about the customer having someone to talk to."
James Governor, analyst at Red Monk, is sanguine: "Nothing really changes in the channel does it? If things are going well vendors want the channel to be their friend.
"If things are tough they find it difficult to keep their hands off. Long term, I do see more ASP activity, with the renting of applications. Why not? Perhaps the channel needs to rethink the business case. Is it really so smart to shift boxes, after all?"
Channel trends come and go
Vendors like to constantly repackage channel strategy, choosing from a range of options that move in and out of fashion:
- Tiering The creation of different levels, allowing the vendor to graduate levels of support and margins according to size and commitment of the reseller. Tier usually relates to levels of accreditation and sales.
- Rebates Come in a variety of forms, but in essence encourage growth in sales by guaranteeing a percentage of sales on agreed targets. The downside of such deals is that distributors/resellers can 'dump' products at below cost just to reach the rebate target. Many resellers also report increasing frustration with rebate programmes that are too complex and time-consuming to handle.
- Marketing A variety of approaches exist for vendors, varying from centralised to decentralised, with an increasing desire that marketing spend is directly related to sales and lead generation.
- Training and support Resellers must weigh up the benefits of paying for training against possible future revenues. Some vendors are accused of making profit out of training rather than seeing it as an investment in the channel. Increasingly, training and support are provided online to reduce costs. At its most basic, support consists of a call centre trained to meet a range of enquiry needs. Most vendors also provide extranets to support resellers semi-automatically.
- Accreditation Vendors have to balance the need to have a highly trained reseller workforce with the costs of offering such accreditation. High costs drive resellers to other vendors that subsidise training. In a saturated market, vendors often treat accreditation as a profit centre, to the anger of resellers.
Contacts
EMC (0870) 608 7777
www.uk.emc.com
Channel Solutions Europe (00) 35 1 240 1300
www.euro-channels.com
Clarity (08700) 667 222
www.claritytechnology.co.uk
Hewlett Packard (0845) 270 4114
www.hp.co.uk
IBM (0870) 610 2502
www.pc.ibm.com/uk
Microsoft Business Solutions (0870) 6010 0100
www.microsoft.com/businesssolutions
Repton (020) 8894 9000
www.repton.co.uk
Sun (0800) 731 0658
www.sun.co.uk
Veritas (00870) 243 1080
www.veritas.com/uk