Paying for value

Is service quality set to suffer if VARs continue the current trend of squeezing distributors' margins until the pips squeak?

Large resellers have for a long time used annual or biannual supplier tenders to squeeze the best price out of distributors.

But with these tenders becoming more widespread - and arguably more rampantly price-led in character - some distributors have stepped forward to remind vendors and resellers that value costs money.

The logic for the reseller is quite simple.

First, the tough economic backdrop has put their own margins under intense pressure as cash-strapped end users play them off against each other. Threatening distributors with loss of business is a sure-fire way to secure a couple more points of discount.

Second, more areas of the IT market - including parts of the security and networking sectors - are becoming commoditised, and therefore less of a black art. This means resellers sometimes see the supply of these products as more of a pure price game.

Giant security integrator Integralis is among those to have performed a tender in recent weeks, porting some of its big vendors - including Juniper - to Arrow ECS. But such tactics are now commonplace among much smaller resellers too, a trend not altogether welcomed by the distributors, some of which are concerned it is not only trashing their margins but damaging the value the channel as a whole can offer end users.

If left unchecked, this trend could even force them to scale back investment in the value-added services they offer as standard, including help with marketing and lead generation, evaluations and technical support, they argue.

How low can you go?

Dave Ellis, director of new technology and services at Computerlinks (pictured), said: "From a VAD's perspective it can be dangerous if you get into a position where resellers are judging distributors solely on price."

Bruce Hockin, head of solutions strategy at Avnet Technology Solutions, said: "Tenders among resellers have been around for a while but in certain areas of the business we have seen an increase over the past couple of years - since economic pressures have increased. Invariably the criteria seems to be more price-led than value-led. Price-driven tenders are not sustainable in the long term - competing on price alone normalises the channel and this will not provide the all-important differentiation that allows for increased profitability and growth."

Some recent reseller tenders have forced distributors to swallow margins in the very low single digits.

But Ellis said such tactics have sometimes backfired on the reseller after their chosen distribution partner was forced to make savings by cutting back their level of services.

"You always get some who think they can make a quick buck but don't look at the long-term viability of the business," Ellis said.

"The distributor gets swamped with business, then their customer service goes downhill. We have seen some partners do a U-turn after realising it is more about the overall package. Once they lose that support it becomes more apparent."

But both Ellis and Hockin were quick to point the finger at the manufacturers for not doing more to halt margin erosion in their channels.

Ellis said: "Value costs money and if you get to a point where it is not viable for the distributor to offer value-add services, ultimately it will be the vendor that suffers. Vendors need to protect VADs from this - if they want a VAD channel, they need to build models that pay for the value they add."

Hockin added: "Too many distributor and rebate schemes that reward volume will inevitably lead to challenged margins. Distributors will put expertise and resource behind the vendors offering the best returns. Value-based distribution is the only way to reverse the trend."

He added: "However, it is for the distributor to understand and define a value that is recognised by either the partner or vendor but ideally both."

Other distributors CRN approached for this article said they had not noticed the trend at all, however.

Andy Gass, senior vice president at Computer 2000 parent Tech Data, said: "I do not think resellers are basing everything on price. Customers are price-conscious but if anything, we are capable of increasing the value-add element of our business this year."

Self-sufficiency

The overwhelming response from resellers is that they are willing to pay for value, but only on non-core products or when the distributor can demonstrate incremental value.

Security VAR Network Technology Solutions (NTS), which has a turnover of £9m, performed its first commercial tender last January in a move it claims netted it substantial savings with its two largest vendor partners - Juniper and Check Point. Most mid- to large-sized resellers see themselves as self-sufficient on the core technologies they offer, meaning the onus is on distributors to prove their worth, claimed NTS managing director Jonathan Lassman.

"We are all getting squeezed and you have to look after yourself," he said. "The top-tier partners such as Integralis and Vistorm [now HP Information Security] go head to head with each other every day. Their customers are doing it to them so why wouldn't they do the same to the channel?"

Lassman added: "We are self-sufficient on Juniper and Check Point. We have a dedicated account manager from Check Point driving business with our sales guys. I agree with all the other resellers that there is next to zero value in the broadline distributors. What we see as value is incremental revenue, not us placing an order and them delivering it, which is their job and something the vendor could do. What extra business can they bring us? If it is zero, then it's all about price. If it is going to give us four extra customers a quarter, we are willing to pay extra."

Software licensing VAR Trustmarque last month completed a supplier tender for the £20m of products it buys through distribution annually. Chief executive Scott Haddow (pictured, left) admitted the process had a commercial element to it, but stressed his firm would happily compensate distributors for any extra value they provide.

"Where there is demonstrable evidence of our distribution partners providing value, we recognise it and actively support it over commerciality," Haddow said. "Where w

e feel a distributor is not adding value and is rinsing us, that is where we would swap them out, as that trust has broken down."

Trustmarque's group sales and marketing director, Angelo Di Ventura, said he had some sympathy with distributors where they are being squeezed by smaller partners lacking in-house skills.

"Our model is to develop high-level technical skills in-house and not to be beholden to the skills of others," he said.

"VADs play a massive role in the broad reseller space where they lack the skills in-house. If they do not have the skills and are squeezing the VADs, I think they have a point. We value distributors in areas where we have skills gaps, but those skills gaps are reducing.

"Some of the VARs swap the distributors around on a monthly basis and there is no loyalty - at the first sign of a big deal they move it around. That is not our game."

Educating the market

The past few years have seen distributors attempt to diversify from their core pricing, availability, logistics and credit functions to provide a wider range of services for their reseller partners. In the case of Avnet, this includes its SolutionsPath programme, which is designed to help VARs tailor solutions to vertical markets. And in the case of Computerlinks this includes its ALVEA platform, which is designed to lower the barrier of entry for resellers looking to move into the cloud space. Although investment in such services does not come cheap, the distributors concede the onus in on them to raise awareness of the value they can add.

Hockin (pictured, right) said: "Partners should identify where they are prepared to pay for value in these tenders and where they are not, and we should be rewarded for providing it where it is needed. But it is our job to educate the market. We have to help them realise it is in their interests."