Exclusive Group's Barrie Desmond argues that recent events in the distribution sector should serve as a warning to the whole channel ecosystem
After reading CRN's news about Entatech's demise, and ongoing speculation about Westcon's future, I wanted to advocate, just like Dory and the sharks in the ‘Finding Nemo' film, that distributors are friends, not food. Vendors and VARs alike should be careful what they wish for because, if the prevailing view is correct, then there will be less competition and rising prices for little or no value.
Just like fish, VADs are a part of an important ecosystem where all the species make a contribution. By the same token, they extract value too. The whole thing is mutually beneficial, and if it isn't then the ecosystem itself may not survive. VADs seem to be getting squeezed from both sides, forcing them to reduce the value services they can provide in order to get cost of sale models that work. This is pulling the ecosystem out of balance, and unnatural things are starting to happen. It's like a snake eating its own tail: demise is inevitable. I hear horror stories of VADs doing deals at cost plus two, three or four per cent margins. When you take off so-called ‘back-end rebates' proudly negotiated by the procurement guys of some of the larger SIs, you don't need to be Einstein to understand where this will eventually lead; fewer services, offshoring of resources and account management, huge cost reduction programmes, lower calibre people, the list goes on.
The result is the ‘dead cat bounce' effect. VADs may claw back a couple of percentage points relocating their quotation team somewhere cheap (like Wales - only I can say that by the way), and you may get a ‘bounce' in the health of the business, but ultimately - after witnessing the rebound off the pavement it achieves after falling off a skyscraper - the poor moggy will be very much dead. And so are the distributor business models that get caught in this spiral.
But let's not put all the blame on everyone else; VADs should take responsibility for their actions as not all value-added disties have earned the right to call themselves ‘value-added' which, in my view, also undermines the sensitive make-up of channel ecosystems.
The evolution of VADs was borne from the need to provide a kind of proxy vendor role that accelerates sales success through well-resourced and intelligently composed technical pre-sales and other services, ongoing 24/7 support and marketing-driven business development, demo kit investments and sales lead generation. I have lost count of the vendors whose eyes light up at this sweetie shop of market-making value, only to turn around later and question whether it can be substantiated by giving up a few more points on margin. Similarly, of the VARs and SIs who benefit from lucrative opportunities through disruptive, new technologies - only to claim afterwards that all distribution ever does for them is ship product to the right place at the right time.
Make no mistake - no one benefits from weakening the pure-bred VAD species. This only leads to a monopoly of parasites to take their place.
And I make a prediction: that we will see more in the way of sole/exclusive distribution agreements between VADs and vendors. Why? Because this enables available resources to be focused entirely on sales success, benefiting reseller partners with the fruits of a monogamous partnership. In this way, vendors (and resellers) will benefit from the present lack of inter-distributor competition, reducing the costs of sale and encouraging more investment in strategic rather than tactical planning.
So be careful what you wish for, because an alternative future might just come true. Scale on its own is not value, and neither do multi-distributor channel models automatically translate competition into tangible benefits. Vendors and VARs alike should wise up to this. Without distribution exclusivity, a landscape of fewer VADs means the broadliners will have even less incentive to promote value, and more power to extract greater margins, with all the costs falling on the VARs and vendors. Our ecosystem will be damaged beyond recognition.
I'm no fisherman, but that doesn't sound like a future to me.
Barrie Desmond is COO of Exclusive Group, which includes the global Exclusive Networks and BigTec VADs