Facing challenges in the channel

A recent survey of more than 30 ICT companies, including vendors, distributors and resellers, highlighted the inadequate amount of credit available to channel players. Respondents said this was contributing to the slow pace of development in the sector.

Rectron CEO Mark Lu comments that he has noticed some serious channel restructuring in the local market. "It has been more than three years since the demise of Siltek, and I would say the channel is fully recovered financially. But the perception of IT is still a bit funny because the past three years have also seen a lot of companies come and go, and there have been some surprises from the likes of AST, CSH and Dimension Data," says Lu.

From the vendors` point of view, the channel is going strong and growing nicely. Intel, for example, has confirmed SA was its fastest growing region in Europe, Middle East and Africa in 2003. Microsoft also enjoyed strong growth last year.

However, Lu says, from the customers` point of view, the channel is slowly becoming a collection of unnecessary middlemen they could do without.

A new trend Lu and other local distributors have picked up is of both large and small corporates attempting to bypass the reseller and approaching distributors directly for products.

"This pressure is not only coming from big guys; even the ordinary consumer, the man on the street, has the same argument. He is questioning why he has to pay for having a middleman. This is a serious and general concern that the channel needs to be cautious about," Lu explains.

There is no doubt the reseller, in general, lacks finance and skills. Although resellers can get financial backing from vendors and distributors, they cannot expect to make easy money without pulling their own weight - whatever the business model a reseller decides to engage in, be it solutions selling, system building, retailing, B2C e-commerce or training. All these areas require specialised skills. One of the channel`s major priorities has become uplifting reseller skills to justify the value of the middleman.

Imported products, including ICT products, are back in demand - to an even greater extent than previously.

John Oliveira, Polycom technology manager, Kathea

The channel needs to work collectively to resolve the so-called "perception crisis". Vendors need to improve their efforts in building logistical efficiency and friendly service infrastructure; distributors need to add more value for the reseller and become more proactively involved in channel programmes and training, and resellers need to build skills and push solutions selling.

John Oliveira, Polycom technology manager at Kathea, comments that although the South African channel is still in a teething phase, many industry players believe the next five to ten years will see the channel and retail sectors establish themselves more firmly. Both sectors are in a growth phase and many resellers are realising the importance of becoming value-added resellers (VARs).

"When the rand lost value against the dollar a couple of years ago, many channel players experienced a market plunge," says Oliveira. "But now we have seen the currency regain value, imported products, including ICT products, are back in demand - to an even greater extent than before."

The ICT market and its channel will always make room for the distributor and there are opportunities for players with the right kind of offerings. "Vendors have realised the importance of VARs and are placing an emphasis on the technical training and accreditation elements in their channel programmes," adds Oliveira.

"The emergence of leading international vendors on the local market landscape initially left decision-makers within distribution companies feeling somewhat uneasy," says Oliveira. "However, as many of these vendors have invested significant time and effort into skills, training and product acceptance locally, much of the channel has responded positively to their proactive stance in SA," he says.

The industry is certainly seeing a demand for smarter networks capable of handling the management and control of all network traffic, including voice, video and data.

The recent government announcement on commercial use of voice over Internet protocol (VOIP) technology within the next year provides Kathea with greater opportunity to deploy virtual communications systems that are easy to install and manage. The roll-out of these technologies translates into increased collaboration and productivity, greater flexibility, faster decisions, lower costs and improved relationships.

The importance of implementing technologies such as VOIP and video over IP in businesses cannot be ignored, as they give companies the competitive advantage needed to boost IT infrastructure development, which in turn promotes customer retention and solid internal management techniques. VOIP`s potential to minimise network management costs is the key motivation for executives implementing network convergence.

A solid investment in the channel is needed to drive a company`s products and services through a national base of accredited partners to ensure end-users obtain products and services of the highest standard.

Comztek MD Paul Conradie agrees that, despite the ups and downs in the sector, spending in the channel has improved notably, primarily in the small and medium enterprise (SME) space. "There is now more propensity to spend in that segment, so it has become a little easier to convince the mid-market to spend on networking," he says.

On the matter of distributors and resellers selling more than simply product, Conradie says that, on the communications and networking side, there is still a trend toward box-dropping rather than systems integration.

"I have, however, seen a lot of vendors and distributors putting programmes in place that embrace systems selling, integration and support. As the market gets more mature, solutions offered around the 'box` is going to be the differentiating factor between distributors and resellers alike," Conradie explains.

He believes vendors and distributors should not hold sole responsibility for ensuring their reseller partners maintain adequate business management skills. "I think it should not be an obligation, although it can be done as part of a company`s social responsibility initiatives. As far as I am concerned, a reseller should already understand the business environment it chooses to enter."

Of the many reseller companies that disappeared after the demise of Siltek, Conradie says the fact that most of them fell apart so quickly proved they did not belong in the channel in the first place.

He adds that, nowadays, many would-be entrants into the channel reseller segment find barriers to entry have become higher, because of the need for creditworthiness. This pushes players to invest more in their businesses.

He believes the industry has a way to go before reaching maturity, but says the people running today`s South African distribution companies are seasoned individuals, a factor that gives analysts confidence in the channel.

Conradie explains that IP telephony is not yet off the bricks, but his company believes the next 12 months will see it gain a lot of momentum. To this end, it has set up an IP telephony division. "The reason it has not boomed is that most companies do not want to put telephony in the hands of the data guys, and the technology is also curbed by local laws and regulations," he says.

IBM channel executive Johnny Gounden says the channel has come a long way since the turmoil that followed the demise of Siltek.

We have to work with the end-user as well as the reseller to create demand.

John Oliveira, Polycom technology manager, Kathea

He says at the time of Siltek`s collapse, IBM was only doing about 23% of its business through the channel. Now 46% of its South African and other African business goes through distributors and resellers.

"Our channel strategy is also part of our strategy to work with BEE [black economic empowerment] partners, hence our Andisa initiative, which is tailor-made for BEE partners. Through the initiative, we allow our second tier partners, who are usually BEE, to enjoy the benefits and discounts usually given to first tier partners," he says.

IBM also runs courses aimed at helping its partners with business management and has set up a Web site through which partners can interact and obtain information on IBM products and solutions.

"IBM cannot operate effectively without its channel partners because we can only influence about 15% of our business opportunities. The rest is done through our channel partners," says Gounden.

On on-demand computing, he says IBM has about 500 reference sites and offers its business partners various options, including training in solutions to enable them to use proprietary tools to earn income.

Dave Caygill, sales director at Axiz, says the channel is definitely in a state of change, driven by the challenges presented by the government and the ICT BEE charter.

"There is a lot of business opportunity in the SME space. We have seen some sort of growth on the reseller side, but we have also seen some attrition in the entire channel sector," says Caygill.

It is no secret that the drop in the price of commodities such as the PC has done much to motivate movement in the channel. Of course, this has been due to the performance of the rand against the dollar over the past 12 months. Caygill says recent BMI-TechKnowledge figures indicate PC sales are likely to continue to grow at a rate of about 60% year on year.

Looking at challenges in the market for both distributors and vendors, Caygill points to the need to put in place structures to enable them to tackle the SME market. "It is vital we attract that market segment."

His company is also segmenting its business in different areas in order to achieve certain goals, including better coverage, servicing, risk management and credit limits.

Caygill says the box-dropping syndrome seems to be slowly fading away, although some companies still stick to it.

Vendors and distributors are, however, coming to terms with the need to have regular partner training, with a focus on specific technologies. "Axiz, in particular, has set up the Ledibogo programme, which goes beyond just product training. Through this programme, we communicate with our resellers on how we can better help them to improve their skills, and we run nine-month programmes focused on technology as well as business management skills. I must say the response has been quite encouraging," says Caygill.

"It`s true that distributors and resellers have been through tremendous upheaval over the past few years," says John Hurrell, CEO of Westcon. "However, it is probably premature to declare that better times for all are on the horizon. The jury is still out on whether the recovery plans of some resellers are going to pan out."

He believes Westcon AME is in a far better position than even a year ago. "We have been through immense change. We have not just brought on lots of product to make up sales revenues. We have done true consolidation, involving products we offer, as well as the really heavy lifting in terms of rationalising staff but still ensuring we keep the skills our customers expect to have available to them," explains Hurrell.

He adds that the key to successfully managing a dramatically changed business environment has been the company "sticking to its knitting" in terms of investment. Westcon AME is involved only in distribution. There`s no investment in a reseller or equity in a manufacturer company.

In the changed business environment, Westcon AME believes the number one priority is not sales, as such, but stock management. Everyone has learned the hard way that without a declining rand you no longer have a one-way bet and a blip in the currency can wipe out the margins.

"The strengthening rand has changed the way you look at stock and margins. It`s a most delicate balancing act. Uncertainty over the currency suggests you do not want to get caught holding stock that is cheaper tomorrow because the rand has strengthened again. However, stock availability and delivery times are critical to maintaining service and credibility with customers."

Hurrell explains that the way a distributor such as Westcon AME does business has changed in other ways, for example in helping customers find new revenue streams by giving them the knowledge and skills required to improve revenue from services.

"Vendors are leaving us to take on more and more responsibility as they concentrate on big enterprises. Now we have to work with the end-user as well as the reseller to create demand," he says.

End-users have also changed. The networking people, for example, know exactly what they want and are mostly very sharp. A company can no longer sell to these people purely on the basis of product specs, price and availability. It must be able to show them how to solve particular problems related to business processes.

"To achieve this, partnering with the reseller has become more important. Our role is to understand the vendor programme and educate resellers in terms of concept and certification. Previously, the reseller took us to an end-user to back him up. Now, end-users have done all their own independent research. It comes down to services. You must be able to offer 24x7 backup, two hours` response and the ability to train the end-user," says Hurrell.

A reseller can offer a bundled solution, but price is driven by end-users and they are not keen to pay for service "extras".

End-users can buy only hardware if they want to. However, this leaves them exposed should something go wrong and they do not have immediate access to skilled support. This support can be acquired, but at a much higher price than via a package, and not necessarily immediately.

Some end-users in SA, such as small Internet service providers, have learned the hard way that there is great value in buying the full service option.