The SA channel: Charting rough seas

The SA channel is a complex mix of players that market, aggregate and integrate products. While some work together to mutual advantage, others operate in expedient and sometimes unethical ways.

[VIDEO]No single body regulates this mix and nobody knows exactly how many players there are in this field. Its development and sustainability, skills requirements, codes of conduct and place in the greater IT industry remain fragmented and impenetrable to the casual observer.

One issue that is immediately apparent, however, is that the channel is still sluggishly traversing the mother of all hangovers, the result of an Internet commerce-fuelled free-for-all party which got under way in earnest in 1999. Everyone was invited (no skills or investments were required to sell the "e" that made commerce so much fun) and this particular party saw the IT industry wading knee-deep in "easy" money and riding on droll stock valuations. Tech companies (that formerly had no use for them) hired Web developers and graphic designers, and sales forces multiplied accordingly. However, the anticipated reinvestments and cash savings didn`t happen, and now these companies continue to pay the price for "business" decisions that came nowhere near to delivering the expected returns.

Those that are recovering from these high jinks are the most resilient channel party animals on the Highveld and beyond. They`re returning to their core business, saying "thank you and goodbye" to excess staff and going back to basics in a market where the party favours are now thinner margins and threadbare loyalties.

At a recent ITWeb round table discussion, some of the channel`s most enduringly successful personalities were polled for their comments on how to remain relevant in this less than salubrious environment. Among them were Tarsus Technologies MD Guy Whitcroft, Sahara MD Atul Gupta, Axiz MD Anthony Fitzhenry, Workgroup Distribution MD Doug Woolley, Datacentrix MD Ahmed Mahomed, Ethniks Systems marketing director Kevin Greig, HP sales manager Bradley Hopkinson, Microsoft channel manager Anton Jacobsz and Sahara FD Richard Watters.

Greig says credit lines to the channel still count among the most stifling of pressures. "It doesn`t matter how honest you are about your business, distributors (not willing to assume the risk themselves) are blaming the squeeze on credit guarantee companies."

[VIDEO]His comments point to the unenviable position of resellers facing long payment terms (up to 120 days or more) while having to buy product from distributors on "normal" terms (30 days from invoice). This forces many channel companies out of business. The most notable recent credit squeeze casualty was Siltek Distribution Dynamics - once the premier IT distributor in SA. Siltek fell prey to what most commentators agree were overly generous credit extensions and brand dilution - the result of carrying product from a full house of international vendors.

Greig says if customers won`t pay up faster, the smaller, niche distributors will either refuse credit to resellers, rely on credit guarantee houses to assume risk, or take to billing the customer directly.

Of course, the reseller may take the risk, but many smaller resellers cannot absorb the impact of non-payment or stunted cash flows. Here the answer would be to enforce reasonable payment terms, but this is much easier said than done.

Microsoft`s Jacobsz notes that it is not distributors` responsibility to bankroll the channel, while Axiz`s Fitzhenry states that any financial analysis points to a need for enforcing maximum payment terms of 30-36 days from invoice. Anything longer makes bankruptcy an eventual certainty.

I think distributors are often not given credit for the extent that they do support resellers, over and above what vendors do.

Anthony Fitzhenry, MD, Axiz

"I think distributors are partly financiers for the channel," Fitzhenry says. "The question is: on what basis do we do so? Like banks, we do a full regression analysis and alert our reseller customers to the danger signals. For credit extension, we take into account debt/equity analysis, payment on time, sustainable growth rate, overtrading in terms of what assets they`ve got, integrity, disclosure, health and hygiene factors. We offer the full amount that we can extend, but no longer than 30-36 days. We assume the full amount of risk that we can assume, based on historical precepts of banking, and then some. I think distributors are often not given credit for the extent that they do support resellers, over and above what vendors do."

Whitcroft sheds further light on the responsibility that rests on resellers. "We never give 120 days to our customers [resellers]. I don`t know where the end-user gets that. I think most people pay or collect 30 days from statement or 30 days from invoice. These days I get cheques every day, whereas previously they used to arrive on my desk at month-end."

Greig`s plea for distributor assistance nevertheless attains poignancy when viewed against the background of the intense competition a reseller faces (from direct vendors and other resellers under-cutting value-conscious integrators, purely on price) and the legacy of poor payment terms allowed by other channel players who went before.

He points out that the distributors that have stood by resellers in tough times are still getting business from Ethniks, and registers dissatisfaction with credit staff at some distributors supplying Ethniks, saying resellers often only get credit facilities once they talk to senior management.

Fitzhenry concedes that many account managers are not what they should be. "One should build up this competency. They must be financially adept, true business administrators, in a position to advise resellers. Credit should be extended on reasonable terms, and not refused purely because credit guidelines usually demand financial disclosure, which a private company can refuse to give."

Workgroup Distribution`s Woolley qualifies this point: "It takes two to tango. We are flexible, but disclosure is sometimes necessary. If they won`t disclose, we fall back on conservative measures. We have five or six different funding instruments, a lot of them requiring full disclosure. True business fundamentals demand as much."

It is easy to assert that commodity products (such as PCs and printers, to which a channel cannot add any more value than the product`s base function dictates) should not be sold through a value-added channel. Yet qualifications of this rule soon emerge.

[VIDEO]Commodities are often said to be the sole province of retail. Retail is a channel in itself, although not in the sense of the classic reseller channel, which offers value-based technology integration and services.

HP`s Hopkinson says the company has introduced the HP Shop to deal with commodities. It is a Web-based storefront selling commodity products direct, but uses a two-tier fulfilment model. HP markets product and a reseller "behind" it fulfils product. "It ensures consistent retail pricing, and we exclude commercial value-add product," he says.

Datacentrix`s Mahomed maintains that black empowerment dictates that even a commodity product is sold via a channel. "How big this phenomenon is, and how sustainable, I don`t know. The good thing is that black resellers can get in at the entry level and work their way up. This works well in terms of skills transfer and job creation."

Both Woolley and Whitcroft concede that even a value-added reseller (VAR) sometimes sells commodity products as a service to customers, but point out that no VAR can ever sell only commodities.

With the war several weeks under way, the channel must weigh up delivery times, currency fluctuations and more. Whitcroft postulates two possible scenarios - a long or a short war. A short one would be good for the globe, he says. "There will be strong positive reaction in business and consumer confidence, and the economy will take off. If it is to be a long war, however, the world economy will suffer. A lot of countries are on shaky ground. Germany is on the point of deflation, Japan is already there, and the US could head that way. A long war will cost a lot of money, and someone, specifically the taxpayer, will have to foot the bill."

Woolley claims that Workgroup`s constant contact with banks has made it clear to him that there is some panic with regard to forward cover. Importers across the board are scrambling to secure their positions. "At times, it stabilises, then there`s a run on it again. The effects will be felt on the exchange rate."

Greig believes that, like the post-11 September problems filtering through locally, the war is likely to be used as the reason for every ill in the industry, "from bad service and long delays to any increase in prices".

Although business commentators agree that any industry should first and foremost do an impartial financial evaluation of the consequences of a war, Mahomed points out that political considerations also play a part. "One could argue that there are other knock-on effects, possibly over a longer term. One might expect, for instance, an escalation in global terrorist attacks, whether the war lasts a long or relatively short time."

Because of SA`s remoteness and neutral stance, however, most attendees feel that SA will be less affected than most others, even by a protracted war.

The customer is king. But can they do what they like, or are there responsibilities that, if shouldered, will improve the channel climate and the quality of solutions? And are vendors blameless?

With some weariness, the delegates at the round table tackle this topic. Woolley tells of a large tender, on which both the reseller and the distributor spent R1.5 million in preparation, and allowed the user three months of evaluation. When it came time to award the tender, the suppliers were told a further 90 days evaluation were required, causing cash flow delays and further business uncertainty. Another case involved the user signing the contract and then reneging on maintenance costs and upgrade insurance.

Greig tells of vendors vacillating between indirect and direct models, enraging their partners and then re-committing to them. "A reseller that has been burned before will be twice shy," he says.

[VIDEO]The feeling in the channel seems to be that customers hold the trump card, are generally spoilt for choice (between channel and direct delivery, and between value-added bids and price-based bids) and often play candidates off against one another to drive the price down.

If this sounds like the ideal setting for customers getting their own way, Whitcroft speaks of the responsibility to make the right decision. "When you instigate a price war by making it clear that this is the only value you will consider, then be prepared for an inferior solution, and do not lay the blame at the vendor`s, or the channel`s door. The caveat emptor rule applies strongly. End-users should appoint resellers who can deliver value."

Other end-users unashamedly demand a flat licensing fee and direct dealings with the vendor, no matter what the product (the channel then often gets a small, flat fee-based commission, despite their involvement). This inevitably leads to a scenario where the channel is increasingly forced out, and delivery often lacks the quality normally associated with value-added integration.

The irony, of course, is that the IT industry prides itself on selling solutions that enable users to collect their own money more quickly (eg customer relationship management or enterprise resource planning). The channel, on the other hand, has not been able to do the same, ie, enforce better payment terms or more mutually beneficial deals. It hardly seems necessary to educate the end-user on the dangers of negotiating solely on price, but such seems to be the case.

What are the most prevalent complaints that end-users level at the channel? According to Greig, an all too rife lack of skills is the main gripe.

[VIDEO]Mahomed adds that "as long as the end-user uses price as a basis for making buying decisions, this skills dearth will persist. But what incentive is there to skill up, if that value-add is negated by an end-user simply putting a contract out for open tender, after having heard detailed solution offerings from many integrators?"

By way of drawing a comparison, he says BMW dealers are all authorised, and that if one buys from them, a hefty (and lucrative) service component comes along, whether the buyer likes it or not. This example should be emulated in the IT channel, he believes.

HP`s strategy is to certify all its dealers, explains Hopkinson. This is something Microsoft is also grappling with in the lower-end original equipment manufacturing space.

Woolley adds that in the software space, IBM`s solution to this challenge works well, in that it offers deeper discounts to accredited resellers. "Everyone can compete for business, but not on the same price footing," he says.

The twin challenge is to have breadth of resellers delivering lower end solutions on the one hand, while taking care of customer satisfaction.

Sahara`s Gupta points to the need for certifications - sales as well as technical, and possibly a body that polices the industry in that regard.

As regards a general certification policy, Whitcroft denies the responsibility of distributors to offer it (averring it must be centralised) and saying it is the vendor`s responsibility. Hopkinson argues for a joint vendor-distributor programme, making qualification expensive enough to minimise risk.

Greig defends the anti-local stance taken in some tender circles, saying SA manufacturers have made themselves guilty of poor manufacturing standards in the past. "Until this is addressed, we cannot hope to compete with international vendors."

HP`s local assembly programme has proved successful, but this is not a true example of local manufacturing, rather local assembly of an international brand. The success probably rides on the back of the HP brand, some commentators say.

Axiz`s Fitzhenry points out that in the memory market, Axiz manufactures to international standards and enjoys international certification. Testing is, however, not done to international standards, as the equipment cannot be supported. Manufacturing of memory at Axiz differs with international standards only in that die revisions are not done to international standards.

Woolley`s opinion is that the shortfall in standards is a hardware issue. "There are hundreds of software developers all over town doing large deals with overseas countries, but failing to secure local business." Jacobsz testifies to games being developed locally on the Xbox platform, also not sold locally.

Be that as it may, it is clear that a combination of a failure to believe in local know-how and lesser standards are a hindrance to a proudly South African spirit. Companies like Sahara are, however, looking into local manufacturing of motherboards, Axiz has a good reputation for memory, and software developers from here to Cape Town have been doing it for years. The groundswell of creativity and self-belief has begun.