Demanding vendors eat into channel’s margin

Read time 5min 30sec
Jacques Malherbe, CTO of Axiz.
Jacques Malherbe, CTO of Axiz.

The distribution game has changed drastically over the last couple of decades. Back then, it was about box-dropping, but the ongoing digitisation of practically every industry is leading businesses to demand new ways for products and services to be delivered.

So says Jacques Malherbe, CTO of ICT distributor Axiz, adding the industry has also become more inherently competitive. “All the top ICT players are restructuring their operating models and looking for ways to boost their production and service delivery capabilities. Cloud technologies, the consumerisation of IT, big data analytics, mobility, AI and the IOT  have shaken things up, and completely changed the way that organisations conduct business today.”

According to Malherbe, all the major vendors are changing their businesses too. “Where they were once active across the entire chain, from marketing their technologies and bringing them to end-user markets, to servicing these markets and creating the opportunities and solutions for them, they are steadily shrinking back into their core businesses.”

He says in the process, many of the activities traditionally handled by OEMs are being moved to distribution. “They are asking distribution to handle everything from marketing to enablement, so that should a technical issue arise, or if a solution needs to be built, distribution can step in and deal with it. We are also being asked to provide support services for OEMs, so if our reseller base or end-users need specialist technical services, we can provide them.”

Becoming agile

There are several reasons vendors are doing this, he notes. “All the major players are trying to transition to become more agile. At one time there were the ‘heavyweight’ businesses, the IBMs, Oracles, Ciscos and Microsofts, and they were very fixed in their lines of business and dominant in their space. Then practically overnight they were threatened, and this has led to IBM, for example, transitioning from a giant hardware and software player, into an agile, intelligent, cloud business.”

These vendors realized they couldn’t fulfil all their traditional functions while transforming their businesses at the same time, and needed their channel partners to take over certain aspects of their operations, to allow them to become the new, agile entities the market is looking for. 

Unless there is a restructuring of profitability and income from the vendors, the channel will find itself in a place where this model isn’t viable.

“We’ve seen this across big banks and big system integrators. We have seen huge staff losses over the last year, all in the drive to be agile and refocus and retool for a digital world. Customers, too, are looking for digital values, digital inputs, digital architectures, digital consulting. Everybody is heading in that direction, which leads us back to ‘box-dropping’.  No one is interested in buying a box any longer, they want a solution. And the fact that the de facto way software and services are now consumed is via the cloud has also forced all channel players to evolve the way they run their businesses.”

The importance of ecosystems

And if you consider the dwindling income and narrowing margins from the channel’s traditional business, it is easy to understand why even technical services need to be commodified these days, adds Malherbe.

Those who rely on box-dropping alone to provide them with an income stream will see their businesses lose serious altitude, he adds. “To be successful, the channel needs to be a part of the cloud and digital world that operates on a pay-as-you-use model, which by its nature means less profit upfront, and doesn’t immediately replace the profits lost by the change in the business model.”

According to him, this is where building ecosystems comes in. “While this transition is going on, we need ecosystems. Any business who has to ‘go it alone’ will experience a trough in income.”

There is a time while the old business is falling away, and the new business is just starting, but not yet at a level where it is profitable, where everyone is unhappy because they are not making money. 

“Ecosystems help to fill this gap. They help us absorb economic shocks and costs for one another, by enabling each other within the ecosystem. For example, I may have engineers that my system integrators would like to use, and they might have some other expertise that I need to draw upon. We can buy and sell from each other during this transition phase until the new models ‘sift out’ and we understand what our new speciality or new competency really is.”

Shifting cost

Traditionally, the channel’s profitability model was built on the premise that the OEM does everything, and the distributor represents them and ‘moves the boxes’. 

“In this way, distributors were more of a logistical partner or a fulfilment partner of the manufacturer. However, these days, vendors may have cut staff, but the work still needs to be done, and is passed on to channel partners. Naturally, the channel is finding it difficult to accommodate all these new costs, and still maintain profitability, as essentially, OEMs are shifting the costs to us.”

So unless there is a restructuring of profitability and income from the vendors, the channel will find itself in a place where this model isn’t viable, adds Malherbe. 

“Each year, we are expected to do a little more. Our entire chain stems from opportunity creation, marketing, reaching new markets, expanding into Africa, and we have to do this while still maintaining the skills here to keep our resellers stocked. At 4% or 5%  margins, it simply isn’t sustainable.”

Malherbe says there needs to be a conversation around reshaping the way the channel gets rewarded by vendors and system integrators. 

“For example, they could approach us with a view to buying pre-sales services or similar from us. They won't have pre-sales engineers themselves but will consume various services from us, and pay for them. As we go forward, this model makes far more sense and businesses will realise there are certain elements they have to invest in and  others that can be consumed out of an ecosystem.”

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