The distribution game is changing significantly. Twenty years ago, it was about box dropping, but the ongoing digitisation of practically every industry is leading organisations to demand new ways for products and services to be delivered.
By Jacques Malherbe, chief technology officer of Axiz
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.
And all the big 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.
In the process, a lot of the activities that were traditionally done by OEMs, are being moved to distribution. Vendors 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.
There are many reasons vendors are doing this. 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.
However, vendors realised that they cannot fulfil all their traditional functions while concurrently transforming their businesses and needed their channel partners to take over certain aspects of their operations, to allow them to become the new, agile entities that the market is looking for.
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.
If you consider the dwindling income and narrowing margins from the channel’s traditional business, it is easy to understand why even technical services have to be commodified these days. Those who rely on box dropping alone to provide them with an income stream will see their businesses losing serious altitude. 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.
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. While the old business is deteriorating or diluting as it were, and the new business is just starting or isn’t at a level where it is profitable, we find a space in the middle, where everyone is unhappy because they are not making money.
Ecosystems help to fill this gap. They help us absorb economic shocks for each other, and help us absorb costs for each other, 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.
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’. Distributors used to be 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.
I believe that 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. 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.
There needs to be a conversation around reshaping the way the channel gets rewarded by vendors, and rewarded by 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 that there are certain elements that they have to invest in, and others that can be consumed out of an ecosystem.