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Revenues dropping or flatlining at hefty distributor giants

Maybe it's not just the recession, cloud and direct sales...

Software licences not the money-spinners they once were

Software licences have traditionally been a good revenue driver for distributors (and resellers) and although margins might be a bit thin, the quarter end rebates and marketing dollars made it, sort of, OK. Well, this is changing very quickly and while acknowledging the recent announcements from Microsoft, most major publishers are developing new ways to encourage more usage, sales or rental of their products, therefore many of these models will decrease current license revenues. Some publishers are also starting to grab renewals directly wherever possible, while some larger corporates are handing their licence estates (and renewals) to their outsourced partners or are negotiating directly with the publishers. This is becoming an increasing challenge for distribution.

Even hardware sales have been hit

Hardware sales have usually been the backbone of most channel companies, especially larger distributors, and lots of technology refreshes and whizzy products meant that good salespeople could usually find end customers for the latest technological marvels. However, times they are a-changing here as well. Even slick marketing campaigns, (how many of those are there around these days?) cannot force users to place orders. Many companies, who would traditionally have bought through channels, and therefore drive distribution revenues, are now considering a range of options which include outsourcing, hosted models, rental etc.

Sadly for many channel operators, some of these end customers have also discovered that hardware does not explode after three years, but can often keep working rather well for longer! Assumptions on refresh cycles should no longer be relied on too much, with the probable exception of the expected Windows 8 bonanza driving massive theoretical hardware refreshes, and the kitting out of data centres is still good news for competent players but there is really not a lot of must have technology change nearby, especially in a recession where dollars are tight. The exceptions are vertical specialist areas such as Voice and security.

We'll see more of this...

The fact is that distribution revenues will probably continue to erode going forward and there is not much that can be done to change the market. I suspect that we will, therefore, probably see some interesting behaviour including:

  • Very competitive pricing, especially at quarter ends – probably at the expense of margins, which could be good for resellers.
  • Ongoing distribution acquisitions, because buying revenue is a lot easier than actually driving organic growth.
  • More cost cutting because of slowing revenues, which might drive more revenue decline and therefore this could drive more cost cutting.
  • Senior distribution management merry go rounds, as targets are increasingly not met.
  • Better deals for resellers, who are increasingly realising that their business is essential to distributors and therefore demands for pricing and terms will often be sympathetically met, as the battle for revenues gets really serious.

What should be done

Superior management and execution capability by some highly motivated distributors will always enable better companies to win business at the expense of their less agile and intelligent competitors, but the fact is that all distributors and wholesalers will have to reinvent themselves and simultaneously invest in their businesses and systems. This will be difficult in an age of austerity and will cost accountant-led companies.

The adage that basic common sense is a really good thing would suggest that distributors (and other channel companies) could think about the following:

  • Train your people to be better. Good people, either in sales or technical disciplines, are very important and they should be valued and retained.
  • Invest in real customer understanding and support as this is crucial to business success and order fulfilment is only part of the engagement cycle.
  • Understand existing and new technologies. Remember that being early adopters of new opportunities and vendors is critical to success.
  • Make sure your systems actually work and are acceptable to your customers.
  • Realise that the trick of increasing revenues by acquisition and then getting rid of the expensive people rarely works and unless there is a well-thought-out integration plan, your customers can migrate as fast as the rejected employees!
  • If acquiring companies, try to get the integration plan right, especially on culture and retention of great skills and knowledge.

These lessons and many more – not even referencing the huge challenges of developing cloud models and electronic delivery capabilities – will be very hard for the distribution giants to understand, and it will be difficult to get the bigger companies to agree to the sort of rapid execution that's needed to drive change. The clock is ticking and Avnet’s recent weaknesses serve as a stark lesson to all – that revenues can and will go down sometimes. ®

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