Looking back over the last 20 to 30 years of channel evolution, one of the things that amazes me is IT distributors’ ability to quickly respond to market trends and boldly step into totally new roles.
How did this happen? In the early 2000s, distribution companies drove growth by buying their direct competitors. Then they started acquiring other ecosystem players with integration capabilities so they could expand their service offerings into new areas, such as low-volume manufacturing.
Today, distribution companies’ have re-focused their acquisition efforts to target software houses and engineering and design companies with the objective of acquiring world-class engineering talent. This is a major development, in my mind, because what you are seeing here is the rise of a significant force in the outsourcing game. These new players are going to be instrumental in enabling solutions in IoT, in data centre, in security and so forth.
But what’s driving these moves and what impact will it have in the channel?
Climbing the Ladder
The Amazon Effect is one of the biggest disruptors to modern industry and commerce in history and is forcing ALL companies to reimagine their business model, supply chain, manufacturing and distribution strategies.
For IT distribution companies it has meant moving up the ladder of value-added services so they can remain competitive. In this environment, if you stay at the base level, you will become consumed, or even worse, irrelevant. The “Amazonification” of business commoditizes the basic level of pick-pack-ship-fulfillment services and is driving distributors to add higher-end capabilities to support emerging and changing customer demands. It’s also helping to ensure their future viability.
Never Say No
There’s a joke among manufacturers that when a distributor is asked if they can provide XYZ service, the answer is always “YES!”, whether or not they’ve ever done it before! And, there’s a good reason: Willingness and ability to change is what differentiates the leading distribution companies. And the industry is moving that way—CompTIA found 64% of firms expect their mix of offerings to change to new types in next two years.
We’re seeing more and more vendors focussing solely on their specific Intellectual Property, i.e. their software solutions, and are looking to outsource all the other nuts-and-bolts of running a business. Distributors are facilitating this migration by taking over some or all of the design, engineering, manufacturing, customer support, and financing roles, which are natural extensions of the many services they’re already providing. As an example, look at the DIRECT CONNECT program offered worldwide by Avnet Integrated.
Another benefit of this move to extend the range of value-added services – it makes their customer relationships “stickier” and that leads to longer lasting engagements and future growth. This is a win-win for the distributors and for their customers who gain a trusted partner in their business.
More than 35% of vendors expect their distributor costs to increase as a result of the development of enhanced value-added services.
What’s the Downside?
One challenge presented by this evolution is that distributors are now sometimes competing with their historical customers, such as the traditional integration entities who buy their components from distributors. As expected, it’s causing some tension in the channel but I don’t see how this genie can be put back in the bottle. A solution for distributors would be to increase the up-front clarity about who they’re selling what services to, and for manufacturers to be cognizant of this shift, and structure their channel programs holistically to treat all kinds of partners (Distributor, Integrator, MSP) fairly.
To me, it feels inevitable that the lines will continue to blur between distributors, system integrators, original device manufacturers (ODMs) and contract manufacturers as their offerings become more and more similar. This will require vendors that utilize these types of entities to regularly review the marketplace to re-validate their assumptions about the business models and focus of their partners and be ready to change their programs to minimize channel conflict and enable growth for all parties.
The marketplace will decide who the winners are, but I suspect that the industry trend that I’ve discussed today will drive another wave of consolidation, but this time it will be really big fish eating other really big fish!
Next time I will continue my walk through the evolution of IT distribution by looking at what they are doing in the realm of managed and professional services. Drop me a line if you have a comment or idea!