Where are the profits?

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This article appeared in the 2 October, 2006 issue of CRN magazine.

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Where are the profits?
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Bad management and too much focus on sales and not profitability are causing resellers and distributors to fail in an otherwise growing IT industry, according to attendees at CRN's inaugural Distributor Roundtable.

So far this year, resellers and distributors such as Enstor, Premier Technologies and EAA, to name just a few, have hit the wall, raising questions about the ongoing profitability of the greater IT channel.

Ross Cochrane, managing director at Express Data, tells attendees that poor management is responsible for these collapses and reseller principals are not doing a good enough job in controlling sales staff.

"They [sales guys] just want to win deals - most of the reps you speak to in a reseller have got no idea about profitability," he says.

"What they want to do is make their quota, get their commission and life is rosy. Poor management in most resellers means that guys don't know what their reps are quoting, they don't have limits on what they can go to and the guys are trying to win deals that are either big, high risk and low return," he says. "Management quality in the IT industry is pretty poor."

Resellers winning large deals that they would not normally win also starts to set the alarm bells ringing, Cochrane says.

"The guys take the mentality they have from selling boxes into selling products and services and they don't understand the real cost of doing it," he says.

Nick Verykios, marketing director at niche distributor Firewall Systems, believes the "death of profitability" occurs when the final transaction gets made with the reseller.

"We are doing deals with our vendors and resellers in security that have been profitable all the way right up until the time the transaction gets made - and the person who screws it up is the reseller.

"One or two strong players go into it [the deal] and someone else who goes bust, wins it. There is plenty of profit in killing a dead model and kick-starting a new one," Verykios says.

Firewall Systems has been profitable since inception, turning over $15 million in the past 12 months. "We could have done $40 million, perhaps $50 million," he says. "A lot of resellers are still working on that mentality, that 'I want to be a $100 million [company]', 'I want to get that $5 million deal that I will never make money on'."

While these resellers can afford to complete the deal at a GP (gross product) level, they lose money in the ongoing costs associated with servicing the client. "We are in a specialised area and the costs after that initial product and service transaction are ongoing for a reseller.

"That's where we are seeing some of these guys lose money. Ultimate IT were high value add; they couldn't afford that because they were doing transactions that they couldn't afford," Verykios says.

Altech's national sales manager Kevin Hartin adds there are many distributors that also have the same mentality.

"Looking at it from a consumer IT perspective, the number of distributors who have gone off to Flemington or Auburn and knocked on Gerry Harvey's door and were going to turn the world around - who have gone off six months later with their tail between their legs because they didn't understand the business process they were getting into - they didn't understand the cost of doing business with retailers." He agrees that ultimately, these issues boil down to bad management.

Teach them

Training resellers about how to sell profitably is key, according to Daniel Lee, managing director at LAN 1, who says the distributor has been assisting with this process. "We have been training the resellers about profitability - how to sell, how to be a professional - and we are using MDF [marketing development funds] to do that. I think that's the best way of spending the MDF."

At the end of the day, however, the individual salesperson is going to be driven by remuneration, he says. "You can teach them everything, but he is going to get any deal possible for the company and he just wants to get his commission."

Lee argues that there should be courses in place for account managers, business development managers and product managers. "Transferring the knowledge to the next generation of people that you bring in is a huge challenge. It's a holistic and long process, but you've got to start somewhere," Lee says.

Altech's Hartin describes channel staff before the advent of the PC as "professional salespeople" cut from a completely different cloth than today's IT sales executives. "They were educated on their products and the role of selling back then was doing business, not just getting the order and going onto the next one."

Stead Denton, managing director at distributor IPL, argues that in the voice and office equipment market where IPL plays, professionalism is still a high priority. "There's service and consumables. You don't just go out and sell a PC or a laptop and walk away - in the IT business it's completely different. It's your eight points, 10 points and hope the guy comes back one day," he says.

Still, there are plenty of areas in IT where there is still margin, adds Express Data's Cochrane. "There are a lot of skilled people out there selling into corporates with large solutions making big margins with a lot of services behind it." Firewall's Verykios adds that there is good margin in security. "They guys that are cutting the big security deals deserve to make their money because they know what they are doing," he says.
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