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Financial freedom for VARs

by Stuart Wilson, Monday 22 December 2008

Over the next few months, Channel EMEA is carrying out a series of interviews with senior distribution executives working in the Europe, Middle East and Africa (EMEA) region. These interviews focus on market conditions and the future of channel development in EMEA. First up is Sukh Rayat, senior VP for sales at Avnet Technology Solutions EMEA, with his own personal take on the market’s future and how the channel can overcome the obstacles it currently faces.

Avnet Technology Solutions, which expects annual sales of US$7.6 billion for calendar 2008, is an operating group of New York-quoted global giant Avnet. Clearly positioned as a distributor of enterprise computing products, software and services, Avnet Technology Solutions’ customers include ISVs, OEMs, system builders, system integrators and VARs.

With the current economic conditions putting channel financing under the microscope, it was no surprise to discover that Rayat has strong opinions on this particular topic.

Creating value

“Everybody is talking about the credit crunch but it is important to remember that finance has been an issue in the channel for many years now,” Rayat explained. “The dynamics of the market place have created a situation where there is not enough value being created in the channel.”

“Vendors have taken out much of the profitability in the channel,” he added. “Some vendors have been more focused on talking to the end-users and this has actually created some weakness in the VAR and reseller channel.”

“We have a situation where the largest VARs are getting even bigger while the mid-tier and smaller VARs and resellers are struggling. The credit crunch that we are currently experiencing can only serve to accelerate this trend,” continued Rayat.

Rayat reckons that there is a way for small and mid-sized resellers to safeguard their future role in the channel and ease the pressures related to financing a deal. It does however require a significant leap of faith for resellers that have previously been reluctant to relinquish complete control of a deal or project.

“Small and mid-sized VARs will have to change in order to survive and this means focusing more on delivering solutions to customers,” explained Rayat. “Some of the VARs do not have the financial scale to handle the transactions involved in a large deal. As Avnet we are working on programmes and initiatives that enable VARs to use our scale to handle the transaction side, allowing them to do the services. This requires VARs to trust the distributor that they are working with.”

“We have to look at the channel as a pipe and understand that in most cases the end-user is financially strong and so too is the distributor,” he added. “By handling the transaction side for the VARs that part of the pipe, which is currently narrower, can be widened as well.”

“We are working hard to try and explain to VARs why this is the correct way forward for the channel but it is a paradigm shift. The VAR community in the UK has been responsive but it is important to understand that each market in EMEA has a different dynamic,” Rayat continued.

Business benefits

Avnet Technology Solutions claims to bring value, not just through the delivery of products and solutions, but also through the provision of additional services that boost customer retention and development for channel partners. The range of value-added services includes sales and business development, marketing, partnering, logistics and also the all-important financial solutions.

“There are many programmes now available to offer this type of financial support to VARs,” added Rayat. “When you look at the distribution landscape you can see strong players such as Avnet, Arrow, Ingram Micro and Tech Data with the ability to offer this.”

For VARs that embrace the financing solutions available to them, there are numerous potential business benefits including improved liquidity, more cash on hand and it can also mean that existing credit lines are preserved.

“The biggest problem facing many VARs is their inability to get access to cash. If they do move away from the transaction of product they can release the funds available in the business,” said Rayat

“[Avnet has] not moved away from any major deals during the last quarter,” he continued. “There hasn’t been a situation where – working with the VAR – we could not find a financial solution. For the small and medium VARs it is all about how to run the balance sheet and not letting ego influence the running of the business.”

Avnet wants VARs to think outside the box to enable their success, according to Rayat. It is a message that has been preached to resellers for many years but it remains as valid today as always: any deal has to be about more than just selling the server.

“In the UK, Avnet is no longer just an IBM and Sun distributor – we have all the solutions that a VAR could want,” said Rayat. “We work with them so that they can add more value and deliver more outside the box because this is where they can command margin.”

“We still have gaps in our UK portfolio,” he conceded. “You just have to analyse our line card and there is clearly one major vendor that we don’t have: HP. But I think there will be an opportunity at some point to address this.”

Consolidation pressure

Moving up from the second-tier reseller level to the first-tier distributors, Rayat believes that the current economic conditions will only serve to add to the consolidation pressure that has shaped much of the EMEA market during the last decade.

“I think in the distribution sector consolidation forces are creating these four major forces: Avnet and Arrow in the value space and Ingram Micro and Tech Data in the volume market,” Rayat stated. “The credit crunch is also impacting the channel with credit limits now being cut by credit insurers.”

“The enterprise server space could face issues in 2009,” he added. “The continued improvement of industry standard servers (ISS) is eating away at the proprietary market place and this was the traditional technology area where some vendors made a stack of money.”

Rayat believes that vendors themselves will look to align their channels even further in 2009 and the current conditions will help to crystallise their thinking.

“In 2009 clever distributors with strong cash flow will get stronger in both the mature and the emerging markets [of EMEA]. Weaker distributors will see increased pressure on their credit lines from vendors. In the current climate, the financial results are all relative to the market conditions – but each distributor has to ask itself just how strong its foundations really are?”

This interview took place prior to the announcement that Avnet had made a move into the Turkish IT distribution market, forming a joint venture (JV) with Sanko Holding Group. Read full story here.

Sukh Rayat is representing Avnet at next year’s DISTREE XXL channel event for the EMEA region.

DISTREE XXL creates a new, unrivalled opportunity for channel leaders across EMEA to meet and do business with existing and prospective vendor partners. The event takes place in Monaco from February 9th-12th 2009. DISTREE XXL will assemble leading technology distributors from more than 80 countries.

Find out more at www.distree.com/xxl

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