Corporate resellers face wind of change

You can't open the financial pages of any newspaper at the moment without reading about a quoted reseller or services business warning that profits will be below analyst expectations.

In recent weeks, Computacenter, Compel, Kalamazoo, Parity and Logica to name but a few, have all issued such warnings. These companies have either become complacent, or have been caught on the hop by a more insidious trend.

Computacenter, the most recent company to issue a profits warning, trotted out the standard explanation that the year 2000 bug was largely to blame. Its statement said: "There has been much discussion of the slower than expected recovery of the IT market across Europe, post Y2K. Computacenter, as market leader in the supply of distributed IT systems and services, has, not surprisingly, been affected by this general market condition."

Corporate customers in general spent so much money ensuring that the millennium did not affect them, that budgets this year have been cut as a consequence and projects have been delayed.

Corporate development director Phil Williams said that the industry was seeing a permanent slowdown in sales, and was confident that recent problems are temporary. "We expected the first quarter of 2000 to mirror the last few weeks of 1999 when sales dropped right off, and then start to build up again. March was pretty good and we thought it was going to plan, and then April didn't happen and May wasn't any good either," he said.

Putting it in Context
Williams added that Computacenter has been hardest hit in its top 30 accounts, while business with smaller accounts has been good. This experience is reflected in a recent report by analysts Context, which found that there has been a heavy decline in demand in the corporate PC market.

Jeremy Davies, senior partner at Context, said that corporates generally regarded the year 2000 issue as a good housekeeping exercise, and while the extra costs had delayed new projects, he believed that the corporate reseller model itself is changing.

Some commentators have pointed out that corporate customers have become a little wiser, and are looking for more business benefits from their IT investment as a result of year 2000.

Williams conceded that corporate resellers may suffer due to the new priorities in large companies increasingly focused on internet projects. A growing proportion of the corporate IT budget is being spent with ebusiness consultants - business which companies such as Computacenter and Compel are repositioning themselves to capture. "Our ebusiness division is expanding extremely fast. We can't develop it quickly enough and there's a shortage of people," said Williams.

There is certainly no money in products, so services and consulting become more important. The stark reality of this change can already be seen in the US, where once seemingly invincible corporate resellers like Microage, Inacom and CompuCom have learned the hard way that it's no longer possible to make money just by turning product round. These companies and others are now either struggling to stay afloat or trying to reinvent themselves as services companies or ebusiness consultants.

In the global market, trends cross the Atlantic sooner or later, and Davies confirmed that large companies are already becoming much more choosy about their relationships with their reseller suppliers.

"These people are in cost competitive mode. They are asking 'how much value-add do I need?' They're starting to look at the value-add [which] resellers provide, asking for services to be broken down - it's getting a lot tougher for resellers to justify their value-add," he said.

Davies cited Michael Dell's law of economic redemption: "If what you do is worthwhile, then you will make money." The resellers that win through, said Davies, will be those that save their customers money or that enable them to use their money more effectively.

Realising the SME potential
Corporate resellers may be suffering, but outside the corporate arena the SME market looks buoyant. Although this is the arena in which most UK resellers trade, the potential of this market is yet to be fully realised.

Brian Burke, manager at Dunn & Bradstreet Computanet, said: "Everyone knows it's a huge market, but no-one's got the keys that open it up yet."

At present, the successful SME vendors are those pushing potential corporate product through the high street. Part of the problem may be terminology, as the heads of small businesses are more likely to think of themselves as butchers, bakers or candlestick makers than the usual small business operators targeted by IT marketing messages.

Since small businesses want solutions and not just product, increased co-operation between vendors helps resellers to provide such solutions, though this seems a distant prospect at present. Another factor may be financing. Small and medium sized resellers that typically sell to small and medium sized businesses don't necessarily have the financing and lines of credit to fund the deals they would like to. Perhaps there is a bigger role for distributors here.

What is certain is that the rigid traditional supply chain from vendor to distributor to dealer to customer is becoming more flexible. Distributors are becoming more certain of what they want, harder to convince and more circumspect. Resellers will have to change, just like everyone else.

Growth and decline in the PC market

A sharp decline in the corporate market meant that growth in the European PC industry fell to an all-time low of eight per cent year-on-year in the first quarter of 2000. Demand from small business and consumers grew, with sales from Dell and Hewlett Packard up 10.9 per cent and 34.3 per cent year-on-year respectively (Context figures).