The Future of IT Distribution

I sampled distribution as my second job after starting life at HP as a fresh-faced graduate. That was mid-eighties and if I am really honest about it the fundamental issues in distribution haven't changed drastically. We still talk about vendors, stock, margins, credit and marketing co-op.

It is fair to say that there has been a lot of consolidation which has brought about a small number of 'super-broadliners' who operate on a wide scale though none of them are truly global. But there are also quite a large number of more specialist distributors and there are plenty of small to medium sized players who service specific markets by products lines or geographies who do very well. What has changed is the overall volume bought through what we describe as 'The Channel' over that time and its importance to vendors.

I remember, as a young General Manager, when Digital invented its Green Space/White Space policy and tried to preclude the Channel from playing in their major accounts and Peter Herke grew DEC Direct to take over. That strategy probably plotted the pathway of destruction of one of the industry's finest businesses. It ended up in the hands of its worst enemy, HP, after scoring an own goal of monumental proportions. That own goal was to underestimate the importance of Channel in the dynamics of the market.

So, after all these years of importance, why are we suddenly saying that the Channel, and specifically distribution, has to change?

Many analysts bring up the concept of 'Value'. The most common misconception of distribution is to say it is only good for moving product in the market and handling credit. So for that, vendors think they should 'pay' no more than a slight premium on what they would pay a good carrier. That might describe hardware, but software has been a different for quite a while. In fact, boxed software only really exists for retail shops these days.

But there is a change happening that is fairly fundamental. The Cloud does create new possibilities. Most large distributors talk of The Cloud as being something that may build momentum over time and then they can play 'catch up' as time goes by. I think that's a mistake.
You see, the writing is on the wall. Hardware distribution is perceived as 'valueless' buy vendors and at one of the scale broadliners are offering new concepts of logistics-led services such as not actually buying and selling but just logistics. That model has only so far to go as ultimately distributors rely on carriers to ship which means only the warehouse space is left and maybe some invoice printing on vendor headed paper. This, to my mind, is one of the shortest lived strategies possible for distributors as they are effectively opening hardware distribution up for logistics companies. This model does not even include credit - it is just distribution leveraging its contracts with carriers.

The other area that is open to large distributors is 'White Goods' like consumer electrics. Esprinet in Italy already trades handsomely on this. In fact, so simple is this form of distribution that its model is more attractive in terms of margin opportunity than high end storage and servers. The big trick is credit as there are tons of small resellers as well as big retail chains. That usually means small credit lines and higher margins. Nice business.

All this detracts companies from what is happening in software. The assumption is that, at some future point, distributors will just become 'aggregators' of software via some kind of portal. Most are looking at working with some kind of hosting centre and then trying to fathom out how on earth they would charge and make money.

But there is a risk here. Having been through the early SaaS model at a vendor, we decided there was no need to use traditional Channels. You see credit was not an issue - we never did a credit check on any company, large or small. If someone did not pay a bill, we simply cut off the service. Despite monthly charges, most companies paid us the annual fees upfront with no discount offered. We only gave discount for multiple year deals.

We used different Channels to offer pay-as-you-go, by-the-minute services as this suited us. And so some users received the service as an event based rental or over-flow facility. Gross margins overall were 80+% as a vendor and there were few middle men and not one classic distributor or reseller. In fact, the major player in that market, WebEx, finally got bought by Cisco for $3.2bn without ever having a real Channel. We got bought by Microsoft and most of the technology got bundled.

There is a real danger here that unless a distributor shows leadership, creates a Channel proposition that can be understood, then the software market could drift away. Years ago, with two partners I started a business based on this precise assumption - over time the Channel role in software distribution would profoundly change and, at best, a whole layer would get removed as it was not required. The three of us still like to think we were precursors to electronic software distribution but we were men of the Channel and we knew the world would change. Maybe not quite then.

This time around, it will change. Aggregation of software will not be good enough in itself. There will be many other services around The Cloud which will be equally if not more important. For instance, one of the biggest arguments for The Cloud for large companies will be comparing financial models. Where do you start with that? By auditing current assets. Most large Corporates either don't have a good handle on what software assets they have or have weak understanding of licensing. Either way, it's fair to say most large companies are overpaying substantially for many products and services they receive from power to telecoms to software. Quantifying that overspend is crucial to justifying The Cloud.

For larger vendors, getting their software into the high volume of SME companies has been a perennial issue. Today, the Channel has an important role in that specific supply chain. That will not last much longer as I believe there will be companies who will offer software from multiple vendors to SMEs who do not form part of the Channel today. Look at Amazon and The Cloud for a sneak preview but look at how Tescos and food retailers have muscled in on the mobile market to understand that players from 'left field' have plenty of profits to invest in a huge opportunity. And then there is Private Equity - always ready to back potential game changers. On top of that, I don't for one minute believe that the likes of Facebook and LinkedIn are not looking at additional models to make money to justify their astronomic valuations.

I read recently that one major, more specialised distributor, was refining its strategy to focus only on a small number of major resellers and the rest could get a 'Lite' version of its service. I think that company will die with that kind of old-distribution mentality. Because the smart money will be exploitation of the mass accounts where their skills to leverage vendor relationships and 'electronic logistics' should yield higher margin business. The argument would be to minimally service large resellers as that opportunity will surely give less value and margin opportunity over time. Heck, we all know how little money there is in selling highly technical goods to someone like Computacenter. That is not a sustainable business model.

So some distributors will see the Blue Sky through The Cloud. I have read a fair bit about Blue Ocean strategies where businesses have moved out of crowded markets into calmer oceans which yield higher profits. The problem is that most distributors think there is no money to be made in The Cloud today.

That's because they don't understand it. By the time they react, it will be late and it will cost more to get in, against a backdrop of their traditional business suffering under higher pressure.

My message is 'Invest while you have the money'. Investing when you don't have the money is a lot, lot harder.

The Wrong Type of Snow?

It's amazing how a relatively small amount of snow can completely screw up Britain but it always does.

This time around, it wasn't as if we didn't know it about having had the first wave on Friday. But yesterday we got another faceful and total chaos.

Amazingly, without reading the forecast I put a winter jacket, scarf and hat into my boot before leaving for Basingstoke yesterday morning. It rained about lunchtime but it was well above freezing so no one was panicking. By 3.15pm, the MD put his head round my door and said I had miles to travel so go! I didn't get further than a few yards from the office before we encountered a hill where cars were struggling. No sign of gritters but there was one citizen who bought grit from a wholesaler on the business park and he was manfully laying it down the hill. I have a 4 wheel drive Audi saloon so this snow has been a breeze but all the cars ahead were in no way equipped for the snow. Eventually I got my run at the hill and cleared it easily, then came the queue on the A33 to Reading. I did not have a lot of fuel but I knew there was a station half way to Reading.

What could possibly go wrong?

Three hours later the car began to splutter and I had travelled about three quarters of a mile up the A33. I got out, suited up with my golf shoes on and trudged back to Tescos, bought the last can and got some fuel. I bought water and sweets and a few overnight things just in case. Back in the car, I waited another hour and moved no more than 10 yards, I decided to turn back to Tescos and fill up. I took me 40 mins to get there and I filled up. I waited an hour to get back onto the A33 which was still not moving and so made for the M3.

I got drove past the office I left at about 8pm and saw the MD in his office still. I got up onto the ring road and there was a scene from the 'Day After Tomorrow' up there - cars strewn everywhere and people throwing snowballs. When I eventually crept onto the M3 it crawled all the way to the Fleet Services where I had hoped to get coffee but the queue to get in was miles long and lorries lay resting on the hard shoulder either side of the motorway. I gritted my teeth and drove on listening to every book review and play of the X Factor guy on the radio.

I arrived home, some 54 miles from Basingstoke at 11.40pm - the last 40 miles took less than 40 minutes. It struck me that in all that time I had seen only one police car and not one gritter. Eight and half hours to get home.

This year, across the South East, the level of gritting and preparedness for inclement weather has been appalling. There was a rumour spreading that if you attempted to grit and someone fell by your place then you were liable as you had not done the job well enough. I wonder if that was on the Council's mind as there must be some excuse for their inactivity.

Probably all gone home early - after all they didn't want to get caught in the snow.

What a Great Deal?!

You couldn't make it up but I suppose it's to be expected.

Today, our prize investment, RBS, having just got the details of the extra £30bn we are pumping into it, has announced it is shedding around 4,000 jobs.

It makes you stop and think. Recently, there was a lot of controversy in that RBS' investment bankers will be getting fat bonuses this year and, indeed, their CEO, Stephen Hester, is in line for a £9.6m. They may get some deferred but that will really sit well with the 4,000 who will pay for them. In fact, around 16,000 jobs have already been shed from the back room, branches and other places - the sort of jobs that the expensive adverts on TV about NatWest and their push for more personal banking might be lead us to believe have not gone.

4,000 jobs and let's say the average salary is £30,000 per annum - that would be £120m off the wage bill this year. That will probably be less money saved than the bonus bill.

But it gets better. 700 branches of British banks will be sold to other companies in the fire sale of the decade as the EU rules that banks that got state aid must split. Private Equity houses and foreign banks will love this as they will buy already stripped down versions of the banks branches with redundancies already paid for by the taxpayer and because so many branches will be up for grabs they will be sold at rock bottom prices, once again leaving the taxpayer with the mired end of the stick.

It gets better than that. Having given away the jewels of the banking industry cheap and subsidised by us, they will be precisely the same buildings, staff and products as before just owned by someone else who will reap the profit on our loans and mortgages rather than us at least contributing to the value of our 'investments', i.e. the banks we saved. We are told it will promote competition - sure it will. Why would anyone buy the banks and then trash the price when there is so much cash and profit to be made? Prices will remain the same, believe me.

And is it good that Tesco buys into a bank? They squeeze the living daylights out of suppliers and only pass on part of the savings to customers which makes them ever more profitable. We are handing them a cash business to make them more money. Meanwhile, Virgin must be laughing as they offered to buy Northern Rock when no one else would and when it was leaching money - now they get to buy the cleaned up good part at a knock down price with a great deal more advantageous loans from the Government to lend at a large profit.

Alistair Darling kept a straight face as he announced all this. He didn't want to let on that we have all just been right royally shafted. The smiles will come later.

What Do SMEs Want?

The Government believes that banks are choking small businesses by not lending or setting criteria which are too tough. Banks say they're finding it hard to hit lending targets as customers are paying back more.

What do SMEs really want?

It seems that everyone knows the answer and continues to beat the drum. But because no one in the Government or in banks have run small businesses, they have no real idea what they need. They don't have any shortage of senior corporate figures piping up and telling them how much they want to earn or how bad education is (Terry Leahy of Tesco has done just that today). They have even employed Lord Sugar as some kind of Enterprise Tsar, whatever that rubbish may be. But no one in the Government would want to listen to someone like you or I. We don't get knighted or put into the Lords. We don't get to speak at the CBI and tell people how it is.

Small businesses account for 97% of all businesses in Britain and are the largest body of employers and we contribute disproportionately the largest amount of tax into the system through corporation and PAYE but we have the least heard voice. So it comes as no surprise that there is an argument between the Government and banks about lending.

So let's just think about this for a moment. Why is it that SMEs don't want to borrow as much cash as everyone thinks they should? RBS and Lloyds have set aside more cash, they have even put their most experienced bankers on hotlines. Why are SMEs behaving like spoilt brats and asking for credit and then not using it?

The main reason is that lending is seen as the way to prosperity by the Government. There is no other pathway. There is a good reason at a personal level because cheap and available mortgages allow us all to trade up or release equity to supplement our household income. No one could have survived the last 12 years if they had relied purely on their average household incomes and produced the growth we had - it came from freely available, ultra cheap and few strings attached credit. Banks fought over themselves giving it to us and we took it and used it prodigiously.

There was a ripple effect into SME business. Of course, in that environment of growth, businesses see opportunities and invest to grow by taking on people, marketing, gearing up new production, maybe expanding overseas. While the market is buoyant, the lower available credit was essential for companies to move forward.

Even now, at the heart of the recession, mortgages are critical as more people need to keep moving their earnings as wage increases are minimal and jobs are becoming scarcer. People are borrowing to maintain their lifestyle and maybe to survive. They are leveraging their own bank, again. It's a dangerous strategy long term as prosperity has to be geared to income ultimately but in the short term it is the only method the Government has to stand any chance of stimulating growth to cut borrowing. You can almost see the accident waiting to happen - borrow more to fuel growth to decrease borrowing. It's a cycle doomed to fail.

But small businessmen are a canny lot. They do not operate under the same mentality. Experience has taught them that in times of recession, borrowing to invest is not a priority. You may need to borrow to survive but that's different. Survival borrowing is not favoured by banks - after all, why would they want to give money to a company to save jobs or pay wages? That's the sort of thing that taxpayers do for banks but banks don't do it for businesses - oh, no. It's a simple credo, banks lend against some kind of collateral - so if you have assets in the business or you have a strong revenue book to show, you get money under nice criteria and although the cheapest business overdraft is around 13 times the bank base rate, let's face it 6.5% interest is the lowest for business borrowing for a long, long time.

The thing about small businesspeople is that we are naturally sensible. We do not operate like Government lackies would like us to. If sales are low due to a recession, we adopt a different approach. We cut costs, conserve cash and we attempt to decrease dependence on borrowing. Why? Because CASH IS KING. If sales are not coming through and growth opportunities are not there, we do not borrow more money, we cut our cloth. There is a simple reason - SMEs want to take advantage of the growth as and when it comes through to do that you must then have access to readily available credit at good terms. Borrowing in a recession for SMEs is either done out of desperation or because the business has spotted an opportunity created by the recession.

The truth is that the Government does not know how to run their own economics, that has been spectacularly manifested. So there is virtually no chance it understands the economics of running a small business. It has no adequate advice for SMEs and so they will continue to beat up banks and banks will do stupid things like put managers in call centres. It will not stimulate the credit.

What SMEs need is sales. Pure and simple, if there are not sales opportunities out there then there is zero point in investing in new people or production. The only other area where credit would be good is for those starting new ventures - with more people becoming unemployed more will want to try their hand at starting a new business. In general, starting a business in a recession is not a good idea. You only have to look at any High Street and count the number of shops now empty to know that buying consumers are still very nervous and businesses are unlikely to start taking small risks on new suppliers.

Of course, there exceptions to the rules. Many businesses like Cisco will tell you that they started business during a recession. Let's draw a line between book theory and practicality here. Cisco was started on the back of the waves of growth in the IT networking and infrastructure business. They were riding a future wave - true, they did that superbly but not every business has such a wave to rise. If you want to start a car repair shop, a nice clothes boutique, a barbers or a building firm, there are not those waves visible to invest against. Markets are generally depressed so you have to be able to pick where the future growth will come from and focus your business upon what you know you can do to tap into it. Simple statistics show that most businesses fail within the first year - in a recession that statistic gets worse. Banks will not lend money just to help people out in tough times, they want an investment idea.

Venture Capital is a very funny beast. Up until about a year ago, you could have had an idea about paper hat design for Outer Mongolia and they would have flown expensive people to you, to 'chase the deal'. Now they are all sitting on top of their masters' cash and working part time until someone presses the green button. It's not a question of pitching to them, it's a question of finding one who is in as most are on part time work.

The money is in the wrong place. If Government is hell bent on providing credit, then support new business ideas. VCs aren't putting cash down and banks don't want to support new ideas, Government should step in. I know Mandelson will say 'we are', but reality says Government is not and if it is, it is going into the wrong places. For a small time guy to borrow £10,000 to get a small business up and running, the facilities are simply not there whether they are the next Cisco or not. Like me, most entrepreneurs do it from their own means and we, of course, bet very carefully as we have too much to lose. If I wanted to expand my business today, there is not a scheme widely available and well publicised in Government anywhere that I do not have to fill in a ton of forms about my business to the nth degree and then wait six months for an answer. Borrowing should be a simple process. It is after all, a process of gambling and banks are very good at that when it comes to large complex sums that mean nothing to anyone else or serve no real purpose. As banks gamble in front of our eyes and conjure up £billions of profits, down in the real world it would be hard to get a penny of that profit to fund a new business idea.

So here's a thought. Government step in and say, for every new £1 of profit earned by investment banking of any type, 80% of it must be invested in small business funding with a new package of conditions to stimulate commerce. Call it a tax if you want, who cares. Bankers won't like it as it will dramatically cut bonuses but would it not create an impression that if you are going to make vast profits then make them out of something that does just a bit of good to the economy.

There are lots more things that could be done. But simply screaming into a High Street bank manager's ear 'Lend!' will not do it They do not have the experience or skill to understand business in the same way as an entrepreneur. You have to structure the whole conditions properly and borrowing is a mugs game for most SMEs today - they want sales. Stimulate new business ventures and there will be more sales for SMEs and their expertise and products.

Sales are what makes SMEs grow.

Another Beautiful Idea

Sir Terry Leahy has told us that we are on the path to recovery. He should know, his Tesco Group sales are up by 8.3% to £30.4bn for the half yeat to the end of August.

I find it astonishing that he has grown so aggressively in a recession. Tesco pre-tax profit for the same period is up 8.6%. It would be easy to suggest that Tesco have grown as cost-conscious shoppers have been pulled to Tesco by the lure of lower prices. Would that be true, we would see corresponding drops in sales at the high end, like Waitrose, but I do not see the same correlation. Indeed, Leahy tells us that people have stopped trading down and the hardest hit sectors like 'finest' and 'organics' are recovering.

Meanwhile, out on the web there is a massive demand for 'shopping around'. Now many sites like Moneysupermarket.com, Gocompare.com, Confused.com and many. many more offer comparisons for like-for-like buying. This is not always effective with too many of them offering subsets of insurers' main products or low cost offerings only with premium sales only direct but they serve their purpose. If you just want to ensure your 3 year old Ford car, the chances are the comparison sites will serve you well. If you have a few points on your licence, no no claims bonus or some other unique, to be frank these sites are far less useful and brokers who still maintain direct relationships can get you bespoke help.

We can now compare car prices, electronics goods, flights, hotels - just so long as the source companies play ball. But one of the last main bastion of comparison remains in the world of advertising - supermarkets. Asda would tell us that they are bashing down the prices of staple things to the extent they tell us the number of lines they have decreased the prices on compared to others like Tesco. That, frankly, is misleading at best but it serves its purpose as people get the perception that Asda are better 'value'. However, would it not be great if we could have a virtual shopping trolley in which we put all the items we want and the brands we favour too and then, instantly, shop around to find out which stores can offer the best price on exactly the contents of that trolley.

No 'Bogoffs' or other deals, just straight forward 'bidding' if you like for that trolley's contents. The winning company may well then add in offers but basically it has to win the 'bid' in order to play.

In business to business sales, we have seen this go on for some time with electronic auctions for something as valuable as recruitment services for the next generation of employees - reverse auctions to see who will source talent for the lowest cost. It's madness but it has been effectively applied to many products and services across the board and is at the heart of long-winded, often ill-conceived tenders too.

Yet at the most basic commodity levels, companies like Tesco are actually making tremendous profits as they squeeze suppliers for the last penny and then make huge profits on the back of the consumers. Clever advertising gives the impression they are hacking down the cost of shopping when the reality is that their net profits are rising faster than their revenues - their net margins per sale are rising, not falling. The chances are, they are making more money than their suppliers and they are not passing through all the savings on the products they make.

Much like the principle of Google, who make far more on collecting news and presenting it to us than the people who write it, companies like Tesco are making fortunes on commodities that are cheap and basic, and just presenting them conveniently and well. Yet we, the consumers, have no way of driving a harder bargain - we have no way of saying, 'I will take my trolley elsewhere if you do not offer me a discount for my business' as any normal powreful buyer could. There are loyalty schemes - but if profits were being set aside for loyal customers then surely these companies would be making less. The fact remains, that we, the consumers, do not have a great deal of say in the matter.

There are some websites that offer rudimentary comparisons on specific foods. I have found www.mysupermarket.co.uk which compares the prices of some brand commodities from 4 major stores. It's pretty small beer to be frank and the number of lines it offers effectively just make it another marketing forum for those brands and the supermarket companies involved. It does not hand the 'power of negotiation' back to the buyer. And let's face it, Tesco is the brand leader whose market alone is over £60bn a year in products we buy.

Our spending power is enormous - perhaps it is time we got something back for this awesome power.

So here's a thought. Imagine my virtual shopping trolley and I fill it up with all my usual barnds of goods - foods, hardware, drinks and more. I then click a button and 'see' supermarkets and online shopping companies effectively 'bid' for my business. The basic thing they would need to do is to allow me to minimise the cost of my staple purchases - so the best offer would win. The offer may be swayed by the fact I live in a certain area so delivery or my travel has to be taken into consideration, maybe some extra loyalty points may be chucked in, but the essence of the idea is to drive down the cost of our staple weekly shopping trolley and make supermarkets work on our behalf rather than just their shareholders.

Once the trolly is bought, the winning 'bidder' would have ample opportunity to entice us to 'upgrade' or increment our spend on other items or offers - but their right to do so must revolve around their aggregate pricing on the staple goods in my trolley.

Could it happen? It would not happen if it were left in the hands of the supermarkets or marketeers. It would also never happen if big business got involved. This has to be entrepreneurial consumers who drive it, whose mandate is from all or many consumers. It has to be a collective thing where any profits are distributed back to those who subscribe through the savings they make. That would probably mean consumers signing up to a portal to have a 'trolley facility' and maybe paying a small fee each time they do like £1. Then they can use the facilities and get their savings. Meanwhile, supermarkets and online shopping companies would have to subscribe to the service in order to 'bid' for the trolleys, which would probably mean daily automated feeds of the latest pricing across all lines - something all computer distributors offer today on their own websites. Given moderm technology and computer software, this is not a show stopper.

Again, if anyone is interested in the idea, register at http://www.calxeurope.com/contact_us.html and make sure you put 'My Trolley' on your registration. At this stage it's a germ of an idea - tomorrow could be different.

The Internet Bubble Expands Again

I like to see what I am getting before I buy when it comes to groceries but I must admit you cannot beat the sheer convenience of online grocery purchases once in a while.

Like most people, my wife and I will sit down and do an online supermarket shop sporadically. We mainly use Tescos but once in a while we use Ocado because we like the Waitrose brand. Either way we always marvel at how little we have bought, how much of the same thing has arrived, how many items differ to the brand we asked for and the staggering price of so few goods. We often remark that we could have got a good trolley load for far less and ask ourselves where has the money actually gone when we online shop for groceries.

Such questions are more evident when we use Ocado. Focusing on the Waitrose brand, which itself is reassuringly damn expensive, the quality is a good deal higher than Tescos, we convince ourselves. Certainly, the meat and fish products are but often the cold meats and tidbits are nicer too. However, for the most part, the popular brands are the same across the board. But when the Ocado delivery arrives, a few bags seem to have cost an absolute fortune.

So I was surprised when I read yesterday that Al Gore's special 'green fund', Generation Investment Management, is part of a group of investors who have injected around £30m into Ocado, the rest has been stumped up by Fidelity Investments and the shareholders, of which the John Lewis Pension Fund is a large one. The fact is that over the years, Ocado has raised more than £350m and has around £100m in debt, much provided by Lloyds Banking Group. In response, Ocado's sales will be £450m this year and that is reckoned to be a whacking 20% of the online supermarket sector - which analysts expect to grow to £40bn over time. To date, Ocado has not made single penny in net profit and even this year its projections are for operating profit only. Similar outlooks abound for future years as it focuses on building market share before making profits.

Growth is beautiful, and focus on the topline.

Is it me, or is that the internet mantra all over again? You cannot beat grabbing market share in a growing market but reality sets in over time. Ocado may have 20% of the online grocery business today but that does not reflect its true market share in the grocery sector as a whole. Unless it changes its value proposition in terms of what it offers, as this market grows it will tend toward its natural market share, in my humble opinion. That, in time, might still make it some money. But Waitrose has a different bunch of investors or partners to answer to and this makes its narrow, high value shopping a brand itself and the partners like it. But in the cruel world of online retailing, cost may become the key as one of the greatest features of online shopping is the ability to compare prices over a range of shops - item for item. Today this is limited to insurance, travel or electronic goods largely but sites like moneymarkets.com and gocompare.com have a principle and model which is easily repeatable for a range of goods. So if you know what you like in terms of brands, in time, you should be able to easily compare which store is offering the best deals for your shopping trolley before you pay.

If all the clever advertising by Asda, Sainsbury and Tesco is anything to go by, then the online world of supermarkets will get very different in the future and competition will get vicious and cut throat. I believe Ocado is not particularly well positioned and I would focus on getting some money flowing in for the right reasons rather than for speculation. After all, we have seen this all before.

The internet boom is coming to the supermarket world. Pat your virtual bums and start shopping around.