Distribution has performed strongly in these unusual times, but was winning over other models even before 2020 says a new report which analyses the core economics. Two tier is an obvious way to get products and services out at scale to a wider market, as the organisation of the large distributors, the Global Technology Distribution Council (GTDC) has set out in this new report, reviewing some of the economic reasons why this should be so.
In GTDC’s Distribution’s Edge, it argues that the advantages of distribution go beyond the idea of revenue growth and just using the model for scale.
This two-tier model becomes even more important as products and services get more complex, require integration and surrounding services, and in Europe in particular, elements of localisation. 2020 has given an extra twist to the distribution model, with experts expecting this route to market or Go-To-Market (GTM) as the report calls it, to show higher gains as a result of it stabilising supply chains.
Talking with GDTC’s CEO Frank Vitagliano, who has previously spent some time in his career on the vendor side, reveals that this is not just an economic modelling exercise. “There are a lot of nuances associated with the various go-to-market models,” he says. A previous study ten years ago looked at the costs and advantages of the various models, concluding that the partnership model was an effective route to market, and vendors have voted with their partner plans, many companies moving to channels from direct, or adding distribution to a previous single tier model.
“The aim is to help people understand the channel and help them in articulating the details. People like me – channel chiefs as I then was - used it then within the company to explain what distribution did and we have since been asked many times to refresh this report. And ten years ago, in the previous report there was not a lot of SaaS, or non-physical goods.”
One of the key elements discussed in the report is how much control vendors require over their GTM model. The direct model prioritises this but has associated costs and scale limitations. “The control idea is interesting, and puts a lot of responsibility for GTM on the vendor company, from pricing to support and in a lot of cases what happens in a lot of start-ups is that they think no-one else can articulate the products as well as they can. It is psychological, but we think it goes away very quickly because as soon as the vendor needs scale and reach; they realise the trade-offs don’t warrant that control,” says Frank Vitagliano.
How does distribution and its channels demonstrate that they have the skills and abilities to do this and supply the control? “All I can say is that distribution has been doing it for 50 years. 75% of all global IT placements are two-tier or handled by some channel partner, and of those, about 65-70% go through distribution, so there is a vast number using the model. So over time, distribution has shown it can do it – that is not the issue. It is one of control.”
There are a number of variables in the decisions about GTM. These include the product and its nature, the customer type and location, scale and complexity of the solution, and other factors. “I would argue that if you look at the example of the PC – it is actually a simple transaction and not that complex. This would look like a simple direct RTM model. But the value that is provided by the channel in support and overall complexity lend themselves better to the two-tier model. That is what many of the vendors in the hardware space have realised over time and the model has evolved.”
In the all-important area of customer satisfaction, the report finds a higher level when a partner is involved. In many instance, the partner’s main aim to keeping that all-important relationship with the customer, so the advantage of both. “When I was working for a major vendor, we had a big debate on study of customer satisfaction; as this idea was talked about, I got annoyed by it. When you think about the channel model, the satisfaction of the customer to the partner is the same priority as the vendor, if not more important. In a lot of cases, a small solution provider could find a high proportion of their business going into a particular customer, certainly much higher than the vendor’s sales proportion to that particular customer. So the idea that customer satisfaction is less important to the channel than the vendor is one I have never bought.”
Getting the customer relationship right is down to the partners being supported properly with training and knowledge.
Distribution is doing well and outperforming the IT industry as a whole in 2020; “I expect distribution to have a bigger share of the total for 2020” says Peter van den Berg, the GTDC's European regional general manager. Resellers were in a good position to work remotely and responded quickly.
Costs for all forms of GTM are higher in Europe; it could actually be argued that it is more attractive to go two-tier in Europe than the US because of the economies of scale in the US, he says. In smaller countries, in particular, costs are higher, but two tier wins with localisation.
The global GTM models show that indirect as a proportion of total sales is higher in Europe and Asia-Pac than the US, agrees Frank Vitagliano.
There are combinations and hybrids models that work, he acknowledges. “When I say direct, it can often mean that there are vendor salespeople engaged in the sales, especially with large customers. That is not going to change and is the value is recognised by the channel and works extraordinarily well.”
The customer model is up in the air, however says Frank Vitagliano. “The old idea of salespeople visiting customers is not working now. Nobody is engaging like they used to. That is a dynamic that has thrown a curve into the model but is probably temporary. But the collaborating method will be more widespread simply because people are now more comfortable with it and can get more done."
“What distribution has been able to do is nothing short of amazing – the global supply has not been disrupted, even though other industries have seen problems. The typical distributor had about four weeks in the chain, so this flowed for the first month.”
But working with vendors, they understood the change and enabled the supply chain to keep going in the main, apart from a few areas in high demand such as web-cameras which went out of stock briefly. So, distribution has actually proved to be more valuable in 2020 than pre-crisis, he concludes.
