LEAD FEATURE: Is bigger always better?

In an industry where change is as commonplace as new technology, it is no surprise that channel companies' businesses are constantly evolving. However, it is the management of this change, and the issues surrounding it, which can be the key to survival.

Matthew Boon, senior industry analyst at research analyst/consulting company Gartner, believes recent and historical trends in the industry from both the low-end PC system through to the mid-range and enterprise-style server markets have had a significant impact on the overall level of business or opportunities open to the reseller market.

He cites the influence of traditional channel-based global vendors changing the way they do business with end customers as among the issues impacting the number of "new" resellers coming on board. Moves such as direct sales models, setting up major Web-based procurement sites, or opening their own stores are among the examples Boon uses.

Boon also predicts the industry will continue to see the big guys get bigger whilst the small and more specialised resellers become niche specialised service providers.

"It is the guys in the middle, trying to become mid-sized solution providers, that are really feeling the heat as their businesses are getting squeezed on multiple fronts. Margin moving boxes are getting smaller, competitiveness in providing unique solutions is becoming less unique and service providers are becoming more specialised," Boon says.

Trevor Boal, NSW state manager of network solutions provider NetStar, has also seen a growth in the size of channel companies. "In the networking space, Boal says, "NetStar has seen a couple of organisations experience significant growth, a number which have died away or been acquired into other organisations and a large group of smaller businesses which were still growing quite steadily."

Growing pains

Channel companies growing in size is not new to Nick Verykios, general manager and marketing director of distributor LAN Systems, through his years of contact with the channel.

"I would say the majority of resellers who have actually been able to stay in business over the last five years are definitely getting bigger."

This, Verykios adds, includes organic growth, where companies that have stayed in a particular area have become experts. "These are companies with built-in skills, not just products, to offer."

One major issue Verykios sees relating to this growth is managing it. "If you chase cheap [low-margin] deals, it's going to hit your cash flow immediately . . . you're not going to be able to manage the returns on your investment well and your banks and financial institutions are not going to support you - in other words, you're alone. And if you're alone in this game you're not going to survive - you need good financial backing."

Andrew Munro, general manager of integrator Praxa Technology, says he sees a whole range of acquisitions and consolidation in the reseller channel. "There are a lot of pressures on margins and on the channel being able to show some differentiation or value-add that they can provide to customers."

One of the more pressing challenges for growing channel companies, according to Gartner's Boon, is being able to continue providing the support and infrastructure for end users which the hardware vendors they represent expect of them.

"Sure, growing resellers face associated revenue increases," Boon said. "However, the associated costs of infrastructure, personnel and operating premises rise accordingly."

Boal has seen the challenges of growing firsthand, having been involved in NetStar through its growth. "Growing a business from 13 people to 600 or 700 is challenging at the best of times." Companies growing to this size typically did it via a mixture of organic growth and acquisitions, he believes, citing one of the key challenges as how the acquisitions are integrated, or in some cases operated separately, from the business. "It's all well and good to say, ‘this is how we plan to do it', your measure of success will be how well you actually execute that plan."

Another fundamental issue Boal sees in managing growth is taking some of the flexibility and lack of structure of a smaller company and evolving this to grow into a larger-scale business. "You've got to start doing things like establishing credentials with the Government and going through ISO accreditation in many cases to get those Government contracts . . . "As for NetStar's own future, Boal says growth is a fundamental part of its plans. "We need to continue to grow, which means much of our business focusing more and more on services and the ability for a services business to grow is really the ability for that business to grow its headcount and customer base."

This necessitated good recruitment, orientation programs and staff development programs, Boal adds, an area NetStar has been working on with both vendors and universities.

Acquiring to grow

In order to get bigger faster, some channel companies embark on the acquisition trail. According to Praxa Technology's Munro, these companies often acquire to get scale, especially if they are in products, because it enables them to being able to drive efficiencies into their businesses.

Peter Kazacos, managing director of outsourcer and integrator KAZ Computer Services, said, from its point-of-view, the company has chosen to grow both organically and through acquisitions. Since listing on the ASX earlier this year, it has acquired reseller/systems integrator Change Management and document and business processing company Ausdata and, more recently, Fundi Software Group. It had previously made a couple of other acquisitions prior to floating.

"If you're trying to establish a geographic presence over a wide region, it's more difficult to do that organically because of the cultures in different locations." He uses the example of KAZ Computer Services' purchase of Change Management, a company which had a strong presence in South Australia as a large business partner of IBM.

Acquisitions also provide opportunities for channel companies wanting to move into new business areas, Kazacos said. Ausdata augmented KAZ Computer Services' IT outsourcing, and it gained business process outsourcing through the acquisition, skills which Kazacos believes would have taken it a lot longer organically. "It's an understanding of [a] business area that you're not in, or to get a geographical position."

Gartner's Boon offers a word of warning, advising channel companies to carefully consider what business it really is, or wants to be in, before it goes down the merger or acquisition path.

The organic approach

Companies which choose to grow organically are also faced with issues as they try to increase their size and market reach.

According to LAN Systems' Verykios, resellers who opt to grow organically face the huge hurdle of cash and its management. "Whilst you [may be] able to bring in a whole bunch of new customers through your growth, you're going to need to be able to do the things that you're famous for as a smaller player." He said LAN Systems has coached a lot of its own expanding resellers and believes it is in a good position to offer advice because of its own fast growth. He suggests channel companies look at doing what LAN Systems did and divisionalise. "This gives you a smaller company's ability to respond, yet all the benefits of being a larger company."

He believes one of the key survival tactics for expanding companies, in addition to cash, is service recovery. "It comes back to how successful you're going to be going forward because you're going to have the reputation of being a player that knows what it's doing."

And there is also the issue that growing organically may be slower than getting skills and a regional presence via an acquisition.

The speed of technological change in the IT sector is something Kazacos sees influencing resellers' decisions to acquire to gain skill sets. "In our industry, something may be flavour of the month and you may be able to make money out of it," he said, "but if you [grow] organically, by the time you get there, the direction [may have] shifted and you may be too late to really capitalise [on it]."

Looking forward

Kazacos believes we'll see an aggregation of Australian organisations. "Because our dollar is as weak as it is, we'll probably see more potential takeover targets from overseas-based organisations who will find it relatively inexpensive to buy Australian organisations."

Verykios envisages "many, many, many more mergers and acquisitions". He also believes there will be more international companies coming in. "What we've seen at all levels of the channel is large players coming in and failing because they think they can take on Australian companies because they're bigger," he said. "What they don't have is the customer expertise and the ability to do business in Australia." He said there has been the ability to fight a lot of that off to a large extent, so the only way these companies can get a foothold into the Australian market is to acquire the localisation of their model and apply it.

He also thinks there are going to be more floats in 2001, and also state-based companies teaming up to form national companies and then floating, but only if they've got good service delivery, rather than being simply into "box moving".

Boal sees, in the pure network space, telcos and carriers making a much stronger play than they have in the past. "They're a new market entrant into the enterprise space and as a result I think you'll see increased competition with the stronger integrators . . ." He also believes this could make it difficult for some of the smaller companies, because it would mean even more competition in the market place.

And Gartner's Boon says, in the long run, Gartner's Dataquest predicts that we'll see a continuation of mergers and acquisitions taking place in the reseller/distribution marketplace. "The big will get bigger, the medium will consolidate and the small will get squeezed out."

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