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Bad news for direct model is good news for resellers

October 2, 2006
Bad news for direct model is good news for resellers. Check it out:
(Microscope Via Thomson Dialog NewsEdge)
Anyone wishing to buy shares in Dell from an on-line trading web site will be met by the warning: ?Dell is delinquent in its regulatory filings.? For a channel that has struggled against the spectre of direct and channel-oriented vendors wishing to ape the model, the warning has sparked hopes of an indirect renaissance.



Keeping out of the headlines has been impossible for Dell in recent weeks, often disproving the adage that any news is good news. A delay in filing its second quarter results with the SEC has forced Dell into a meeting with the NASDAQ stock exchange with the prospect of being delisted very real.

But one swallow does not make a summer, and accounting issues and a battery recall scandal have affected other vendors too. The question most pertinent to Dell and the channel is whether cracks are appearing in the direct model. Only last week Canalys CEO Steve Brazier forecast a decline in the overall volume of direct sales in Europe (see MicroScope, 25 September) but it still remains unclear how indirect sales are set to thrive on the back of this.

Looking at some of the UK?s largest resellers and integrators provides a glimpse of sunlight between the cracks, but the picture is blurry. Computacenter?s first half results for 2006 (see MicroScope, 18 September) were branded ?encouraging? by Gartner. Pre-tax profits soared by 76.7 per cent, mainly based on services business growth, but sales fell to ?1.1bn, down from ?1.15bn the year before.

At the time, Computacenter chief executive Mike Norris told this magazine that while the product side of the business was lower margin, and PC prices had fallen dramatically, the company had a ruthless and efficient focus on the cost base in order to be profitable.

Profitability here becomes a better barometer of success than sales ? Dell too is struggling to turn around a fall in profits. Sales figures may well have risen quarter on quarter (the company reports a six per cent rise in the year to date) but a 35 per cent decline in profitability to date only fuels Norris? belief that a ruthless and efficient cost base is required to be profitable.

Dell too recognises these cracks, with CEO Kevin Rollins using similar language when reporting on his company?s fall in profits: ?Key actions include accelerating cost initiatives, increasing investments in service and support, and better pricing management.?

Speaking to MicroScope, Canalys senior analyst Alastair Edwards said while the Computacenter results had seemed to pick up, the big question was whether the likes of Computacenter or SCC could become ?a true service-led business?.

?We are starting to see transitions for the channel, particularly in the enterprise space, where companies move away from being dependent on revenues driven by hardware sales to become application and services-led businesses. The possibility is that you will be well positioned to drive growth, but only if you are willing as a reseller to make the investment.?

As Computacenter?s largest rival privately held SCC has not published any results since the year to 31 March 2004, answering those questions becomes a little harder. Morse is often compared to Computacenter, but as the former has just one-third of Computacenter?s annual sales the micro-economic influences may be the same but the macro-economic influences are not.

The height of summer marked Morse?s full year end and, as ever, it justified any published figures with the well-publicised statement that over the past few years the business has made the transition ?from a pure IT hardware reseller into a consulting, technology and support company. This transition has meant reductions in revenues, with increasing gross margin from services?.

True profits have also increased at Morse (by 14 per cent) given the decline in revenues (by four per cent) and the sale of some of its European reselling businesses. If any trend can be drawn by comparing Computacenter to Morse it could be that enterprise reselling drives profits with the right business model but at reduced volumes. Such a trend is backed up by on-line giant Insight, where revenues also fell in its UK operations (by two per cent) and profits rose (by 1.4 per cent) during the second quarter of 2006.

But immediately disproving that theory last week was Compel, which has grown both revenues and profits during the past six months of trading. But that caveat comes with a disclaimer; Compel sold its loss-making hardware business to SCC as long ago as March 2001.

?Markets change, and you have to be prepared to change with those markets,? said Compel chief executive Neville Davis. ?You have to have a sure strategy underpinning where you want to go. Fundamentally, I think we have got that right.?

The channel?s largest dealers and their competition in the shape of Dell certainly won?t walk away from enterprise product reselling as Compel did five years ago, but all their chances of success, despite the decline of direct sales, point to a ruthless market in coming months.

Tough at the top: enterprise reseller woes

January 2006

? Management buy-out at Computacenter is terminated after a year of profit troubles and restructure rebates by Hewlett-Packard.

February 2006

? Dell calls time on multi-million pound service deal with Phillips, which claims the one-size-fits-all model is not working.

? HP performs a U-turn and creates a list of indirect enterprise and corporate customer PC accounts, leaving all other companies not on the list open to approaches from the vendor?s direct salesforce.

July 2006

? Following the sale of its German and Austrian businesses Morse has to reiterate again that it has no interest in selling the reselling side of its UK operation. Last year it described such talk as ?bunkum?.

Copyright 2006 Reed Business Information - UK. All Rights Reserved.


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