Outsourcing Expands Role of Distributors

By Richard McCaffery, Staff WriterDistributors and resellers are attracting more business from systems integrators, which are increasingly turning to companies such as Ingram Micro Inc. and Tech Data Corp. to obtain computer products and services, industry officials said.Some integrators are even going a step further — outsourcing procurement functions to distributors and resellers better equipped to handle inventory, configuration and shipping.Integrators that have expanded their partnerships with distributors and resellers include OAO Corp., Software Spectrum and Unisys Federal Systems. Others, such as American Management Systems, are leveraging relationships with distributors more as their contracts expand."I would definitely say this is a breakthrough year for us and systems integrators," said Shelly Talbott, Ingram Micro's vice president of sales, who heads Ingram Micro's outsourcing unit in Santa Ana, Calif.Ingram Micro's Affiniti division, which was created just over a year ago and broke off as a separate unit in January, handles outsourcing for government and commercial integrators and resellers. It offers integrators and resellers services such as product acquisition, configuration, end user returns and even customer billing."The message is, reduce your cost structure and focus on what your real value is," said Talbott. "It's not stocking product and configuring boxes."Ingram Micro Inc. of Santa Ana, Calif., is the computer industry's leading distributor. It has 12,000 employees and 1998 revenue of $22 billion. Other channel companies, such as Tech Data Corp. of Clearwater, Fla., MicroAge Inc. of Tempe, Ariz., and Merisel Inc. of El Segundo, Calif., are spreading their wings, expanding service offerings and targeting integrators. Many distributors, however, cannot talk about their outsourcing agreements with vendors and resellers because of non-disclosure agreements.Three years ago, OAO Corp. had no relationship with Ingram Micro, said Jay Jones, OAO's vice president of enterprise solutions. Today, Ingram Micro helps Jones move $6 million to $10 million worth of equipment each month.Jones is in charge of worldwide product sales for the Greenbelt, Md., company's Outsourcing Desktop Initiative contract. Under the ODIN contract, OAO provides NASA with desktop computers, maintenance and networking services. NASA outsourced the IT management of about 25,000 seats to OAO. In turn, OAO has outsourced procurement functions for ODIN to reseller Government Micro Resources Inc. of Manassas, Va. Ingram Micro is OAO's distribution partner on the ODIN deal. "OAO has a strategy where we have gone out and learned the [distributor] business," Jones said. "It has literally saved OAO millions of dollars."That is because OAO does not have to hold inventory, which can be risky and expensive. OAO gets the latest product updates, prices and does not have to deal with shipping, asset tracking or any other distribution headaches, Jones said."The systems integrators don't really understand the distributor model," said Jones, who believes many integrators will have to form strategic relationships with distributors to provide their customers a full range of services.Overall, it has been a rough year for distributors and many resellers. Analysts blame the weakness on increased competition, price wars, overcapacity and falling computer prices.Behind much of this is the success of Dell Computer Corp., Round Rock, Texas. The company has done so well with its direct-sales model that distributors and resellers have had to scramble to add value to services they provide.Outsourcing is an option that is paying off for Ingram. On the commercial side, more than half of Ingram's integrator customers outsource some procurement operations to Ingram. Things are moving a bit slower on the government side, Talbott said, where fewer than half of its integrator customers outsource distribution functions. Companies like OAO are ahead of the curve, Talbott said. Consider Software Spectrum Inc., a software services company that sells more than 27,000 software products.Early this month, Software Spectrum outsourced a slew of operations to Ingram, such as product acquisition, storage, end-user return and configuration. Ingram handles the Garland, Texas, company's operations from its own warehouse, which allowed Software Spectrum to close its facility. "We do all of that for them," Talbott said.MicroAge Federal, an integration and reselling business, also relies on outsourcing. MicroAge Federal is an independent franchise of MicroAge Inc., the Arizona integrator and reseller. Last September, MicroAge Federal won a $15 million contract to provide 9,200 desktops to the Department of Agriculture.How does a small company like MicroAge Federal do it? "I do a lot of outsourcing," said Patrick Neven, MicroAge Federal's president. Tech Data provides integration services like final assembly, configuration, custom software loading, packaging and shipping.Could Neven fulfill the Agriculture contract without a distribution partner? "The answer is you can always do it yourself, but at the same speed, quality and at the same price? No," he said.MicroAge Federal had sales of $53 million in 1998 and is profitable. "You make money if you cut overhead," he said.Tech Data has ramped up its outsourcing services in the last six months, said Terry Bazzone, Tech Data Corp.'s vice president and general manager of strategic business development.The distributor has talked to the major systems integrators about outsourcing procurement operations, expanded its outsourcing services and increased its government integrator sales force. Interest has increased, Bazzone said. "To be competitive, I think the integrators will need to partner more with the distribution channel," she said. "Integrators are facing more competition."But many integrators are still figuring out the role distributors play and how to use them. Many are rightfully reluctant to outsource services they have provided for years, such as product ordering and configuration, industry officials said. However, that does not mean they are not listening.American Management Systems of Fairfax, Va., used to buy its employees personal computers from local stores across the United States. Today MicroAge helps the integrator, which has 8,100 employees, buy 400 to 500 PCs a quarter at annual savings of up to 15 percent. Patrick Reardon, AMS' director of data networking, said his unit is leveraging relationships with distributors more as contracts get bigger, customer expectations increase and the breadth of products in the marketplace skyrockets.AMS has looked into outsourcing some procurement operations, Reardon said, though he stressed it is early in the process and no decisions have been made. Nevertheless, distributors are becoming more important to integrators, he said. "The trend obviously is upward."Many integrators have been getting out of the reseller game because selling computer products is a low-margin business, made worse by falling computer prices. BTG Inc. of Fairfax, Va., for example, sold its reseller division to Government Technology Services Inc. in February 1998 for $23 million so it could focus on higher-end integration services.But many integrators consider reselling a vital part of the services they provide. Reselling "is low margin. That's a fact," said Jones of OAO. "But we do it because that is what the customer wants." Jones said he does not want to have to tell customers to find a reseller when they need a product.Unisys Federal Systems, a division of Unisys Corp. of Blue Bell, Pa., first tapped distributors for its reselling business in June 1997. Like OAO, Unisys did not want to turn away customers looking to buy products."If everyone got out of the reselling business, then what you'd be doing is tossing the customer's problem back to the customer," said G. Lee Myers, vice president of Unisys Federal's Volume Technology Practice. "That is not what you want to do.So Unisys Federal started Select IT, which gives its government customers access to the latest products and prices without forcing Unisys to hold inventory or act like a distributor. It is all accomplished electronically, Myers said.Unisys' distributor partners for the program are Ingram Micro, Tech Data, Merisel, MicroAge and Insight Enterprises Inc., Tempe Ariz. "We're looking into 27 warehouses and more than $4 billion worth of inventory," Myers said.Select IT is a profitable and growing business for Unisys, said Myers, who declined to break out numbers for the program. He did say product sales represent 30 percent of Unisys Federal's 1998 revenue of $1 billion, and Select IT is a portion of that 30 percent.Unisys Federal expects to channel more of its product sales through the same electronic-commerce system that powers Select IT, Myers said. "If you do it right, you can make money," he said.