A Filling Station for the Information Superhighway

The fulfillment services demands of systems integrators are opening a new chapter for industry aggregators

Industry aggregators, the chameleonlike middlemen of the computer distribution industry, are defining a new role for themselves inside the burgeoning systems integration market.

Back in the 1980s, buying a computer was as easy as going to the corner computer store. And how that computer got to the local store also was well-defined: the manufacturer sold its goods to a master distributor, often called an aggregator. The aggregator, in turn, sold its merchandise to resellers, which had to be authorized with specific aggregators. Resellers then sold their merchandise to computer stores, which sold the product to end users.

Aggregators were essential to the flow of the product from manufacturer to end user. Aggregators made money by persuading as many resellers as possible to sign contracts to buy certain authorized product lines. In those days, the relationship between franchisers and franchisees was in its heyday. ComputerLand Corporate had ComputerLand franchisees around the country, as did MicroAge Inc. That parent-child relationship was one where individual stores, or franchises, bought all products from its parent company, which in turn bought its products from an aggregator with whom it was authorized to do business.

To the ultimate computer buyer, the situation hasn't changed much in the last 10 years. But to those in the systems integration and services market, the model for distributing computer equipment has turned 180 degrees.

And as aggregators, or distributors, continue to fight for their survival in this competitive environment, they must do more than just provide products. These days, they must provide value-added services -- everything from pre-sale generation programs to post-sale technical support -- much like their resellers provide to their own customers. The services provided can vary by distributor, but some of the more popular services include management advisory services, credit programs, configuration and product fulfillment.

Configuration and product fulfillment are now two of the services aggregators hope to sell to large systems integrators that no longer want to be burdened with warehousing and distributing products. Whether the integrator's fulfillment needs are global, national or local, industry aggregators now want to take over the integrator's back office.

An Evolving Distribution Model

In any nascent industry, it takes time for the channel of distribution to mature, and the computer industry certainly is no exception. Slowly, the distribution model has changed, due mostly to deregulation of the industry. As competition became more fierce and the number of resellers began to expand, computer manufacturers began to allow their resellers to buy from more sources. That change led to the birth of the master reseller. Seen as the next-generation aggregator, master resellers took advantage of the open sourcing boom by amassing a customer base of value-added resellers and by adding more services.

"In the 1980s scenario, the name of the game for an aggregator was to aggregate IBM or Compaq resellers and sell to them," explained Jay O'Callaghan, a spokesman for MicroAge Inc., Tempe, Ariz. "With open sourcing, a reseller can buy products from MicroAge, Intelligent Electronics, Ingram Micro, Tech Data -- any distributor. Now the game for a reseller is to get as many relationships as it can. It is more of a pure distribution model."

O'Callaghan likened the situation to that of banking deregulation. When commercial banks were prohibited from making home loans, and savings and loans could not provide checking accounts, customers were forced to do business with certain banks that could provide those services. When the industry was deregulated and all types of financial institutions were able to provide all services, the mission of banks and savings and loans changed. To keep customers, these institutions engaged customers in as many value-added services as possible.

As the aggregator began to look more and more like the distributor, aggregators fought the change by adding more vendors to their arsenals, trying to emulate the distributors who were taking their business away, said Susan Hanson, vice president of sales and operations at the Ingram Alliance, Ingram Micro's aggregator arm in Santa Ana, Calif. In some cases, they went from 20 vendors to more than 100 vendors. As aggregators discovered that it was more difficult to make money using that strategy, they pulled their vendor lines back and became more of a master reseller, providing more of a direct affiliation with their resellers and would become more involved with the end user.

But today, even the master reseller concept is an outdated mode of distribution. Today's value-added resellers buy their product from large commercial distributors that typically offer 10,000 or more products, compared to yesterday's aggregators that offered their customers a choice of 1,500 products on average.

All of this, say industry analysts, has led to the slow demise of the aggregator. As exclusive relationships with resellers become a thing of the past, the roles of the aggregator and distributor have blurred. In its place is the large commercial distributor, which some say has picked up where the aggregator left off.

"Aggregators are performing the exact same function as commercial distributors today -- a time-and-place utility for the product, credit terms and other services," said Van Baker, an analyst at Dataquest, a San Jose, Calif., market research firm. "But an aggregator is trying to do that for 1,500 products, whereas a large commercial distributor is trying to do that for 15,000 or 20,000 products. So the commercial distributor has much more leverage in terms of being able to amortize its costs over a larger revenue stream."

In fact, the commercial distribution model is growing fast and furiously. Ingram Micro, Santa Ana, Calif., for example, is growing at about 40 percent annually, Baker said.

Changing With the Times

There still are some companies that consider themselves aggregators. But even they have updated their business model to stay competitive, by redefining themselves or by playing a dual role in the marketplace.

Aggregators generally have chosen to take one of three paths. Some aggregators have become systems integrators and corporate resellers. These are companies such as Vanstar Corp., Pleasanton, Calif., which targets large organizations with distributed computing solutions, including systems integration services and limited hardware sales.

Other aggregators become full-line distributors, often called master distributors. These are companies such as Ingram Micro Inc., Tech Data and Merisel Inc., which distribute many products to a large group of resellers. These distributors concentrate on moving products and offer few value-added services.

Finally, some aggregators have chosen a combination approach, playing in both the systems integration and distribution marketplaces. Inacom of Omaha, Neb., for example, owns about 65 percent of its stores, which means that 65 percent of the Inacom chain functions as a corporate reseller. The other 35 percent are affiliates owned by individuals. These stores buy from Inacom and are located mostly in secondary and tertiary markets.

MicroAge also has chosen the mixed model approach. Foreseeing the demise of the traditional aggregator, it chose to operate a dual model, with part of the business operated as a distributor and part as a systems integrator. In terms of revenue, about 60 percent of MicroAge's $3 billion in revenue is due to its distribution business and the remaining 40 percent to its systems integration business.

The dual model allows MicroAge to offer its systems integration services to Fortune 1000 companies while working with selected resellers in its MicroAge Infosystems Services unit. That unit competes with corporate resellers such as Vanstar and Entex. "Now our thrust is to strike up relationships with as many [value-added resellers] and resellers as we can and simultaneously grow our large account business," O'Callaghan said. "We think that now [the best strategy is] to engage the customer in as many ways as possible so [we] create a very tight relationship with them and don't give them any reason to shop around."

In fact, of all the aggregators, MicroAge has gone through the most change. O'Callaghan calls it changing with the times, but in fact, MicroAge has done what it needed to survive. The company started as a hobby store in 1976. By the end of the decade, its founders started a catalog distribution business. From there, it moved into the franchise world and open its first franchisees -- stores with the MicroAge name that sold to end users. In the early 1980s, MicroAge became an aggregator, and today it operates as a systems integrator and distributor.

The Purest Aggregator

Of all the companies still in the traditional aggregation business, Intelligent Electronics Inc. of Exton, Pa., continues to be the purest aggregator model, although it now refers to itself as a distributor. Today, Intelligent Electronics functions more like a distributor, selling products to value-added resellers and systems integrators around the country. That puts the company in direct competition with distributors such as Vanstar, CompuCom Systems Inc. and Entex, but it continues to vie for Fortune 1500 business.

"That puts Intelligent Electronics in a role where it competes with its own customers to some degree, and that is an awkward situation. It has caused them a lot of problems," Dataquest's Baker said. "Ultimately, they [must] transition away from the aggregator model and into a corporate reseller model."

Much like MicroAge and Inacom, Intelligent Electronics has changed over time. From its beginnings in 1982 selling computers from leased floor space in a Philadelphia department store, Intelligent Electronics has become a mammoth distribution company. Today, it has 68 franchise locations operating under the name Todays Computer Business Centers. In 1989, Intelligent Electronics bought Connecting Point of America Inc. and Entre Computer Centers Inc., more than quadrupling the number of resellers it sells to in the United States, according to spokesman Kent Redding. The company also moved to a more service-oriented model for its resellers, echoing the moves made by similar companies.

A Slow Process

As aggregators work to redefine themselves, so will those who have bought products from them.

No change comes easily, Baker said. "It won't be an overnight change," he said. "The habits are there, the business model is ingrained and ultimately the reseller -- especially the small, individually owned outlet -- needs multiple sources of products because they don't have a whole lot of credit or cash flow, so they are somewhat cash-constrained. It helps them to have two or more different suppliers they can go to."

Intelligent Electronics, arguably the largest aggregator/distributor today, provides its resellers with such services. One such customer is Jade Systems Corp., a Long Island City, N.Y., company that is both a value-added reseller and a systems integrator. Jade Systems relies heavily on Intelligent Electronics for most of its product delivery and for a variety of services, to service its customers in the financial, legal and insurance industries.

"Buying through a distributor is the ideal model for us because it allows us to deliver promptly, not carry excess inventory, and warehouse products for large orders," said Jade Systems President Debbie Milner.

A middleman such as Intelligent Electronics also helps small value-added resellers such as Jade Systems to compete with larger value- added resellers. Because Jade Systems doesn't do business in enough volume to deal with a manufacturer directly, it finds Intelligent Electronics' services very helpful.

"Also, they provide certain services and specialties. The manufacturer isn't equipped, for example, to deliver quickly or do returns, or address those issues that occur when you move products from A to B," Milner said. "A lot of our customers, especially in the financial community where time is money, need the products drop-shipped overnight, and it might not be a product that the manufacturer can just pull off the shelf and overnight to me."

By banding with other Intelligent Electronics value-added resellers, Jade Systems also has the ability to provide services that it otherwise could not provide, she said.

And as much as the aggregator was threatened by the distributor, the distributor could be threatened by the systems integrator if it does not dip a toe into that field as well.

Decision Support Systems, for example, a Reston, Va., distributor that focuses on the government marketplace, realized that fact last year and has formed a subsidiary, called V-Squared, to deal with the issue. V-Squared uses contract specialists who work with integrators and resellers in the pre-bid stage to identify government specifications. From there, V-Squared partners with integrators to choose the best off-the-shelf systems to meet those requirements or develop tailored solutions made of the best-of-breed components, explained Monte Coleman, vice president of public relations and marketing at DSS.

"Distributors have traditionally shipped components and the resellers and integrators have assembled systems," Coleman said. "Today, that balance is shifting, and there is significant room for distributors to compete with their channel partners. At DSS, we have increased our focus on value add, while ensuring that we never cross the line to compete with our channel partners."

The Ingram Alliance: A Notable Exception

Whether the integrator's fulfillment needs are global, national or local, industry aggregators now want to take over the integrator's back office.

Ingram Micro Inc. is a notable exception to the popular theory that the aggregator has no place in the market. It has gone from being purely a distributor to a company with a division devoted entirely to aggregation. It has, in essence, taken the old concept of the aggregator and updated it to fit current market conditions. Executives at the distributor realized that vendors were giving more favorable terms and conditions to aggregators than they were to distributors and wanted to find a way to become eligible for the more favorable terms.

"We knew open sourcing was coming, and that we needed to get the vendors to sign on with us as an aggregator prior to that so we could start selling our current distribution customers CPUs in the way an aggregator did," said Susan Hanson, vice president of sales and operations at the Ingram Alliance, Ingram Micro's aggregator arm located in Santa Ana, Calif. "So in many respects, we entered the aggregation market as a distributor to sell CPUs but did it on price and availability."

Distributors have traditionally sold products with a higher margin than aggregators, because vendors pay aggregators for their products much faster than they do distributors.

"Because vendors subsidized the flooring, the aggregator could turn its capital around so quickly that it could sell at much lower prices. Now, as an aggregator, we can ask the vendors to sell to us the same way they do to other aggregators," Hanson said.

The Ingram Alliance addresses the middle ground between aggregator and distributor, Hanson said. It tries to match aggregators in the services they offer.

The Ingram Alliance is a lower-cost business model. It has lowered costs through electronic ordering, larger order sizes and ordering efficiencies. In addition, it sells only CPUs, while other aggregators and distributors sell a larger variety of computer equipment. Because of its lower cost model, The Ingram Alliance can afford to sell computers to its customers at a lower cost, Hanson said.

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