IT distributors play a central role in the supply chain. While cloud computing solutions and AI-driven insights might dominate headlines, no digital transformation project would be able to get up and running without an underlying physical infrastructure. IT distributors that ensure hardware such as servers, computers and peripherals flow from vendors to resellers and enterprises globally are therefore pivotal in this transition.
In spite, or perhaps because of this role of intermediary, IT distributors currently grapple with some of the toughest odds on the channel. Margins for this segment face unprecedented levels of pressure, leaving extremely limited room for growth within traditional business models. The physical distribution of hardware comes with considerable operational costs while margins on hardware keep decreasing. This makes the ability to attract investment capital even more critical. These two factors combined make the room for dividends to reward shareholders a big challenge.
The changes brought about by the new business model present enormous opportunities for IT distributors. Their current role as provider of hardware for infrastructure, enterprise applications and workplaces means they are well-placed to succeed, once they adapt to subscription models. Enterprises now demand the flexibility afforded by Infrastructure as a Service (IaaS) and Hardware as a Service (HWaaS) models so they can adjust to the changing requirements of the agile, distributed workforce of today. They value the ability it gives them to scale while keeping their own operational costs lean.
This new business model consists of becoming digital distributors, shifting from moving ‘boxes to bytes’. Digitally delivering the same computing services, storage, cybersecurity and networking services which those boxes were offering, but in a way that brings unprecedented opportunities to improve business scalability and increased margins to IT Distributors.
Tight margins pose an issue for both the distributors and their investors. Since most big distributors are publicly traded on the stock market, they need to demonstrate the ability to generate profit to attract investment and reward those shareholders with dividends in turn. Moreover, distributors face the additional headache of competing for investment dollars with ISVs and other fast-growing traded companies. This is a challenge in and of itself since ISVs count ‘hypergrowth’ potential and are likely more enticing in the current market. Further, as activity on digital channels increases, the ability to ship boxes is no longer a key differentiator that allows distributors to showcase their value to partners.
On the journey towards increased profitability, distributors used to have two options: reduce costs and/or get bigger. In terms of reducing costs, many distributors turned to operational efficiency through IoT, predictive ordering, and other advances in supply chain technology. For example, Avnet expects to realize approximately $52 million in incremental annualized operating costs savings in the coming five years.
At the same time, distributors increased their size to take advantage of economies of scale. It also allowed distributors to enter new markets through local partners. As such, distribution went through an important shift as mergers and acquisitions made the leaders stronger. This tactic was employed to reduce cost, expand the distributor’s size and geographic coverage, and demand better negotiation power through consolidation. For example, 8×8 signed a new distribution agreement with Synnex earlier this year. Under the agreement, the distribution giant’s VAR, MSP and SI partners would now get access to 8×8’s Experience Communications as a Service platform. Meanwhile, Swiss distributor ALSO has carried out 21 acquisitions in 18 European countries since 2011.
Regardless of the strategy that distributors employed, it must be said that both operational efficiency and consolidation options offered finite results. This is because, underneath any change, traditional distributors would still be using a transactional model. Transactional businesses do not build loyalty through one-off purchases, nor do they offer strong profits or return on capital employed (ROCE). Ultimately, they need to look for new value-added business lines and shift with the digital demands of today’s customers and combat the pressure on margins and subsequent business dividends.
IT distributors have always been experts in enterprise computing. The XaaS model now gives them a golden opportunity to transfer their knowledge and expertise with physical hardware and – arguably more complex and certainly more costly logistics – and becoming cloud enterprise solutions providers. There is a significant opportunity with IaaS for example. The IaaS market size is projected to reach $201.83 billion by 2027 at a CAGR of 23.3%.1 These new business opportunities focus on sales-by-consumption to better generate loyalty and repeat business.
IT distributors can now transform to a hybrid model offering cloud-related solutions to complement their core hardware distribution business, and IaaS delivered via digital platforms and data centers. This transition marks a major shift away from the comparably analogue processes of yesteryear. Though the gains may be clear, success will hinge on how operationally prepared distributors are for hybrid cloud sales across their channels.
The transition from box shippers into enterprise computing providers offers distributors a way to add profitable new business lines. Making the switch, however, is no mean feat. To create a business that can scale—and even hyperscale—without additional overhead costs, distributors need to be aware of three key strategies.
Step 1: Create a digital catalog
First, distributors moving in this direction must create a comprehensive digital solutions catalog, ideally starting with a catalog of SaaS and IaaS solutions. Although this creates a key lever of scalability, distributors may not be ready for cloud-based procurement. Success in this first stage relies on having a broad product catalog, yet the process of integrating vendors on an individual basis risks slowing time-to-revenue. In addition, distributors need to find solutions that automate order fulfillment and billing to avoid any operational roadblocks that increase as more vendors are added.
Step 2: Create a XaaS Marketplace to promote and sell broad digital solutions
Second, distributors need to create their own XaaS-enabled marketplace to streamline procurement, fulfillment and billing to their resellers. Moreover, they must endeavor to create a system that is automated end to end in order to maximize potential downstream sales through ease of access. After an initial investment, XaaS marketplaces can be classed as hyperscalable as additional client contracts or suppliers do not create increased overheads that distributors are traditionally faced with, such as warehouse space.
Here, the benefits truly come into focus. More than 70% of the channel’s resale revenue is sourced through distributors, with the volume capabilities and value-add opportunities that channel distributors bring to the table being invaluable to short- and long-term channel success.
Step 3: Enable an automated channel of digital resellers
Once the basic foundations are established, distributors should seek to create their cloud reseller marketplace as white-labeled, multi-tier, and multi-subsidiary.
The third stage will see distributors harness further growth potential by expanding through their channel partners. Developing a robust ecosystem allows distributors to offer digital hybrid cloud solutions such as networking, productivity, cybersecurity and collaboration. For example, Cisco and Westcon-Comstor have teamed up to launch a white-label web store for cybersecurity SaaS offerings.
With a powerful multi-tiered commerce engine at play, distributors can enable their partners and resellers by creating their own branded storefronts, publishing custom catalog with their own services and bundles in multiple languages, currencies and billing models. At this point, distributors will have created a hyper-scalable business model based on automation that doesn’t require incremental overhead to boost revenue.
High infrastructure costs, transactional sales, disparate processes, low scalability: the threats facing distributors today demand immediate action. As outlined in this whitepaper, distributors can boost margins within the existing operational models through improved efficiency and consolidation. Yet it will be those who successfully transform into distributors of packaged service offerings with the highest chance of success in the years to come.
CloudBlue makes this transition possible in a variety of ways. The platform enables distributors to launch or expand their cloud catalog with more than 200 top vendor integrations. Considering that most distributors count narrow cloud catalogs, ranging from 4 to a few dozen, and several are not automated, this feature presents an important opportunity to streamline contracts, listings on marketplaces, procurement and fulfillment. Onboarded successfully, the result adds predictable revenue with digital products to impact the bottom line.
Further, CloudBlue enables distributors to offer subscription-based services, bundles and hybrid cloud solutions to their downstream channel. Here, the platform makes it possible to streamline end to- end management and billing of subscriptions. Moreover, ecosystem creation and collation presents an important chance to scale. Using CloudBlue, distributors can grow their own network of cloud partners and resellers with minimal overhead. Resellers can manage their own listings, onboard their own products and services and create XaaS bundles with distributors, all the while using white-labeled storefronts, either private for procurement or public for their end customers to access.
From unifying operations across subsidiaries, languages and currencies, to offering hybrid cloud solutions and multi-cloud orchestration, the sky is the limit for distributors that embrace cloud transformation and the potential growth it offers. With CloudBlue, distributors can ease the transition from boxes to bytes and transform into cloud-ready hyper-scalable business in the fight for profitability.
BY USE CASE