Channel Viewpoint: Waiting For NexInnovation Part II 14 August, 2006 By Robert Cohen, president and business editor, Integrated mar.com

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I empathize with NexInnovations. They have been a pillar in the Canadian industry for almost 30-years. Times are tough and the industry is going through a lot of changes. I hope they can turn things around and make a successful comeback.

Who Is NexInnovations

According to their own Web site, NexInnovations provides: leading technology consulting, infrastructure, deployment and support expertise to organizations across Canada. Business and government, local and national, have relied on NexInnovations to help them meet their unique Information Technology challenges as they adapt to the digital economy.

They then end with the tag line: NexInnovations... we design, build and support IT Infrastructures.

By description they are a VAR -- a Value Added Reseller. Not a box pusher, retailer, etailer, cataloguer, discounter, direct marketer or a volume super star. In fact, they differentiate themselves from all of these by providing consulting, infrastructure, deployment and support expertise to organizations.

So & Who Really Is NexInnovations

Todd Irie, Director of Marketing at NexInnovations told eChannelLine that: "We're facing a lot of the same industry-wide challenges as our competitors and resellers, namely the direct sales model. The direct sales model is a low- touch transaction with minimal service levels  that doesn't feature services to the customer  and this in turn creates a pricing expectation so the average selling price decreases and that has hurt our profitability. That also hits everyone's margin industry-wide."

For about a decade now, I have been telling VARs that there is no way that the direct model or mass retail outlets can have a serious effect on a solution focused VAR. The direct model provides hardware and packaged software with no integration, solution selling, service, training, support, or any of the offerings that NexInnovations offers its customers.

On a positive note, I was thrilled to see that Liam Lahey quoted Michelle Warren who in her always-charming way, made it obvious that the direct model could not be the focus of the blame for NexInnovations problems.

If NexInnovations is going to come back as a strong force in the industry, they need to address their problems, rather then assign blame on outside variables. Excellent companies have excellent managers who look at challenges and find ways to capitalize on the changing marketplace. Weak companies allow challenges to fester and become scapegoats.

I am writing this Channel Viewpoint because I believe strongly in the channel. If we let NexInnovations go unchallenged on its comments about the direct model & the ripple effect can be very detrimental to an industry where trust between the makers and sellers is already at an all time low.

And the ChannelLine Advisory Council Members Speak Up

Jim Estill, CEO - SYNNEX Canada Ltd.

I am wondering if replying to it validates it. Perhaps ignore it. The story angle is: what will NexInnovations look like when they emerge? NexInnovations is big enough that I believe they will survive this. In cases like this, it is easy to try to identify the one reason why they are in difficulty. But in a business like this, it is not one thing; it is a bunch of little things. Like Air Canada and Stelco, CCAA is just one tool that is used to help reform the company to ensure survivability.

Elio Levy, (Retired) SVP Marketing, Tech Data and now a Senior Consultant with Integrated mar.com

It will be interesting to find the root cause of NexInnovation's downfall. I'll bet you that one of the main problems is their focus on being direct with many suppliers which carried a high cost of operation:

" Inventory carrying charges
" Logistics and warehousing
" Freight
" Purchasing staff
" Inventory management and write offs
" Accounting, rebate and funding tracking
" Staging nightmares on large projects
" Financing from vendors and to end users "

Direct Model. There is room and need for the direct model, it works in well in many situations when:

" Customers have an IT department that designs, stage, implements, train, support and repair the solution
" Have a warehouse or staging space to carry inventory from various product providers
" Know what they need = solution is standardized
" Looking for price and delivery

How to combat and bypass the Direct threat. VARs must:

" Specialize, be innovative and first to capture market opportunities
" Build deep relations with large vendors management, regional and local sales force
" Bring vendors new opportunities
" Add value to the transaction at the end user and vendor level
" Invest and become the go to VAR for one of the many multi vendor solutions & technologies
" A VAR can be part of the direct model supply chain by being the pre and post sale value added supplier
" Run a low SG&A operation
" Outsource internal/external redundant functions that someone can do it more efficient at a lower cost

Mark Bryski, President, Klinix Software

Managing your cash level and cost structure when faced with market disruption is business 101. This keeps you ready for the new opportunities that come up when the rules of the game change. You need a hungry management team to pursue these new opportunities.

John D. Herrington, Vice President, Sales and Marketing, Capris Group

I agree, an enterprise VAR should be making profit with the right model regardless of any direct model from their vendors. It would appear that there is more to this then the lack of profit (margin) on hw/sw.

Vendor relations have always been a key component to the channel and can make or break any reseller.

Jim Jezioranski, VP Technology, Otec Solutions

I have to say that I am in agreement with all comments I read, including those by Todd. However, I identify most strongly with Michelle's comments i.e. that NexInnovations is a little late to the table with this whine. Our company decided to focus almost entirely on services a few years back when the writing was on the wall with respect to reselling. We have sold equipment at or near cost for a couple of years now. It is still a tough game though. When a client buys equipment direct, they are far more likely to take the do-it-yourself route than contact us for assistance. If they do contact us later, we have the thankless task of cleaning up their mess. This means the expense is usually unplanned and unbudgeted. It also means that they screwed up and to ensure follow-up business or a place in their budget, you have to find a way to tell them this without offending them. This is way more unbillable selling then to sell them the equipment with an installation charge. In short, it is far more challenging, and therefore expensive, to sell service then to sell service with equipment. You need to build your own brand to sell service. It is tough for a small integrator like us to build a brand to which people are drawn. We used to be able to trade on brands like Cisco and the value-add of our ability to integrate such powerful brands. The only OEM that we find draws clients to us is Sun. They are the most reseller-focused company we have come across.

Kevin Fitzgerald, President, Auora Micro

I think that there are more issues than are being discussed obviously. The real issue is with the overall industry, i.e. anyone can sell a product for a manufacturer and how the distributors will sell the product to them. It's really a bad cycle that keeps eroding margins. Also, the customers and large account base that Hubert's people (I would only guess here) rely on that business and then suddenly the clients are doing what they think is less expensive to support themselves ... when reality tells us it costs more. Hubert's team is very competent and the product business will more than likely disappear in the traditional sense for them, they will end up profitable without that drag on them.

Hubert will emerge from this with a stronger company and a stronger services organization  delivering enterprise class solutions that really are solutions, not mostly hardware, rather professional services engagements, from the ground up. It is entirely possible that there will be fallout in the terms of jobs, however, that really is what many companies have had to do to change. It just took NexInnovations longer to hit the wall. We hit it some time ago and we are still smarting from that, the pain is slowly going away.

I wish Hubert the best of luck in creating a Win for everyone out of this unfortunate turn of events.

Cecil Young, President, SBG Technologies

I read with interest the predicament that NexInnovations have found themselves in. Over the last several years, many VARs have blamed the direct sales model for their difficulties, whether that be losing sales, to eventual bankruptcy.

I have attended several trade shows across North America where VARs harp on the Dell direct sales model which have been copied by other Tier1 manufactures such as HP, Lenovo and Toshiba. There has never been any merit to these complaints as VARs are supposed to be providing solutions to meet customer needs. Direct Sales model does not, and never will. We have never lost a sale to a direct sales model. On price, SBG cannot compete with the direct sales model. When the customer realize that they are at the mercy of the Direct marketer, and that service and support might take days, costing lost productivity, they opt to use SBG Technologies for all their computing needs.

NexInnovations have chosen to blame the direct sales model for forcing them into CCAA. I do not believe this for a moment. The direct sales model cannot offer the customer the depth of support and training available from the numerous VARS across Canada and the USA. The direct sales models and many callings themselves VARs are "box pushers", dropping off boxes at the customer premises, in large volumes, leaving the customer at the mercy of their knowledge of computing technologies. Often frustrated, these customers then are required to find someone, good quality VARs, who are ready to properly configure a computer or entire network. Sadly, the customer ends up paying a lot more had they gone to a VAR/Consultant in the first place, instead of purchasing on line or some other means than using the personal touch means of shopping.

Todd Irie, NexInnovations' Director of Marketing, says "The direct sales model is a low-touch transaction with minimal service levels -- that doesn't feature services to the customer -- and this in turn creates a pricing expectation so the average selling price decreases and that has hurt our profitability. That also hits everyone's margin industry-wide."

It is well know that margins on hardware is at rock bottom, and have been for many years. This has affected the bottom line of all hardware vendors, even the Tier I manufacturers. Mr. Irie's comments suggests that NexInnovations was a "box pusher", and not a VAR. This them explains why its profitability was hard hit by the direct sales model. VARs add value to the hardware and software, generating greater profitability from exceptional customer service and solutions that meet the customer needs. VARs are not just sellers of hardware and software; they are strategic technology partners with their clients, managing an IT infrastructure while the customer go about increasing business and profits.

Michelle Warren, senior IT industry analyst for the Evans Research Corp., said "& when vendors sell directly, resellers face some challenges, but it is also an opportunity for the reseller to provide services, installation and follow-up, notwithstanding." She knows what a VAR is. Did NexInnovations lose sight of the role of A VAR? It certainly looks like it. Let's hope the restructuring helps them out of the hole they dug for themselves. We need large VARs like them to challenge the direct sales model of the Tier 1 manufacturers.

All VARs need to focus on solutions, not hardware and shrink-wrapped software. Sadly, the customer cannot differentiate the VARs and Solution Providers from the box pushers.

Keith Charlton, Vice President Sales, VAS Value Added Systems Inc.

Here is a smaller dealer perspective on it. Clearly NexInnovations has not moved with the times and some of their woes obviously stem from a reliance on reselling activities. Our role in the industry has subtly changed over the last decade and is still changing. It is a fact of life that the manufacturers HP, Dell, Lenovo, etc are big hungry machines that are dependent on volume, and being more "cost effective" than the "competition". To this end they are driven to use whatever methods they believe will meet these goals. Thus the direct sales model is really only a full circle, this time round however resellers are a part of the complex infrastructure.

As stated by our friends at Hewlett-Packard, the big resellers are "getting bigger at the expense of the smaller ones". The reason is obvious: its called pricing structure. Our recent experiences are that the manufacturer determines prices in competitive situations and are of the opinion that the reseller can survive on 3 to 4 percent margins. The larger resellers focused on products and manufacturers obviously bought this story.

Smaller ones like VAS are still dependent on supplying hardware and reselling software but for a different reason...it is part of the IT solution and not the reason for it, as the manufacturers would have you believe.

Sadly the manufacturers still only measure resellers on numbers and some of their own ideas on what value added means. There will always be a need for companies to "bridge the gap" between what the IT manufacturers can provide and what the customer needs. The challenge is to figure out what the customers' future needs will be.

Sadly I must agree with his statement since the changing landscape does have a major effect on those resellers still largely dependent on reselling "packaged" IT products, and looking to increase or maintain their sales.

Incidentally we have seen manufacturers take directly what we considered our business, when we involved them in accounts to win the deal in some cases they have offered to do this and pay us a small "finders fee". Dream on guys, as soon as we give you the receivables we no longer have "ownership" of that account

Larry Noble, President, Evron Computer Systems Corp.

My opinion (and I emphasize my opinion) and comments which are not based on any knowledge specific to NexInnovations follow: Clearly, a heavy reliance on Hardware sales is problematic. In the article they talk about the difficulties of competing with the Direct Model i.e. DELL, CWB, SoftChoice etc. Since NexInnovation's market was the large corporations they were and are very exposed to transactions where the Margin would be severely squeezed. Their situation would be worsened by the fact that they have higher cost Sales People, expensive Technical resources and an infrastructure and corporate presentation geared to look attractive to the largest 250 - 500 companies and government entities in Canada. At Evron, hardware sales were about 43% of sales in year 2000 and now are about 18%. At NexInnovations, their market and mission involved significant hardware sales. These sales require a lot of capital and the related costs of capital as well as the handling costs of this hardware.

The direct model supplies only product. VARs survive and thrive on basis of the services, solutions and advice that they provide. Consequently, talking about providing solutions and actually doing so are quite different. It is my impression that often, once the speech about solutions was finished, the actual transaction can often become a commodity conversation about cost. The Sales person often drives this issue. It is my experience that the skills to sell a solution are quite different then the skills to sell millions of dollars of products. Also, there is the issue of financial controls. Specifically, there is the question if the financial systems are in place to know if one is making money on a transaction or not. I have seen organizations in our industry who seem very happy about the revenue generated by a transaction but seem to have little knowledge about the profitability of the transaction.

In conclusion, it is becoming clear that the strongest players in the IT industry will be those who can pay more than lip service to the idea of being a "solution provider" The industry pundits have been talking up this strategy for a couple of years, and everyone is quick to adopt the idea without embracing it's principles. A true solution provider must do more than change it's Mission Statement, as a means of using the phrase "solution provider" to move more hardware and software. A true solution provider must take the time to understand their clients business and to provide valued solutions to real problems, while understanding the real costs, both to themselves and their clients.

In Conclusion

Maybe, just maybe, I am overly concerned about Todd's comments. Steve Wexler, VP and Editor-In-Chief for Integrated mar.com, put it in perspective, saying: "The channel is not going away because the IT industry cannot function without it. Ergo sum, the channel will continue, if in a somewhat different form. That morphing is already taking place. All we should be saying is that a number of initiatives could be undertaken to ease some of the transition that the channel faces."

If you want to add your comments, please send me an email at rcohen@integratedmar.com or visit the ChannelLine Advisory Council blog at http://c-lac.blogspot.com.