In today’s fast-paced, low-margin environment, it doesn’t always make sense for VARs to maintain distribution and configuration facilities. This business model isn’t always sustainable for resellers – even larger ones. So we’re starting to see more resellers sign deals with distributors to configure and private-label solutions for their customers, rather than carry that overhead themselves.
But perhaps we’ll start to see this model evolve even further. Take NexInnovations, one of Canada’s largest VARs, which went into Companies’ Creditors Arrangement Act (CCAA) protection on Aug. 13, 2006 (which is similar to Chapter 11 protection in the U.S.).
This came as a shock to many in the industry. But NexInnovations had a lot of overhead with its own distribution centre and configuration capabilities. When the VAR came out of court protection last month, it had a restructuring plan, part of which involved signing a three-year deal with Tech Data Canada to become its exclusive supplier of hardware and software.
As a result, NexInnovations ditched its distribution centre, a service centre and configuration capabilities have been outsourced to Tech Data. The distributor which will configure solutions and ship them to NexInnovation’s customers under a private label.
This isn’t exactly a new concept – plenty of resellers have signed similar agreements with Tech Data and other distributors. What makes this arrangement different, however, is that Tech Data has security on business transactions through Primary Money Security Instrument (PMSI), which means the transaction is secure until the time the customer pays. Tech Data controls the bank account; it takes a cut off the top before NexInnovations gets paid.
This could be a sign that distributors are learning from past mistakes, after being burned by VARs that couldn’t pay their bills and filed for bankruptcy. In a tight-margin business, nobody wants to take too many risks.
And this arrangement does take much of the risk out of the equation for Tech Data, while NexInnovations can stay in business and continue to service and support its customers.
Will we start seeing more of this? There are, in fact, quite a few advantages to this model, which will benefit both distributors and VARs. Resellers are often limited by their credit with distributors, so they can’t go after big business – such as government RFPs – and this arrangement could eliminate that problem. Of course, they have to be willing to give up control of their accounts, so this clearly wouldn’t work for everyone.
But all resellers should benefit by higher product availability. Tech Data, for example, said it will have to expand its configuration capabilities 10 times to deal with the influx of business from NexInnovations, meaning it will also have to stock more product.
For VARs who want to focus on service, not logistics, this could be the way to go. For NexInnovations, it could breathe some new life into a VAR that had one foot in a grave.
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