From Boxes to Bytes: Why Distributors Must Digitally Transform to Protect Profits

By Joan Puyol

Joan Puyol

Despite a tumultuous start to the new decade, the size of the IT professional services market continues to grow at a prodigious pace. With a market totaling an estimated worth of $821 billion, opportunities abound for vendors, manufacturers, MSPs and ISVs, which are all competing for larger pieces of the pie. Yet, despite the industry’s enormous growth, one player of late has had a more difficult time increasing profit margins: IT distributors.

In terms of profit margins, business-to-business wholesale distributors operating in the global IT and consumer electronics market are on course to earn a meager 2%-5% on average, with even the largest distributors managing to generate between 6% and 11%. Racing to rethink their business models and reassure shareholders, most distributors have begun to resolve the issue of lower margins by aiming to get bigger via acquisitions. By acquiring other companies, distributors can generate an economy of scale, negotiate better price points and combat commoditization. Still, the gains here are finite.

Even so, the outlook for distributors isn’t all doom and gloom, as several pathways to transforming their business models have proven promising. Exertis, one of the most profitable European distributors, exemplifies such success by expanding its presence and recently notching 9.7% yearly growth.

Keys to Revamping Roles Are Clear

As other distributors pursue a similar rebound, the keys to revamping IT distributors’ role in the supply chain have become clear. Let’s examine why and how they’re looking to achieve much-needed operational efficiency and business evolution through digital transformation.

The move toward operationally efficient digital distribution. The business of IT distribution isn’t what it used to be. So, to address decreased growth and low scalability, distributors are aiming to change with the times. Increasingly, they’re following the digital transformation pathway by acquiring computing power, storage and networks from the cloud. By evolving from boxes to bytes, IT distributors can expand their market share as enterprise computing providers, selling data centers, cybersecurity, storage and analytics to larger companies. In short, distributors are now becoming XaaS retailers.

This shift from traditional license billing systems to subscription- and consumption-based models has upended the distribution business model of yesterday. While at first glance these channel players usually recognize a lower revenue per customer, they quickly achieve significantly higher earnings before interest, taxes, depreciation and amortization.

At the same time, this new service model engenders customer loyalty and a more profitable return on capital employed (ROCE). In fact, from a sample of companies analyzed by CloudBlue, those using hybrid delivery models generated overall gross profits of up to 13%, while traditional distributors struggled to surpass 4%.

With better margins and more convenient delivery, it’s no wonder the market is turning to operationally efficient digital distribution. The first way distributors are doing this is by creating a comprehensive digital solutions catalog. Success in this first stage relies on implementing a digital and automated cloud product catalog. Here, streamlining contracts, quotes, procurement and fulfillment enhances efficiency and reduces operational costs. Further, the most repetitive (and complicated) processes, such as creating invoices or purchase orders, are then automized and standardized. This allows for expansion into new segments as headcount and associated costs remain comparably low.

Streamline and standardize. A second key component of a digitally transformed IT distributor is a focus on streamlining operations. Those distributors going digital are now creating their own anything-as-a-service (XaaS) marketplaces. This is the logical next step toward standardizing procurement, fulfillment and billing between their vendors and resellers. Moreover, distributors at this stage must strive to create a system that eliminates complexity through end-to-end automation. In this way, they can manage the entire lifetime of the subscriptions as well as maximize potential downstream sales through ease of access.

Of course, achieving this requires …

… an initial investment as well as a shift in business operations. But it must be noted that once in place, XaaS marketplaces are hyperscalable, as additional client contracts or suppliers don’t create increased overheads that distributors are traditionally faced with. As a result, costly bottom-line considerations such as warehouse space soon become a thing of the past. The goal of building and deploying an automated marketplace with a subscription service is to unlock increased efficiencies and higher margins per customer.

The secret to scaling. With these foundations in place, distributors additionally set their sights on scaling across multiple countries, multiple tiers and multiple subsidiaries. But exploring the value proposition of potential partners — both domestic and overseas — and understanding shared value can be a slow process that prolongs time to market. Many IT resellers struggle with expansion, especially regarding regulatory compliance, communications and technology infrastructure.

Here, the idea is to scale by building reseller relationships and licensing products. For example, Ingram Micro and Kaspersky partner to deliver cybersecurity offerings in SaaS. Another strong sales partnership is found between IBM and VMware. Also, thanks to digitization, distributors can offer their resellers the ability to operate in any language or currency and layer their own services and XaaS bundles onto the solutions in the catalog. This allows the distributor to curate different listings according to reseller location and truly respond to their local market requirements.

Higher margins, unparalleled efficiency. From high infrastructure costs to static profit margins, today’s outlook for IT distributors may appear precarious at first glance. However, market-leading companies in this space are responding by moving in one direction — to become operationally efficient digital distributors.

Build Digital Expertise

The above three steps drive forward this aim, seeking to automate the supply chain from vendor to end customer and thereby accelerate time to revenue for each player. It is now up to distributors to harness their position as vital channel intermediaries and combine this standing with newfound digital expertise, all the while keeping an eye on their bottom lines. Those who do so will enjoy higher margins and unparalleled operational efficiency.

Clearly, achieving all of this is no mean feat. Digital transformation and operational overhauls require a team of developers, leadership with the right mindset, an implementation framework and quick wins to keep stakeholders onside. However, distributors don’t have much choice. There is no way around digital transformation and — if you want to stay ahead of the game as a distributor and share in profits in the long run — you need to start innovating now.

Joan Puyol is the global director of marketing and product marketing at CloudBlue. He is a cross-functional leader with global and virtual/remote team management expertise, with 13 years as a serial entrepreneur and then 8 years in the enterprise space. You may follow him on LinkedIn or @ThisisCloudBlue on Twitter.