Dell EMC restructures the distributor landscape
Monday, April 4 2017
One of the biggest tasks in bringing together Dell and EMC’s worldwide channels is the integration of distribution. Bringing on board EMC’s legacy distributors is an opportunity for Dell EMC to extend relationships with a new set of storage specialists and build stronger relationships with existing distributors that also carry EMC. The combination of Dell and EMC boosts the importance of both vendors in some of the largest global wholesalers. But this also creates significant over-distribution. Dell had hundreds of distributors worldwide, many of them small or specialized by product line, which are now being combined with EMC’s distributors. Soon after completing the acquisition, Dell EMC kicked off a global rationalization exercise to consolidate the number of distributors.
Central to this is the appointment of four global distributors: Arrow ECS, Avnet TS, Ingram Micro and Tech Data (now three with the completion of Tech Data’s acquisition of Avnet's Technology Solutions division). These have been given global priority, based on their size and investment in Dell EMC. But all three have gaps in their portfolios or geographic coverage, so will be complemented by strong local players, either supporting the full Dell EMC portfolio or specific product lines. Dell EMC’s formal strategy is “two plus one” in each country, and across both volume and value. In theory, this means appointing two globals plus one local for volume products, and the same for value products. This could mean up to a total of six distributors authorized per country. But many countries are likely to have fewer, particularly where Tech Data and Ingram Micro (as well as the strongest in-country distributors) span both volume and value. Dell EMC has already begun the process of terminating partnerships with over 100 distributors around the world, but more are expected to be cut as the vendor completes RFP processes in each country. At the same time, it has launched a new global distribution program, creating a standard framework of requirements and benefits for Dell EMC authorized distributors, which broadly mirror the wider Dell EMC Partner Program (see Canalys report, “Dell EMC new partner program goes live”).
Bringing together two approaches to distribution
Both Dell and EMC worked with distributors, but strategies differed. EMC’s channel model relied heavily on two-tier distribution, which accounted for over 60% of total indirect revenue. Distributors played an important role in supporting and training even some of EMC’s largest partners. In contrast, while Dell has spent the last five years ramping up distribution at a worldwide level, it is still estimated to represent less than 30% of total revenue (though of a much larger overall business). Dell began developing its distribution model predominantly to support SMB partners selling PCs, in response to demands for better availability of stock and credit. More recently it started expanding its enterprise products into distribution. Over time, it built up a network of local distributors around the world for both infrastructure and client products, but it lacked a consistent global strategy. For example, it had only established pan-European contracts with Ingram Micro and Tech Data in the last three years. In emerging markets, including the Middle East and Africa, Latin America and Asia Pacific, Dell had historically relied on two-tier distribution. But in its largest developed regions, its most important partners continue to be served directly.
Dell EMC’s global channel leadership has recognized the need to show a commitment to the distribution model, and particularly to legacy EMC distributors serving large EMC partners, as it integrates the two channels. It has made a series of pledges, including:
- Dell and EMC partners currently buying through distribution will continue to do so, rather than being switched to a direct relationship (as part of Dell EMC’s commitment to maintaining existing purchasing models).
- Dell EMC promises to protect “distributor incumbency”: this means that even as partners move up through the tiers of the combined Dell EMC partner program, they will be able to continue to buy through distribution, rather than being converted to a direct relationship.
- Net new partners onboarded to the Dell EMC program will be automatically served by distribution rather than directly by Dell EMC.
But Dell EMC must ensure these pledges are backed up by behavior in the field. The vendor reserves the right to make exceptions to these rules, and distributors will be watching closely to see how these exceptions are applied. Dell EMC now has a mix of large indirect (legacy EMC) and direct (legacy Dell) partners in its channel. If all large resellers are treated as “exceptions” and taken direct once they reach a certain size, distributors will quickly become skeptical. Equally, what happens when channel partners currently buy directly from Dell and indirectly from EMC? Will these be treated as direct or indirect accounts? In addition, if Dell EMC is maintaining the status quo for existing procurement relationships, does this put many smaller direct-purchasing legacy Dell resellers out of reach of distribution?
There is a risk of Dell EMC’s global strategy being overly-influenced by US thinking. For example, while client, server and networking products will be served through open distribution, storage will follow a preferred distribution model. Storage resellers will be required to select a preferred distributor, with rebates and deal registration only paid on purchases made through that named distributor. This strategy is currently not implemented worldwide due to regulatory reasons, so there will be limitations in certain countries. Equally, despite its promise to support “distributor incumbency” or compensate distributors for business that is taken direct, this is not easy to do in an open distribution model. Resellers typically prefer multiple purchasing options, including more than one distributor.
A significant opportunity for distribution
A combined Dell EMC represents a major opportunity for those distributors securing authorized status. They gain access to the broadest portfolio in the industry, spanning client, server, storage and networking. A stronger Dell EMC gives distributors greater leverage over other brands selling through distribution, in particular Cisco, HPE, IBM and Lenovo. Arrow, Ingram Micro and Tech Data will be the biggest beneficiaries of Dell EMC’s strategy. But despite their global status, each has different levels of coverage:
- Arrow: Arrow, through its ECS division, is one of EMC’s leading distributors in the US, and has a practice in a number of European countries, including France and the UK. It is a key VMware distributor. But beyond this, EMC is not one of Arrow’s leading brands. Storage accounts for around 20% of Arrow ECS’s total sales, but most of this comes from NetApp. More importantly, it currently has little Dell business. Arrow ECS will be authorized to carry Dell’s enterprise portfolio wherever it carries EMC, but this is primarily in the US and Western Europe (though excludes Germany). In North America it has even been given authorization to carry Dell clients. Yet even on a combined basis, Dell EMC will not be one of Arrow ECS’s most important brands, particularly as Arrow ECS continues its move toward security, software and services.
- Ingram Micro: Ingram is one of legacy Dell’s largest distributors in the US and EMEA, with significant coverage in APAC. But it lost its legacy EMC distribution contract in the US in 2015, and had little EMC business in EMEA. Securing a global status with Dell EMC represents Ingram’s opportunity to regain access to the EMC portfolio: Ingram Micro will be able to carry legacy Dell and legacy EMC’s enterprise and client portfolio where it has a presence. In the US it was authorized to restart transacting EMC storage in March. The risk is that this encourages aggressive competition as Ingram seeks to win legacy EMC share in Europe and the US. Ingram will only be able to sell to net new customers until August, after which it will have full access to the market. Under Chinese HNA ownership, Dell EMC will also see an opportunity to expand with Ingram in China.
- Tech Data: Tech Data, with the acquisition of Avnet TS, is set to become Dell EMC’s strongest global distributor. It was already one of both Dell and EMC’s biggest distributors in the US and Europe, carrying Dell’s client and enterprise portfolio and EMC’s storage lines. Avnet TS is a global leader in EMC distribution, including VMware. With Avnet TS, Tech Data has wider coverage of central and Eastern Europe, Middle East and Africa. It also has presence in APAC for the first time. In February Tech Data was appointed a full-line authorized distributor (for both client and enterprise) in Europe and the Americas for Dell EMC. On a combined basis, Dell EMC is likely to become one of Tech Data’s top three vendors.
While these globals will be given priority, local specialists and strong regionals will continue to play an important role through the “two plus one” strategy, particularly in emerging markets where the big three have limited coverage. Dell EMC’s strategy may even encourage further consolidation, either led by the big three acquiring local Dell EMC specialists, or in-country distributors buying each other.
Distribution will be critical to Dell EMC’s future success
Making distribution a strategic priority will be critical to Dell EMC’s future success, as it seeks to grow its channel business while cutting costs. If anything, Dell EMC will need to reduce, not increase, the number of direct managed partner accounts as it pushes for greater efficiency. Distributors will be vital to both maintaining its share of the incoming EMC channel and expanding its reach into new channel partners (helping it to win competitive share). Distribution will also provide cash flow, allowing Dell EMC to pay down its debts sooner.
But Dell EMC must prove this commitment, both internally and externally. Rival vendors, fearing a loss of share, can be expected to respond to Dell EMC’s initiatives. The new Dell EMC distributor program reflects a willingness to invest in distributor growth: authorized distributors within the program will have access to a centralized partner portal and deal registration tool. They will receive base rebates, paid from dollar one on sales-out revenue. They will qualify for growth accelerators, for example, for meeting targets for line-of-business (product segment) expansion. Authorized distributors will receive qualified leads from solutions providers and marketing support. They will also be rewarded for services attach, as Dell EMC invests in pushing services through the channel. In return, authorized distributors will be required to achieve minimum revenue and growth targets by country, minimum services thresholds and training requirements. The program has now been launched in most regions, aside from Greater China and the new financial incentives that will be implemented in EMEA from Q2. But Dell EMC must also be prepared to back this up by building more mature back-end processes, and maintaining the legacy EMC’s closer alignment with distribution. 2017 will see an intensifying battle for distributor awareness between Dell EMC and its competitors.
For more information:
Canalys APAC: Singapore Tel: +65 6671 9399 or
Shanghai, China Tel: +86 21 2225 2888
Canalys Americas: Palo Alto, USA Tel: +1 650 681 4488
Canalys EMEA: Reading, UK Tel: +44 118 984 0520