Outsourcing May Degrade Ingram's Customer ServiceBy Elliot Markowitz | Print
Opinion: Considering the tight margins with which Ingram Micro has to operate, its move to outsource some business is understandable. But even though the company says customer service won't be affected, the reality is some short-term effects are liNo matter how you paint the canvas, no matter how you pretty up the old Dodge, the distribution business is mainly about moving product from point A to point B in the cheapest, fastest and most accurate fashion.
Computer product distributors for the past 10 years have been trying to put a new spin on their core competencies, from lead generation to technical support to training and education, but no matter how they dress up the pig, they are still distributors. And let's face it folks, distribution is about size and scale. It's about low-cost bulk buying. It's a razor-thin margin business and always will be.
Margins are so thin in this business that any sort of price war salvo needs to be ultimately challenged and will undoubtedly result in lost profits in return for market share gain, or in some cases, prevention of market share erosion. Just ask Synnex what happened in its first quarter and you can clearly see the eggshells these folks constantly have to walk on.
That is why Ingram Micro's bombshell that it is laying off 500-plus employees and outsourcing most of those job functions to an overseas company is really not that surprising when you stop and think about it.
Ingram is a public company, a Fortune company. It behooves any company of that size to always look at its options to better its bottom line and increase operating efficiencies, regardless of how unpopular a political move it may be.
Many of the largest companies already have embraced offshore outsourcing of specific job functions and are planning on doing more of it. The fact Ingram is also in an ultra-sensitive margin business only begs the question as to why it didn't look into this option sooner. Odds makers have Tech Data following suit soon after it gets its internal ERP system deployed later this year or in early 2006.
"Companies in the U.S. need to outsource service to other companies in order to save money and gain access to expertise that they currently don't have," said Ray Mota, chief research officer at Synergy Research. "With the tough competition in the distribution space, profit margins are in the low single-digit range. Ingram is being left no choice. They at first will accept the fact that customer service quality will suffer a bit, and they are obviously willing to take that chance. Once an area becomes so commoditized and pricing is the main driver to your success, outsourcing outside your company and then overseas becomes inevitable."
In fact, Mota and a few other analysts addressed this very issue during an eSeminar I moderated late last month titled "Look Before You Leap Into Offshore Outsourcing."
"Ingram has to cut costs in order to improve its operating margins, and this is one way to do it. It is a reflection of the need to cut costs in this particular business model," added Benny Lorenzo, general partner at Aspira Capital Management, in Fort Lee, N.J.
In fact, Ingram claims the move will end up saving the company $25 million on an annualized basis by this time next year. That's a lot of ViewSonic monitors.
Although Ingram claims it is still doing due diligence on selecting the right outsourcing partner, all trends lead to India. In fact, AMR Research claims that outsourcing will grow 9.3 percent this year, and India will be the dominant player with about 50 percent of the market.
But there is a rub here. Cost savings and efficiencies aside, the majority of the mega-distributor's VARs need handholding, support services, credit help and so on. As one Ingram channel partner, who happens to be part of the company's elite VentureTech Network, put it, "The bad news is Ingram's got 45,000 customers, 15,000 of which are actually credit worthy. The rest need a lot of help."
The distributor claims customer touch points, and in this case we are talking about channel customer touch points, will not be affected. But how could it not be?
Ingram said it is outsourcing transaction-oriented service and support functions, including selected North American positions in finance and shared services, customer service, vendor management, and some positions in technical support and inside sales. Granted, the company said field sales or management positions will not be affected.
However, unless you are one of the select VARs that have a dedicated field sales representative always paying attention to your business needs, you are going to be caught in the lurch.
Many of Ingram's smaller customers do need financial support and technical service, and they will soon be dealing with an offshore outsourcer that doesn't know their business as well, is not as responsive as they might need to be and is not familiar with all the tools Ingram has to offer.
Now, most of this stuff will probably be sorted out eventually. But it will take time and resellers are going to have to grin and bear it or go somewhere else.
Ingram still has to choose the right partner. This is a big part of the puzzle they should have had in place before going public with the strategy. This may have helped in providing more answers than questions for Ingram's channel partners. The changing of the guard at the helm of the company probably had something to do with the delay in choosing such a partner.
Ingram then has to train the company. And let's be honest, the chosen outsourcing provider then has to execute. All this is going to take time. This is also going to take a bit of trial and error.
In the short term, a chunk of Ingram VARs will get poor service for a while, and they will have to make the decision if they are willing to wait it out. In the long term, however, a financially stronger Ingram is a better distribution partner to the channel.
In addition to being editorial director of Ziff Davis eSeminars, Elliot Markowitz is also editor at large of Ziff Davis Internet's The Channel Insider.