Channel Needs to Focus on What It Can Control

As the second-quarter equity markets ended with a whimper in response to the Federal Reserve’s ninth consecutive 0.25 percent hike in the federal funds interest rate, bringing it up to 3.25 percent, the winners in the quarter were small-caps, mid-caps, technology stocks, oil and gold, the dollar, and, of course, real estate prices, which saw an estimated double-digit boost.

Industrial equities represented by the Dow Jones Industrial Average lost ground for the second quarter in a row. This index lost 2.18 percent and is now down 4.71 percent for the year.

The tech-laden Nasdaq composite rose 2.89 percent in the quarter. The improvement reduced its year-to-date loss to 5.45 percent.

The Russell 2000 small-cap index increased 4 percent during the last three months, still down 1.83 percent for the year. The S&P 500 Index gained 0.91 percent in the quarter, cutting its yearly loss to 1.70 percent.

The question that most investors want answered is, when will the Fed stop raising interest rates? No one really knows.

But the consensus on the federal funds rate is now between 3.5 and 4.25 percent, which means that the Fed will probably stop raising rates some time in early fall.

Some people think that the Federal Reserve Board will only stop raising interest rates when the economy shows clear signs of softening and the housing market starts cooling off.

Click here to read about SAP’s new channel network.

In any case, it is becoming increasingly clear that the U.S. economy may show slower growth later this year or in the first half of 2006, as higher interest rates, high oil prices and weakening demand from Europe and Japan may prove too much to overcome.

So, what does this all mean for the channel?

Among many things, it means channel companies should stop worrying about things they do not control, like the economy, and focus on what they can control—like choosing the right partners, technology focus areas and profitable customer segments.

In terms of choosing the right partners, a few weeks ago I attended an investor conference vendor panel discussion with channel executives from Cisco, Hewlett-Packard, Symantec, Symbol and Xerox, among others.

I came away impressed with Cisco’s John DiLullo, vice president of Worldwide Channel Distribution, and his articulation of the company’s channel strategy and commitment to its distribution partners, particularly in the SMB (small and midsize business) space.

Cisco claimed that 90 percent of its revenues from the SMB segment go through the channel. Its sales force has complete compensation neutrality with the channel.

In contrast, a HP representative left me with an unclear understanding of the company’s evolving strategy and commitment to the channel. Although more than $50 billion of HP’s $83 billion sales comes through the channel, it seemed to me that HP wanted to increase the percentage of direct sales and reduce its cost of doing business through distribution channel “operational excellence.”

The key here for channel companies is to choose partners with products and programs that will keep them in business with adequate profitability.

In terms of selecting the most promising technology practices, it is no surprise to hear us advise a focus on managed services, network systems, wireless application deployment, CRM (customer relationship management) implementation through SMBs, and targeting upgrade opportunities during major new product cycle deployments, such as Microsoft’s Longhorn release in 2006.

Read details here about how VARs are extending their sales reach through partnerships with other VARs.

The issue here is focus: honing your execution skills in one or two specialized segments while not diluting limited resources trying to cover too many different areas.

Finally, perhaps the most important thing VARs and other channel players can do to increase profitability in any environment is choosing to do business with profitable customers. This assumes that you have the systems in place to know who these customers are.

To minimize the typical situation where the SMB customer goes out and buys the product online and then calls the VAR to fix the installation problems, it is important to price your services accordingly so you can be equitably compensated.

It is clear that the current environment’s unusual degree of uncertainty is restraining corporate managers from spending as freely as might be expected, given the record levels of cash in corporate balance sheets.

Nevertheless, capital spending for information processing is still about 50 percent of total non-residential private capital expenditures in the United States. So, there is plenty of money to be spent.

The key for resellers wishing to get their share is to get out of “business as usual mode” with their customers and prospects, and passionately serve their targeted segments better than anybody else.

Benny Lorenzo has more than 30 years of business and technology experience and is currently General Partner at Aspira Capital Management of Fort Lee, N.J. He has held various positions with AT&T and IBM. He was also portfolio manager at P.A.W. Partners and served as senior vice president of Equity Research at Dillon, Read & Co. Inc., general partner at Volpe, Welty & Co., and vice president at LF Rothschild & Co. Inc. Benny Lorenzo can be reached at biencito@aol.com.