In all the buzz about direct-selling vendor Dell and its plans to finally make an honest partner out of the channel, one extremely significant fact has gone unmentioned: Dell already has a relationship with the IT industry’s largest distributors, Ingram Micro and Tech Data.
The deal with Tech Data is reportedly worth several hundred million dollars, and goes back to 2004. Dell is, in fact, one of Tech Data’s top customers, according to well-placed sources.
Here’s how Tech Data’s arrangement with Channel Enemy No. 1 works:
A customer places an order for, say, 100 Dell machines. Dell processes the order and fulfills it through its own distribution apparatus. Now, remember, Dell has always made much of its fulfillment capabilities that, the vendor brags, cut out the middleman, i.e., the channel.
But let’s say the customer who placed the 100-system order also needs a dozen peripherals, such as printers, and some networking devices to tie everything together. Where do you think those products come from? Since Dell is essentially a systems vendor, that equipment has to be sourced elsewhere.
And, you guessed it, that’s where Tech Data comes in. The distributor processes and fulfills orders placed with Dell for components, peripherals and whatever other devices that do not carry the vendor’s label.
Even though that deal is no secret to the channel, Tech Data through the years has remained reticent about it.
And who can blame Tech Data? The arrangement puts the distributor in a delicate position. As the multitude of VARs and integrators that buy products from the distributor have struggled over the years to compete with Dell’s basement prices, Tech Data has actually played a role in making Dell such a formidable competitor to the channel.
Of course, it wasn’t enough to prevent Dell from losing its PC market leader position or missing earnings expectations and developing customer service issues.
To win the deal with Dell back in 2004, sources said, Tech Data had to outbid rivals Ingram Micro and Synnex with prices low enough to make you cry.
Tech Data won, but keep in mind that the contract could just as easily have gone to one of the other distributors. And let’s not forget Dell also does significant volumes of business with Ingram Micro, the world’s largest IT products distributor. Ingram Micro has a deal to handle software licensing for Dell.
It’s all business in the end, and even though Tech Data put itself in a delicate position with its channel customers, a deal worth hundreds of millions of dollars, as has been reported, is tough to pass up.
The IT channel is a funny place. For all the bellyaching about Dell over the years, enough solution providers have been all too willing to sell or service Dell products. Dell now even acknowledges that it generates some $4 billion through the channel. That’s not news, of course, since eWEEK reported in 2006 that as much as 20 percent of Dell’s business came through the channel.
And that’s despite all the bluster from Dell until recently, to the effect that nothing beats cutting out the middleman and buying direct.
The fact is, the channel has worked with Dell for years, and not just Dell. I remember touring the warehouse of a large channel company in the late 1990s and noticing that every fourth or fifth box in the systems area bore Holstein-inspired decorations of the Gateway logo. Gateway at the time, much like Dell, proclaimed that it did business only directly with the customer.
But let’s take this a step further. If you look at Tech Data’s and Ingram Micro’s customer lists, you will find CDW somewhere around the top of both. CDW may be considered a channel company, of a sort, but let’s face it, the online retailer is a major thorn in the side of the channel at large. Much like Dell, it competes with VARs and integrators by offering prices so low that the channel companies often cannot possibly beat them.
Competing and partnering with the same companies is a fact of life in the channel. And that will not change when Dell finally makes its channel program official, an eventuality Dell tells us will happen some time in 2007.
You can bet that plenty of channel companies will join a formal Dell program, especially since Lenovo hasn’t made much of a splash since it bought IBM’s PC business.
The question is how Dell’s relationship with distributors, particularly Tech Data and Ingram Micro, will change when a formal channel program is in place. Most likely, no changes will happen on the distribution end, at least for now.
But wait until management at Dell decides more cost-cutting is necessary to help profits. Do you suppose dismantling Dell’s logistics infrastructure in favor of working with distributors will be considered?
No? Well, some would have never thought possible that Dell would conveniently leak an internal memo saying, “Direct is not religion.” But as the memo and Dell’s relationship with distributors show, anything is possible in the IT channel.
Pedro Pereira is editor of eWEEK Strategic Partner and a contributing editor for The Channel Insider. He can be reached at firstname.lastname@example.org.