When Greg Spierkel took over as chief executive of the world’s largest IT products distributor June 1, he inherited a company that was already undergoing dramatic changes.
For the first time, Ingram Micro Inc. is outsourcing some job functions overseas. The $25 billion distribution giant is also in the process of laying off 550 employees and has just reshuffled a handful of executives to consolidate its Canadian and U.S. operations.
Ingram is continuing to shrink the campus of its once-sprawling Santa Ana, Calif., headquarters from three buildings to one, a process it started four years ago. Sales and technical support are being consolidated at Ingram Micro’s Buffalo, N.Y., location.
Typically, these types of changes occur in response to a crisis. That is not the case, however, with Ingram Micro.
In fact, Spierkel, who was previously co-president and once ran the company’s European operations, is taking over under far more pleasant circumstances than those faced by his predecessor.
Kent Foster, who handed Spierkel the chief executive role but remains as chairman, took over the company on the eve of the dot-com implosion of 2001 and the sharp decline in the overall IT market that followed. Distributors were hit hard; Ingram Micro’s revenue eventually stabilized at its present $25 billion after peaking at more than $30 billion.
In the lead and moving ahead
“Our goals are straightforward: be the best and most efficient source of IT solutions for our customers,” Spierkel said. “Our associates know this is job one, and as such, everyone [at Ingram Micro] is involved in driving change in the company. This is particularly important when the company is executing well. It ensures we stay ahead of our competition.”
In the first quarter of this year, Ingram Micro reported revenue of $ 7 billion and net income of $42.4 million, the highest since 1999. For the second quarter, the company expects revenues to range from $6.7 to $6.9 billion, with net income ranging from $41 million to $46 million.
Credit Suisse First Boston even predicted at the end of May that the second-quarter results and outlook of Ingram Micro’s main competitor, Tech Data Corp., of Clearwater, Fla., will “pale in comparison to chief rival Ingram Micro.”
A big factor in that prediction is the Asian IT market, where Ingram Micro does 17 percent of its business. While demand has dropped in Europe and remains modest in North America, Asia is growing at double-digit rates. Tech Data has no presence in Asia.
So why all the changes at the world’s largest IT distributor? The short answer is profit.
Ingram Micro’s management says for the company to boost profitability and remain competitive in a world of airtight margins and reduced vendor incentives and rebates, it has to cut costs and increase productivity.
The company wants to be able to invest in new business areas, as it has done with forays into point-of-sale and digital home markets, and, more recently, with an ISV initiative. By investing in new business areas, the distributor gives its customers, mostly VARs and integrators, opportunities to expand into new markets and boost their own profits, according to Ingram Micro executives.
Without the consolidation and cost-cutting, the company’s management believes its ability to make such investments will be inhibited.
For one thing, the margin pressure that keeps IT distributors constantly on their toes will not go away. Vendors, under their own pressures, will likely continue to get stingier on incentives and rebates for partners. And the 6 percent growth estimated for distributors in the foreseeable future, while not bad, is considered very modest in historic IT market terms.
“All these guys are under pressure,” said longtime channel analyst Benny Lorenzo, general partner with Aspira Capital LLC in Fort Lee, N.J., and occasional columnist for The Channel Insider.
The only way to remain competitive in a tight-margin, slow-growth market, Lorenzo said, is to cut operating expenses, which is what Ingram Micro is doing.
Ingram Micro expects its various cost-cutting efforts will save about $10 million this year. By the first quarter of 2006, the company estimates its cost savings will have reached a rate at which it will save $25 million per year in operating expenses compared with the 12 months prior to the measures. The moves will cost the company $26 million ($18 million net of tax).
Tech Data Chairman and CEO Steve Raymund said his competitor’s cost-cutting moves are designed to increase shareholder value and operating profit.
“Apparently the only way left for them to cut costs was outsourcing,” said Raymund, who added Tech Data has no current plans to outsource. “We prefer to pursue automation first and outsourcing second.”
Tech Data is doing some restructuring of its own. The company is spending $40 million to $50 million in its underperforming Europe, Middle East and Africa region with an eye to improving profitability. The company has embarked on an IT system upgrade and “harmonization” project, which, combined with the restructuring, is expected to save $55 million to $65 million.
Ingram Micro’s outsourcing plan entails moving some job functions that require telephone contact with VARs, such as basic tech support and inquiries on e-commerce transactions, to the Philippines; it will move some backroom transactional jobs that don’t require customer contact to India. The distributor is retaining Progeon, a subsidiary of outsourcing and consulting firm Infosys Technologies, to handle the offshoring.
Ingram Micro executives promise not to allow any degradation of service. Customers by and large have reacted positively, or, at worst, with a shrug.
But Ingram Micro customer Darren McBride, president of Sierra Computers, of Reno, Nev., has some misgivings.
“I personally think the changes are a mistake, but I seem to be in the minority,” he said. “I am not confident they can implement these changes without impacting service. However, I think it will be six months to a year before we even begin to get a clue.”
Raymund and some other channel insiders speculate that the overall positive VAR reaction may embolden Ingram Micro to eventually outsource more jobs.
“I think they’ll expand it to Europe,” Raymund said. “I’m not sure how far they’ll go.”
However, Brian Alexander, senior vice president at Raymond James & Associates, said he doesn’t think further outsourcing will happen. Alexander added that customers have reacted positively to Ingram Micro’s outsourcing plan because most of the functions affected are not customer-facing.
Customers, channel observers and Ingram Micro executives all agree on one thing: The company will have to execute well on the outsourcing and consolidation moves or customers will balk. Or, even worse for Ingram Micro, they’ll go shop elsewhere.
To avoid the pitfalls experienced by other companies that have tried outsourcing, Ingram Micro is taking its time with the transition, which will take up to nine months. Parallel operations will run at Ingram Micro and the outsourcer before the distributor finally pulls the switch.
Channel observers and customers say they understand the distributor’s need to manage its cost structure and seek higher profits.
And that means despite market challenges and profit margin pressures, at least Ingram Micro can count on the support of its customers. And that’s not a bad thing if you’re just taking over as CEO of the company.
“I feel good about where we are,” Spierkel said shortly after Ingram Micro announced his promotion to CEO. “The company is in a good situation.”