Charting growth

With the anticipated channel growth this year, all eyes are on the Middle East channel. Octagon International MD Sukant Mishra offers his views on what the region?s channel need to do.

The channel market may be tough and competitive but that shouldn’t deter Middle East-based channel partners from preparing for the much talked about growth this year. Given the prevailing market conditions, most resellers have been turning to exports and Greenfield markets to offset slow-moving IT sales in the Middle East.

For many involved in the IT game, it’s balancing limited resources and necessary investments for business growth that has proved to be a challenge especially after the 2009 global financial shakedown.

Yet, in this tough business climate, solution providers are galvanising themselves in preparation for business growth as signs of an upturn begin to show on the horizon.

Sukant Mishra, MD at Octagon International, a Dubai-based systems integrator, says although there is a lot of confidence about the Middle East’s channel business prospects in 2011, Octagon’s advance and progress in the last two years has been to handle business with prudence. Mishra says that while there is no denying that the market remains volatile, the company has managed to mitigate its own risks by focusing on solutions where it is able to bring value to customers. “We have been able to continue with our business because we were prepared from the onset as the downturn was kicking in,” he says. “We evaluated our portfolio and made a decision to focus on key solutions.”

Mishra says Octagon International’s focus this year will be in the managed print services, mobility and growing the consumer business. In addition, says Mishra, the company will also be focusing on expanding its GCC footprint in particular (Qatar and Oman) and East Africa. “We have decided to have in-country support in markets that we identify to have growth potential,” he says. “This will not only position us in good standing but also help us to become more client focused.”

To this end, Mishra says the company has moved to decentralise its operations with plans to have people on the ground in Qatar, Oman, Tanzania and Kenya.

Growing local reach

Although Octagon’s business contracted in 2010 in volume terms where it managed to do business worth US$60million compared to $100million in 2009, Mishra says the company has made progress in building its business in the Middle East, Africa and the Far East Asia. “Our turnover may have shrunk but none of our employees left the company or partners deserting us,” he reiterates. “Our employees just like our partners are a strategic asset and we will do whatever we need to  do to make sure that they have a great future with Octagon in the Middle East and all the regions where we have presence.”

He says because of the current channel volatility that has seen some channel partners demise from the market, there is need for all involved in the channel to take extra caution as the market picks-up. “Credit and insurance have become expensive to finance and way out of reach for most channel partners,” he observes. “We are fortunate in that we have not been affect by any of the market exits by some players. From that perspective, the measures we put in place to mitigate risk have worked.”

Hesham Tantawi, VP at Asbis Middle East, Turkey and Africa (META) region, points out that although the channel is upbeat about business in 2011, reseller companies in the region are not doing enough to develop local markets as doing so will ensure that the channel is strengthened. Tantawi advises resellers across the Middle East to take leaf from what their peers in Saudi Arabia are doing as they have developed and grown their in-country business in the Kingdom before turning to other countries or venturing into exports. “This has propelled the channel to emerge much stronger in the Kingdom. This is evident in that there hasn’t been reseller runaways or companies exiting from the channel in the KSA,” he notes. He explains that because resellers in Saudi Arabia have invested time, money and effort in developing the local market there, most businesses are on a solid footing as money stays within the channel.

Tantawi believes that resellers that will capitalise on the expected growth this year are those that continued to invest during tough times especially in value add solutions. “Most distributors in the region are stable, but some resellers have struggled to stay afloat. “The current channel scenario was inevitable given what has happen during the course of last year,” he notes. Going forward, Tantawi says there will be something good that comes out of these reseller company closures as this purge will ensure that a much more stronger and competent channel emerges. “We expect a much stronger performance business wise in the second half of 2011,” he says. “This growth will benefit partners that have competencies and add value to the solutions they sell, implement or integrate.”

Arun Chawla, COO at Trigon, says in the current business climate there is need for the channel to focus on providing high quality support and services as these are vital for partners to differentiate themselves from competitors.

Chawla says for many companies in the channel today, the main focus has been top line growth without getting the balance of their product portfolio and business right. He says as a result, many have failed to realise the cracks within their organisations and eventually their businesses have become untenable with a good number of such firms collapsing.

Diminishing margins

Margins in the channel have continued to decline making it extremely difficult for resellers to survive on products selling alone. Those that have grown their businesses are companies that have embraced solutions selling.

Mishra says because of the diminishing margins on products, the company’s has strategy going forward is on three segments namely mobility, managed print services and the consumer sector. He adds that the company has also expanded its server and storage business with HP and Dell the main brands represented. “We had a great 2010 with our notebook business,” he says. “We’ve tweaked our business model to lessen the focus on products with diminishing margins and low end interest.”

Chawla points out that support and services in the channel is often an area that is overlooked. “Partners shouldn’t forget that in this cut throat competitive environment, high quality support and services are vital to distinguish your business from competitors,” he says.

Chawla adds that if the channel works together and goes back to basics of doing channel business, it can overcome the external market factors and achieve the desired balanced and healthy channel.

Channel evolution

Aside from declining margins, competition, credit crunch and market volatility, Mishra believes that the reseller channel especially in the UAE needs to take advantage of Dubai’s pioneering efforts in establishing itself as an IT hub for the re-export market. He adds that selecting the right export markets has the potential to propel channel partners to new heights.

Asbis’ Tantawi agrees and explains that choosing the correct market can lead to immediate success on the part of resellers that want to venture into exports. However, Tantawi points out that an incorrect decision to enter a new market can not only lead to substantial losses but also long-term damage to the company’s operations. “A poorly thought entry into a foreign market can have negative effects to the company’s future plans as well as morale,” he says.

Tantawi explains that in order to make the right decision, any reseller company that is interested in the export market needs to go beyond personal preferences and intuition. According to Tantawi, the process of market selection requires the exporter to undergo certain essential steps namely data collection, differentiation of markets and prioritisation of markets.

Chawla adds that a trading mentality continues to persist in the IT channel with some companies willing to buy and sell products at the same price level. “What matters in the IT channel is gross profit margin and the bottom line. This has been our focus and reflects that we are serious about growth and our existence in the market,” he says.

Market challenges

Most of the challenges that partners face in the Middle East at the moment have to deal with overheads and profitability.

Mishra says channel business has always been a highly price-sensitive sector, and at Octagon International, the company place great emphasis on prudent cost management, both in good and tough times. He adds that like any industry, the year 2010 had challenges for the IT channel. The sector witnessed several abrupt exits by players who could not cope with the difficulties in the market. These exits could have led to two possibilities – offering a greater pie of the distribution business for existing resellers as the number of players declined and increasing pressure on volume of sales due to fewer channels.

Mishra adds that in reality the market also shrunk, as partners were only creating an artificial market using the channel for conversion of inventory to cash.

Consequently, the global credit crunch and liquidity in the region also tightened, affecting the expansion initiatives by the channel. That being the case, Mishra adds that for resellers to continue being in business, they need to create new markets for their inventory. “Octagon has continued to monitor the costs of its operations to ensure prudence and effectiveness. “In addition, we are also closely monitoring the demand and supply dynamics to assess optimal inventory purchases. We have also lowered our inventory cycles as the market is witnessing high fluctuation in prices due to variations in forex,” he says.

Retail channel

Mishra says that although the power retail channel is being touted as the next “big” thing that will offer stability to vendors and distributors, the segment itself is still in its infancy at the moment. He says most of the power retailers are still learning how to resell technology products. “It’s good business for us although retailers that are growing their business and making profits are those that utilise their space well, are innovative with the products they sell and go that extra mile to train their floor sales staff,” he says.

Looking ahead, Mishra believes that for resellers to progress and capitalise on the anticipated growth, it’s vital for stakeholders in the channel to uphold the highest ethical standards of doing business. He goes on to say that vendors must also play their role and take control of the supply of products by identifying the “right” distributors who can add value to their brands. “There is need for vendors to support channel partners better and ensure that the smaller companies that are just in the channel to disrupt the market find it increasingly difficult to do that going forward,” he concludes.