Last month, CRN and sponsor GE Capital invited senior executives from the reseller, distributor and vendor tiers of the channel to discuss the thorny issue of credit and finance – how to get it, how to manage it and how it needs to change for a managed services and annuity revenue world.
ATTENDEES
- Paul Mitchell, GM, Business Development Distribution Finance, GE Capital
- Fred Viet, ANZ channel manager, Lenovo
- Richard O’Donohue, director of business development, Dell
- Daniel Campbell, channel manager, Fujitsu
- Victor Lee, managing director, Mwave
- Eoin Coghlan, commercial director, CCNA
- Steve Martin, general manager, national channels, NextDC
- Brodie Murdoch, Program Manager APJ, Dell Financial Services
- Norm Weaver, managing director, Dataweave
- Sandeep Mehta, chief financial officer, Avnet
- Steven Kiernan, editor, CRN, moderator
Steven Kiernan, CRN: We often hear that customers want to pay on an annuity basis or as a subscription, but many publicly listed vendors are focused on capex sales to hit their end-of-quarter budget. It is then up to the channel in between to structure deals as an opex model. The big challenge is that the customer wants to pay one way, the vendor wants to sell another way, and the channel in between has to make it work.
Norm Weaver, Dataweave The marketplace has changed quite quickly, but obviously from a ‘reporting to the stock market’ point of view, the large vendors and their distribution chain have real challenges. They have to meet the expectations of shareholders in a marketplace that’s slipping from a really capex-orientated market to quite a free-flowing, opex-type market.
The opportunities to grow are around that combination of different services you’re providing: subscription-type services, managed services, private and public cloud combinations. This is where the marketplace is going to grow, because that’s what customers are asking for.
CRN: The distributors are often the ones stuck in the middle of this. Do you agree, Sandeep?
Sandeep Mehta, Avnet It’s a disconnect, which, from a distributor’s ‘middleman’ perspective, will only get worse. It is a challenge, but on the flipside, it is also an opportunity.
The vendors want revenue recognition and being mostly US multinationals, I think the GAAP (generally accepted accounting principles) will not allow you to recognise revenue unless you have a clear-cut sale.
Cash flow is paramount to resellers, so they do not want to invest capital upfront for three-year usage, so a ‘pay as they use’ type of model is big on their mind. That’s where the distributors come in, and I think that disconnect will only get worse. What we need is for some of our partners to be more open to the financing/leasing type of solutions that are in the market.
For Avnet, as a distributor, one of the more important metrics for us, apart from profitability, is return on working capital – the return we make on our investment in the channel. That gets more challenged when we have this disconnect.
In my experience, I’ve seen that the leasing and financing companies are putting out some pretty aggressive options – GE Capital being one of them – to play in this space, where the vendors want one thing and the resellers want something else. I think this challenge can become an opportunity for folks like GE.
Paul Mitchell, GE Capital Do you think there will be a drive back to capital, or do you think that opex is the way forward?
Sandeep Mehta From a reseller perspective, opex is the way forward for them. If I am Dataweave, for example, my focus is on my core competency: how do I service my end customers and how do I maximise my ability to do that right?
From a reseller perspective, I think it’s getting more and more intense, competition is getting harder, and they want to be able to use their capital in the optimum manner, such as investing in their technical resources or certifications. They do not want their capital blocked in hardware or blocked in two- or three-year transactions.
I think that’s more where the push is coming from. The resellers definitely want to be more nimble with their finances.
CRN: Brodie, can you offer a perspective on this?
Brodie Murdoch, Dell Finance Australia is leading the charge in some of this stuff. This utility or ‘as-a-service’ concept is one that our customers are asking for and our sales force go out and offer. You have to market your ability to provide an as-a-service or utility product, and then specialise it quickly to meet specific customer requirements.
If a sales person asks, ‘Would you like flexibility?’, the customer is always going to say, ‘Yes’.
But does the salesperson actually ask the follow-up question: ‘And are you willing to pay for it?’ Customers invariably don’t want to pay for it because it’s unnecessary.
Does my storage capacity really need to be able to return to zero next month? Do I really need that flexibility? Probably not. If it is a bank of servers then you may have ebb-and-flow requirements but sometimes we are trying to build complexity into something that isn’t required, and that just builds in cost.
Norm Weaver This cloud stuff has really spoilt the playing field, because in terms of customer expectations, they expect to be able to switch it on, pay by the month, switch it off, reduce the price – and, oh, there’s full DR, the vendor patches it and you get an upgrade free of charge every month.
That’s all very well for simple systems, but when you’re talking about enterprise systems, guess what – it’s not that easy. We need to price some software, price some hardware, and there’s a whole bunch of services associated with plugging all this stuff together.
The vendors are getting smarter. In the past, Oracle wouldn’t even consider a subscription model historically because the NASDAQ was saying, “I want to see how much licence revenue you’ve sold.”
Now Oracle are getting hammered because they’re not selling enough cloud. I’m sure the other vendors are the same.
I can buy platform-as-a-service, I can buy software-as-a-service [and] I’m knitting together hardware, but I’ve got to plug all this together and deliver it as a solution to my customer, and my customer goes, “That’s great Norm, but I’m not paying you a million dollars upfront before I’ve seen the result. I’m used to paying a monthly fee, so maybe I’ll give you a bit of a service initiation and transition cost but…”
We’ve got to eat a lot of that into the contract price and amortise it over the three- or five-year contract, which isn’t bad because it means we’re now locking the customer into a three- or a five-year managed service contract, but we’ve got to get over this initial financing hump.
[Vendor finance] are happy to give us a little bit of services as long as there’s a lot of hardware, but where the services are big and ugly, it’s hard to finance a whole solution and turn it into a subscription model.
Steve Martin, NextDC You need to pay for the privilege of flexibility. If you come in to NextDC and take a contract over multiple years, you get a certain price. If you don’t want a contract, we’re happy to do all that, but the price is higher.
I don’t think selling has changed much. We still have things that we can negotiate with and things on which we hold firm.
From NextDC’s point of view, we’ve been born on a subscription model, so in one sense that’s easy for us, because we haven’t been addicted to big deal-based revenue, and trying to change the deal-based revenue into subscription models.
That said, our finance guys have done an awesome job in managing the many hundreds of millions of dollars we’ve spent building on infrastructure around the country, and finding a way to finance and pay for that on a monthly recurring revenue.
CRN: I’m interested to know how the vendors around the table are morphing to fit the demands from partners to pay on an annuity model.
Fred Viet, Lenovo We see, as more and more standard resellers are moving to managed service providers, they don’t want to resell on to their customer, they want to pay on a monthly basis.
This is the big change for the vendor. Is it up to the distie to take that on their balance sheet? I’m not sure they want that. It’s the same for the vendor – do we want to take that on the balance sheet and then in the first quarter say to the NASDAQ, “We didn’t invoice, but in the future it will be better”? We need to use finance to find a solution.
We need to take bets sometimes as vendors, and say we will support some key MSPs because they are going to go to market with a cloud offering, and we need to help them sell that because then we will have more hardware to sell to them.
CRN What about for Fujitsu?
Daniel Campbell, Fujitsu We’re pretty fortunate because as a fairly large organisation, we’ve got our own financial team and we can offer financial solutions to our partners. So I still recognise the revenue of the transaction whether it’s sold on an opex or a capex basis, because the finance company pays us.
The whole conversation around how do you position cloud versus buying infrastructure in the mix is fascinating. I don’t think there’s any one silver bullet.
Sandeep Mehta I talked earlier about the challenge of this disconnect also being an opportunity. If used well, it’s a great opportunity for financing and leasing companies like Dell, IGF (IBM Global Financing) or HP to use innovation to bridge that gap.
But how long can this disconnect remain? Unless that change in the mindset occurs, particularly at the vendor level, I think this disconnect will blow up. It can’t remain forever. There has to be that alignment and changing mindset from the top.
CRN: Eoin, how important were distributors when you set up CCNA?
Eoin Coghlan, CCNA We started our business just before the GFC hit. It hit pretty hard, but from a partner perspective we were probably in a much better position because there were distributors in place.
There was a bit of competition between the distributors and we were guided by them. It gave us a little bit of comfort. We knew we had to pay the bills on time, we knew we weren’t going to get outlandish amounts of credit, so the business had to be lean and mean.
I remember sitting down with one particular deal where we’d punched a bit above our weight – it was a whole chunk of change. The customer was a federal government department, you could see the margins, they weren’t going anywhere and someone took a bit of a gamble on us and allowed us to do that deal. Then the next two or three more people popped up because we had the ability to transact that, and had been proven from a credit point of view.
Paul Mitchell When I first caught up with Eoin, we talked about when you guys started the business and how someone had taken a bit of a punt, because the end customer was so strong. It was the government, and all [the distributor] had to do was see the probability of that cash flow and they could extend credit capacity to get it off the ground. Now you’re a very successful business in your own right.
The benefit of [tech-specific finance providers] is that because they’re invested in the channel and they understand the channel, they’re not necessarily doing financial underwrites like the banks are, they’re actually lending against the probability of that cash flow and they understand the tech channel.
That’s where we fit in and the value we’re trying to add. If you look through our portfolio of resellers, yes, we still do financial underwrites, but if they’ve [the reseller] been in business a couple of years, and they meet certain criteria, we’ll lend them $150K with basically no financials because we understand the probability of the cash flow and because we focus on the technology channel specifically.
It’s those fast-growing resellers, the entrepreneurial ones that can use that extra ‘rev up’ to start winning those deals. That’s why we invest so much, why we want to be part of the CRN Fast50. Those guys will generate some really good cash flows, they just need some help to get through that credit capacity gap. By partnering with them and their vendor partners and distributors, we’ve found our niche in the market. It’s helping through that probability of cash flow, getting that working capital cycle sorted so you can go out and win those bigger deals.
CRN: Thanks Paul. Victor and Norm, what role did distributors play in your beginnings?
Victor Lee, Mwave When Mwave first started in 2006, we had a number of credit arrangements with suppliers already, so that was a big tick for us. But of course the limits were small. Over the years, we wanted the opportunity to review the situation and most of the suppliers were very happy to support us and enlarge our capability. The support for a new business is very important.
Norm Weaver When I started in 2006, it was me and a laptop and the customer base and if it wasn’t for a small distie called Attain IT, I would never have gotten anywhere. The chance of getting a hundred thousand dollars worth of credit from Oracle was [unlikely], but I was able to close million dollar-plus licence resale deals because they [the distributor] understood the business, they self-funded it, because they were in the business.
Steve Martin What I have heard in that conversation is that for Norm, Eoin and Victor, you all said distribution was your business enabler. Distributors were the ones who took a bet on your businesses when no one else would. I think that underlines the importance that distribution still has today within our business.
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