The New Ingram

When congratulated on his new appointment, and true to his laid-back style, new chief Kerry Baillie responds with a laugh. 'I might have drawn the short straw I think.'

The former Tech Pac Australia boss has his work cut out for him. Today, he is charged with the job of steering a huge distribution outfit with 850 staff in this country and maintaining its profitability for years to come.

If you ask Baillie, the time was ripe for market consolidation. 'In this country having a lot of big distributors doesn't make sense. They only have three in the States and they've got 300 million [people], so why would you have three here when you've only got 20 million,' he says.

Since arriving in this country in 1999 via the acquisition of Electronic Resources Australia (ERA) and Melbourne-based distributor ITG, Ingram Micro Inc has had a chequered past and struggled to make a profit.

Its past acquisitions resulted in staff exits, and the ensuing dotcom boom and bust in 2000-2001 placed intense pressure on its sales in Australia and New Zealand.

According to a company document, for the 2003 financial year, Ingram Micro Asia-Pacific reported US$2.3 billion in sales revenue and a massive US$10.3 million operating loss.

The acquisition will see Ingram Micro staff at Homebush transferred over to the $9 million Tech Pacific office and warehouse in Rosebery, Sydney. 'The [Ingram] office we won't keep - we'll rent it out,' Baillie says, adding that the company, however, will keep Ingram's Sydney warehouse.

Tech Pacific has a new office in Burwood, Melbourne, which will be used, but an Ingram warehouse in Mulgrave will be shut as it is a distance out from the Melbourne CBD. The company is looking a new premises in Perth to accommodate the Ingram and Tech Pacific staff and warehousing as the current individual premises are too small.

The Adelaide operation will 'stay the same' and the Brisbane situation is being reviewed, he says.

As with any merger or acquisition there will be job losses, Baillie says. 'Have you seen a merger where that doesn't happen? I'll try and let people know where they stand in February. Everyone should know where they stand by the end of February and integration will be completed by the end of March.

'We have to have a fair process of selection that will take some time and then we have to have a fit-out of this [Rosebery] building to accommodate more people.'

Duplication in the product management ranks will be the hardest nut to crack. 'Product managers are the hardest one and the duplication is only in Sydney.

'In Queensland, Melbourne and Perth, you join both places together - it's simple. But in Sydney there's duplication in product managers where you've got for example two teams doing Lexmark, two teams doing HP, two teams doing IBM. Do you need to double up the teams? I don't know - we're looking at that right now. In some cases in the finance area there is [also] some duplication.'

However, the company will be looking to hire more staff. 'How many more we don't know so what we're doing is looking at what we have to do and then where there's duplication, we'll just interview both parties for the job.'

The biggest difference between this acquisition and when Ingram first arrived in this country is that Tech Pac is rock solid today and 'none of the staff want to go anywhere unless they're asked to', Baillie continues.

'I don't know any Tech Pac staff that want to leave as part of the acquisition, which causes a problem because the Ingram people now feel disadvantaged by the buyout and there's nothing I can do about it because I didn't buy the company.'

He says his challenge is to retain the value that Ingram bought and include Ingram on a fair and equitable basis. 'Last time [with the ERA acquisition in 1999], they didn't retain the value of the staff that they bought.

'The problem I've got is how to be fair to the Ingram people because frankly they're in disarray right now. The challenge will be how to maintain the sales of both companies going forward.'

Both companies have had staff leave due to the merger, he says. 'I do know of specific examples from both companies - it hasn't been a lot though.'

Baillie says resellers have been requesting that the company should not change anything. 'And that means attitude as well as structure. So the challenge is for us to continue with the same attitude and structure as we've had before - and the attitude is to treat everyone fairly and not get above ourselves,' he says.

'Tech Pac, we're not going to be a lot bigger than we were last year - we're going to increase by about 20 percent in terms of revenue.

'Resellers say just get on with it. We're not changing Tech Link for example, we'll have more products so it's better for the resellers - we'll be a better one-stop shop than we have in the past.

'[Vendors] have said I've got to be careful, "because if you don't deliver our targets we'll be considering our options".'

Tech Pacific also picks up a bunch of new vendors including Acer, Red Hat and Belkin as a result of the deal. 'They have Intel and Seagate - about seven OEM products, which we don't have. I've been trying to have more OEM products for years.'

Tech Pacific's business is split up in equal thirds between retail, small and large resellers. 'We're equally balanced between regional, small resellers, big state-based resellers and [retail] chains. We're the strongest in SMB, we're the strongest in retail and that's where all the activity is,' Baillie claims.

'None of the other distributors have spent much time in retail because they found it too hard, and when retail took off, we were there and they weren't. And SMB remains strong and that's where our success lies,' he says.

Baillie has been at Tech Pac in Australia for the past three years and joined at a time when the company was losing money. 'Last year was the most profitable this company has ever been in its history.'

On $1.5 billion in revenues here, the company recorded $30 million (EBIT). 'The first month I came here we lost $800,000 - that was three years ago. In 2001, this company lost heaps,' he says.

After his second month, the company lost $500,000 and Baillie resorted to the tactic of giving away the first $100,000 the company made equally to all staff members.
'The third month I announced to the staff I was giving the first $100,000 away and they all thought I was a bullshitter.

'In the third month, we made $100,000 and I divided $100,000 by 500 staff and gave it equally away. The person making the coffee got exactly the same profit share as the CEO. It was the most amazing thing I've ever done because everyone says, "Hey this guy's fair dinkum".

'And we've made money every month since. I got the morale right and told people that I would look after them if they did a good job.'

Baillie does not believe that other distributors will find it difficult to compete against the new beast. 'We're not going to change - they'll get the business the same way that they have in the past. They'll find it easier to compete with us because people [resellers] will say, "Tall poppy syndrome, we'll go and give some business to the little guy. A big American company - they don't need our business!"

'Whereas before I think two years ago the market used to see Tech Pac as an Australian company trying to do a good job. We're owned by Ingram Micro but the staff stay the same, they're all Australians working here.'

Despite creation of a big broad-based, one-stop shop for the reseller channel, Baillie says there will always be a place for specialist distributors that do a good job. 'Then the resellers have a choice. Sometimes they use a specialist distributor and sometimes they use a broad-based. At the end of the day, as long as they get their goods at the right price at the right time, it doesn't matter where it comes from.'

Other distributors have mixed feelings about the future of the market following the acquisition, but seem positive about the result nonetheless.

Ross Cochrane, general manager at competing distributor Express Data, says the merger is not a first in the market - Merisel and Tech Pacific came together back in 1997.

'In general terms, the market adapted around it and kept going. From my perspective, the [merger] will be a positive thing. Resellers are generally always looking for choice in the marketplace.'

For Express Data - a so-called value added distributor with a focus on high value markets like networking and security - the merger represents an opportunity for it to differentiate with products that have not been  commoditised. 'We've got a more specialised model, there's an opportunity for us to target resellers that are looking for a technology-oriented supplier,' Cochrane says.

Although the market is showing signs of life, Cochrane agrees that smaller distributors will suffer as a result of the buyout. 'Ingram will add more and more vendors and will target more commodity-type vendors. It's going to be very difficult for them [smaller distributors]. The buying power pressure that Ingram will put on vendors will ensure they'll have a competitive advantage in the marketplace. You've got to be good - the stakes are raised and it's not easy game anymore,' he says.

As with any merger there is a risk involved and, worst case, the combined operation could go from profitable to losing money. 'Their management has got the experience - they know the game, but it's not a walk in the park. If they do a great job, they can make it work,' Cochrane says.

He expects that there will soon be more consolidation in the distribution channel. 'There's still a number of guys that have to decide whether they are in it for the long haul - they've got to make a call.'

Currently, Express Data resellers are making sure they've got alternative facilities for supply and credit with the distributor, given the uncertainty about how the Ingram/Tech Pacific marriage will shape up over the coming months. 'I don't think we're actually seeing the new Ingram. Until they come together, everyone is still uncertain. Tech Pacific has been viewed [as taking] the superior position - it will be very interesting,' Cochrane says.

Niels Kofahl, a director at small, niche distributor Tecksel, says the Ingram/Tech Pac marriage would impact positively on his business because there will be less choice available for resellers. 'And Tecksel as a distributor is a viable choice for a lot of businesses. We're flexible and we can work faster than the giants.'

Kofahl claims that the 'bureaucracy and red tape' will be enormous for the new Ingram and the competition will take full advantage. 'There are enormous opportunities for distributors like ourselves,' he says.

However, he says that Ingram's plan to duplicate Express Data's low-cost Express Online service was a smart move. 'This is unfortunately the way it's going as products become more commoditised; there simply isn't the margin there to offer the full service,' he says.

Kofahl says the combined entity was likely to exercise its market power once the integration was complete and would need to be 'closely watched'.

Components will be a key market for the company and Paul Scanlan from Ingram will look after the national OEM group, which will have combined sales of $450 million. 'And that includes not only OEM products but other products into the OEM, system-builder space.

'We'll continue our focus with - that will remain unchanged. The SMB business will remain unchanged and our staff addressing that in Victoria, Queensland and Sydney will remain unchanged.

'In Sydney with the bigger SIs, Ingram were doing some good work there so the sales people in Sydney who are addressing the state-based system integrator market will continue to address that market working from here [Rosebery].

'One thing I have to improve is our warehousing - we have to be slicker there than we were last year. [The warehouse] is not fast enough.'

Baillie on the IT market

'I think the market is going to be quite good - but the overall challenge will be the Australian economy. I think the IT market is improving because the replacement cycles are coming. Some companies haven't replaced their equipment since 1999.'

Tech Pacific's profit margin increased by 0.5 percent last year, he says. 'In the three years that I've been here, the first year we were very aggressive - our profit margin has gone up by 0.5 percent due to increases in its service capability,' he says.

'Our margin has gone up because - one, people enjoy our service and they're prepared to pay a little bit more, and two, because of the product mix. We've got more products that we're selling now with higher margins that we had before and also we've got a broader spread of customers, which gives you a better margin because of customer mix.'