The distribution business is a tough one at the best of times. Margins are tight, vendors stray over the line and compete with their partners, and the resellers one step down the chain have a whole other set of challenges to overcome.
Itec COO Ryan Miles says the company realised about five years ago that the products it was selling were becoming commoditised, that the resellers had become very brand-focussed (usually on one brand) and that, coupled with vendors coming in directly, meant bad news for the long term. So Itec decided to change its strategy and its approach.
Says Miles: “We wanted a way to help our dealers extend relationships we had with clients, a way to introduce new products to the channel, to help them focus on multiple products, and to develop the skills to service customers [beyond the initial sale].”
The way the industry has evolved was a large contributing factor.
“Products have become commoditised, and customers are more demanding and much more educated about what they want to procure. They want to drive costs down, create efficiencies using technology, take fewer risks when it comes to communications, particularly because they are so reliant on it, and conversely want their service providers to take on more of the risk. Technological convergence is an issue too. Devices that used to be stand-alone have converged (e.g. all-in-one copy, print, fax, scan machines), affecting the industry that sells and supports these devices.
“The Consumer Protection Act, and the banks’ stance on lowering risk in terms of financing, has had an effect, plus we now have to talk to a higher segment of customer. All these contributed to us having to understand clients’ needs in more detail than in the past, taking more risk for the solutions we lay down, and the end of box-dropping, which doesn’t create sustainability. It’s not a way forward for any operator,” Miles says.
Doing more consulting and taking on more risk meant hiring a higher calibre of staff, he notes. “Systems, procedures, processes, national infrastructure are all things we have to do in a way that can enhance our revenue streams. Where we used to make profit off the upfront sale, now we make 30 percent upfront and 70 percent on the service relationship, so we have to do it more efficiently and smarter. The smaller dealers can’t keep up. They need to partner bigger organisations with infrastructure, which is where the Itec Holdings model fits requirements exactly.”
This approach works better for customers too, says Miles. “They’re vetting prospective suppliers more closely, and want to get the same service in a small town as a main centre, which you can only deliver by standardising on systems and implementing best practises. That’s for the office automation players. We’re starting to clash with the traditional networking giants, which have historically worked the same way and are encroaching on our space due to convergence, and vice versa. It’s a very changed landscape; the traditional dealer is becoming irrelevant in the sales process. Lifestyle businesses struggle to create the infrastructure and growth needed, which is why we decided to buy into our dealers’ businesses.”
Another driving factor was the company’s BEE deal with Ikamva Labantu Trust, which owns a stake in Itec Holdings. This approach, Miles says, ensures the company is not enriching individuals but rather giving back to the community, as Ikamva is a non-profit organisation that works in townships providing assistance in health, learning and development, as well as resources to develop and and want to get the same service in a small town as a main centre, which you can only deliver by standardising on systems and implementing best practises. That's for the office automation players. We're starting to clash with the traditional networking giants, which have historically worked the same way and are encroaching on our space due to convergence, and vice versa. It's a very changed landscape; the traditional dealer is becoming irrelevant in the sales process. Lifestyle businesses struggle to create the infrastructure and growth needed, which is why we decided to buy into our dealers' businesses.”
Another driving factor was the company's BEE deal with Ikamva Labantu Trust, which owns a stake in Itec Holdings. This approach, Miles says, ensures the company is not enriching individuals, but rather giving back to the community, as Ikamva is a non-profit organisation that works in townships providing assistance in health, learning and development. It provides resources to develop and support these communities. It’s a great structure for customers looking for BEE solutions, Miles comments.
Twenty two of the company’s 49 resellers were responsible for 70 percent of group revenue. Itec has bought between 30 percent and 50 percent of each. Says Miles: “We’ve kept it owner-managed and entrepreneurial.”
Managing the businesses the company sells to, which all compete with one another, is a delicate juggling act.
“The dealers are customers of the distribution business, and they are required to sell the brand, live up to market expectation and meet contracts they have with the distribution arm. It’s a clear structure,” says Miles.
Said clear structure no doubt helps keep the juggling manageable.
The Itec Holdings company sits on the boards of each of the resellers it owns and acts as an advisor, as well as providing shared services across the group.
“This lets the companies focus on clients and client needs rather than back office functions,” says Miles. “We’ve really taken a number of lifestyle businesses (i.e. businesses that support the lifestyle of the individual owner), which would not have continued without the owner, and turned them into sustainable businesses. This lets us bring key people into the dealerships (we call them partnerships) and is also attractive for the dealers that are standalone businesses but benefit from group structure, policy, procedures, tools and so on at a lower cost. It’s an attractive way to trade and enter/exit the industry,” he notes. Itec facilitates the buyout of an operation if someone wants to exit.
While the companies Itec owns may be small, the group as a whole generates just under R1,6 billion in revenue, and employs around 700 people. Miles isn’t expecting the dramatic change underway in the sector to slow any time soon. Its current structure should see the company well-positioned to deal with the ongoing flux. As for the others, Miles says: “People need to choose to evolve.”