Redefining the channel investment

The current economic situation, along with relentless digital transformation, has placed the channel into a complex space where margins are shrinking and markets are more demanding. Never has there been a stronger need to reinvest into the business.

Disruption in the distribution space is hardly news. Last year several large firms were acquired by several other large firms – Avent, Ingram and Westcon for starters – and hardware margins continued their downward descent. The current economy is still stubbornly down and things are still tough. The channel is playing in a stagnant market which has led to a hypercompetitive space and tight margins. Of course, running a successful channel business is all about the margin so how does the channel build the margin without losing out to disruption? 

“Two things impact on the channel margin,” says Anton Herbst, CEO, Tarsus On Demand. “The first is sales – the more the business sells, the greater the margin. The second is costs – how can the business reduce its costs to create more margin.” 

This does beg the question – does the channel put money back in to create more sales or does it invest into solutions that allow for the business to become more effective and thereby lower its costs and improve its margins? It’s essential that money is put back into the business and that it focus on moving one or both of those levers. The tipping scales that influence the balancing act between the two is determined by the type of business and the challenges it faces. However, one thought should remain top of mind – the channel can’t afford to be complacent. 

“The reality is that any business that doesn’t re-invest capital into the business is doomed to fail and the channel is no different,” says Kevin Hall, National Sales manager, Elingo. “The calculation of money that needs to be invested back into the business is often based on running expenses and the projected bottom line. How you structure the investment and the return on investment into existing businesses is where the cookie crumbles.”

Investment back into the business is important, but the amount is dependent. Forecasting investment in the current economic landscape is only going to become more complex, especially as the global economy remains volatile. The focus shouldn’t be on how much the channel can get away with, but rather on what investment is needed to facilitate growth. In the channel business, it’s important to ensure there isn’t just one stream of income as this will help the business to grow faster and make re-investment less weighty.“

Reinvestment, but how much?

“In my opinion there’s no hard-and-fast rule for investment as it’s dependent on the strategy of the business,” says Monique Williams, regional manager, Hyland Southern Africa. “The level of investment is dictated by the growth aspirations of its shareholders or leadership, organisation size and capability, and market conditions, among others.” 

Herbst suggests that the channel should put as much as 75% back into the business otherwise it runs the risk of having to find another source of capital. It’s a guesstimate and the volume depends on the business, but if investment is less than 25%, then it’s very likely that the company is going to be looking for alternative revenue streams before long. 

“We take approximately 55% of our profits every year and invest them back into the business across technology, skills development and our incentive scheme,” says Maureen Grosvenor, director, APPSSolve. “We’ve used this investment to develop our own internal operations software system to ensure adequate margins and to prevent revenue leakage. This is critical for the sustainability of our business over the long term.” 

Why reinvest?

Investment should be pushed back into generating growth, reducing costs and investing into new solutions and technologies that allow the channel to innovate, automate and dodge disruption. Of course, lightly tripping along this path to become the disruptor rather than the disrupted introduces an entirely new paradigm – risk. The channel also has to swallow that pill or risk death.

“The level of risk aversion a company has tends to depend on where they are in their lifecycle,” says Herbst. “More mature businesses tend to have a lower risk appetite whereas the entrepreneurs and startups tend to be risk hungry.” 

Most channel companies are aware of the need to take on a measure of risk. They know that disruption and change lurk around the next bend and there’s a need to seek out new business models, new ideas and take chances on how they evolve. For older organisations it may be asking questions around how they can bring risk back into the business without changing existing, successful, strategies, but without being left behind. The younger and fresher beasts, well, they’re already riding the tidal waves of risk as they explore new ideas. “

“The channel is no more risk averse than any other business model, the only difference is the dependence on vendors and partners,” says Hall. “The question of managing risk to acceptable levels for investors and stakeholders should be focused around the company history and track record.” 

Hall also believes that the channel is one of the few sectors that allows for richer training experiences than many others. The certification and training opportunities that come with working in the channel space, such as certifying on a product, can completely change a career path. Employees are the future of the business and investing in them not only creates qualified teams, but loyal staff members.

Invest in people 

“Staff with strong product and services knowledge enhance the organisation’s reputation in the market and enable them to deliver improved customer service,” says Williams. “Regular training and (re) certifications are mandatory within our channel community. The same goes for investment into sales and marketing tools as they’re the lifeblood of the business.” 

The channel has to focus on improving operational efficiency. It’s the only way they can remain relevant in the existing market. As the margins remain under pressure, the channel can eke out more profit by becoming better at what it does and the ways in which it does it. Investing into staff training, sales and marketing tools – these steps are the barricade that could protect the business from being overturned by new and innovative resellers and channel startups. 

“It’s really important that the channel build a digital business and use digital to optimise,” says Herbst. “It takes time to build a digital business, so they need to invest in automation and get the benefits of new technologies that are cheaper and more effective to ensure they remain relevant today.” 

The result of investment and a focus on driving efficiency and capability allows for the channel to cement a solid reputation of excellence. This then results in more business, more profits, improved margins and a delectable knock-on effect that allows for further investment and greater growth. “It’s a crucial business circle that starts with internal investment that leads to success, delivers profits and allows for more investment,” adds Grosvenor.

For most channel companies sustainability is key. They’re working towards creating companies that have a long-term footprint and an agile business model. Today, the market is a mix of the old stalwart with more than 25 years of experience and the bouncy young thing, ready to try out new cloud models, new innovations and ride the edges of lower margins. But both need to focus on investment into the business, its people and its processes to thrive. 
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