Avnet’s Solutions And Services Strategy Adjusts To IT Buying Changes

August 26, 2013 Dan Burger

We’ve heard it from IBM and all the major analyst companies: companies are no longer buying products; they are buying solutions. IT vendors that have depended on hardware sales for the bulk of their revenue are shifting to a more services-oriented style. Just two weeks ago, at the Avnet Compass conference for the business partners of that giant IT reseller, the services story was emphasized again and again. The way organizations consume IT is changing. Avnet is changing, too.

There was a time when Avnet’s business on the IT side–it also has a large electronics components business, of course–was mostly hardware sales. And that was a time when the AS/400 was a huge part of Avnet’s business. The same was true for Avnet’s partners in the reseller channel. The master distributor remains closely connected to a great number of AS/400, iSeries, and IBM i shops. But even though hardware revenues have increased over the years, software and services revenue has outpaced hardware.

Avnet adapted. It began selling more software and services and the X86 business boomed. Fred Cuen, general manager of the IBM Solutions Group, was illustrating a point as he recalled those early days. Adapting to change is a requirement for survival in the IT business and in any business.

Change scares the bejeezus out of a lot of people. But this is not flip-the-switch change. This is gradual change. It often gets termed evolutionary change to distinguish it from revolutionary change. IBM, as an example, has been de-emphasizing its hardware manufacturing and emphasizing its Global Services for many years. Avnet, since November 2011, invested more than $400 million in the acquisition of 12 IT services-oriented companies. Services that are connected to the health of IT systems have always been a component of hardware sales. That hasn’t changed. But the added ingredient, where the emphasis is being placed now, is with IT and business alignment and solving business problems. It’s about applying more business brainpower.

There are multiple factors at work. The struggle to align business processes and information technology has gotten very complex. And many companies have reduced IT staff. Software has more built-in automation that allows companies to compensate for reduced IT headcounts. Services are put in place to reduce the complexity for the buyer. To a large degree, they are the new and improved skills and expertise that companies find in short supply in their own workforces. Conquering complexity by renting IT and business skills are opportunities for those who possess the expertise.

Avnet’s adjustment can be seen with a quick glance at its revenue breakdown in IBM-related products and services in North America since the turn of the century. In 2001, hardware sales generated 81 percent of Avnet revenue, services–primarily tied to hardware–were 12 percent and software revenue was only 7 percent. By 2011, hardware revenue represented 54 percent of the Avnet pie (even though the dollar amount had increased.) and services and software had grown to each represent 23 percent of the revenue stream. The overall growth rate for hardware is slowly growing, but the rate of growth for software and services is much stronger. The North American market accounts for half of the revenue of Avnet’s Technology Solutions group. The company’s biggest push into software and services has occurred in that region. At the halfway point in fiscal year 2013, the worldwide carving of the revenue (including non-IBM products and services) shows hardware contributing 61 percent of the revenue, with software at 20 percent and services at 19 percent. Hardware revenue is led by storage and followed by networking gear and servers.

Some segments of the hardware business have been under siege. In the server market, the Power Systems line has been on a slide since the majority of the enterprise customers upgraded to Power7 in 2012 and the year-over-year comparisons are really a comparison of the small to midsize spend this year compared to the enterprise spend from a year ago. And while the X86 market is no longer in decline, its razor thin profit margins makes it not the best business model for hardware-dependent resellers. Avnet’s X86 business is being buoyed by strong growth in high-end systems.

IT growth, as predicted by IDC, will be riding on the back of cloud services along with mobile devices, big data, and social media. IDC’s vice president of system software, Al Gillen, a keynote speaker at the Avnet Compass event, refers to these categories as the “third platform.” The first platform was dominated by mainframes and terminals and the second platform was when client/server computing and the Internet gained the upper hand. In the early going there were thousands of applications and millions of users. In the third platform era, there are millions of apps and billions of users.

By 2020, IDC forecasts that 98 percent of the growth in IT spending will attributable to the third platform technologies and those technologies will require massive application reinvestments. And it’s just as important, Gillen says, to understand what this newest evolution of technology is not. It is not an architecture or a replacement for the current architectures and it is not going to invalidate most existing applications. (For more on the Third Platform, see this IT Jungle article from December 2012.)

In the opening session at Avnet Compass, Cuen noted that companies are looking for ways to adapt to the economic conditions and make their money stretch farther, which has led to a closer look at renting and comparing capital expenses with operational expenses.

Hardware costs for companies are being reduced by virtualization, the cloud, and anything as a service (XaaS), which reduces–or sometimes eliminates–the need to buy hardware. Some IT directors are wondering whether they will have a data center in five years, Cuen told the audience of Avnet business partners.

Cuen also made note of another transition–this one in terms of the traditional IT decision-making process. Budgets for purchasing solutions, he noted, are more frequently coming from areas other than IT. And the decision on the hardware comes at the end of the discussion about how to reach the solution to the business problem.

To sell solutions requires knowledge of specific industries. Companies are looking for vendors, who know business as well as they know technology. The software vendors in the IBM i community have always been strong in this regard, dating back to the early days of the AS/400. Strong vertical markets still exist in the IBM i installed base. Several Avnet veteran executives refer to this refocusing on specific industries as the “back to the future” plan. Avnet has chosen five vertical industries where it has particular interest and is working to build specific competencies: banking, retail, healthcare, government, and energy. All have a strong growth potential. Avnet’s message to its business partners is to pick and choose what you are going to be good at doing and Avnet will help you with the expertise.

One of the ways it will help is by providing education.

Avnet expects to make huge strides in the area of education and training and will be taking over a great deal of this responsibility from IBM. In July, IBM announced that Avnet was selected as one of four global training providers, which means additional training programs to build competency and knowledge around the IBM portfolio will be added through Avnet. More than 2,500 IBM training courses designed for IBM employees, reseller partners, and customers are included in this global training program.

The Avnet Compass conference is solely about the business partner relationship between IBM, Avnet, and Avnet’s downstream business partners. Executives from Big Blue that were key speakers included Steve Mills, senior VP of IBM Software and Systems; Jeff Howard, vice president for PureFlex marketing; and Mark Hennessy, vice president of IBM Global Business Partners.

IBM represents roughly 37 percent of Avnet revenue, according to Phil Gallagher, Avent’s global president for technology solutions. That amounts to more than $3.5 billion and puts IBM at the top of Avnet’s partner list.