Distributors morph into new roles

For most of their existence, telecom equipment distributors filled a dull but absolutely necessary role in the management of supplies between vendors and carriers. Serving as middlemen, companies such as Graybar Electric, Anixter and Sprint North Supply warehoused the workaday equipment that carriers knew they would need but couldn't afford to — or didn't want to — store at their own sites.

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Indeed, Graybar traces its history back to the post-Civil War era and claims lineage that includes Western Electric, the forbearer of virtually every existing vendor.

Like most industry sectors, competition that resulted from the 1996 Telecom Act changed everything and forced distributors to run lean and mean, but their basic function didn't change. “We used to consider ourselves the telecom supermarket,” said David Owens, vice president of marketing for Sprint North Supply.

The latest seismic shift — the bottom falling out of the telecom market — is forcing those companies to shift gears. In their latest iteration, distributors are relying more on providing services such as engineering, construction management and even business-case modeling. In many instances, it means taking over functions for carrier personnel that were caught in the wholesale axing of divisions.

For Graybar, it requires a thought-process change. The company generated $5 billion in revenue last year. And while executives of the privately held company won't break out how much of that was services revenue, they all say that portion of the business is growing quickly.

“Basically what it got down to was that it was less costly for us to do certain things,” said Bill Mansfield, director of the service provider market unit for Graybar.

Ironically, the services business of many distributors got its biggest boost in the halcyon days of 1999 and 2000 when carriers were moving into areas outside their expertise. “They were looking to outsource the deployment of the material involved in that,” Mansfield said.

With the implosion of the market and the resulting layoffs within the carrier market, those efforts have paid off doubly for distributors. Add in the across-the-board cuts at companies such as Alcatel, Lucent Technologies and Nortel Networks and distributors are being relied on even more. In many ways, the past year's carnage has changed the relationship dynamic between traditional equipment vendors and distributors.

“A year ago you had a bunch of gorillas in the vendor community that could bring product to the market by force,” said one distributor executive who wished to remain anonymous. “Now you've got more R&D-type companies that know how to build products but don't have the infrastructure to bring their products to market, and the 800-pound gorillas are mired in turmoil.”

Indeed, even companies that have traditionally provided outsourcing services to carriers are finding that vendors are a potentially rich source of new revenue. North Star Communications Group, for instance, recently signed a deal with Nortel under which North Star will provide engineering services. Previously, the company generated about 40% of its revenue from an outsourcing deal with BellSouth and counted on carriers to provide the bulk of its cash flow.

“We have had the good fortune of a lot of other profitable work coming at us as a result of the BellSouth deal,” said Tom Anderson, senior vice president of sales, marketing and business development for North Star's communications group. “The mainstay of our business is still engineering.”

But as the economy has soured, the company also is being called on to fill in the roles of divisions and groups that have been hit hard by layoffs. “We prefer to project manage anything we're involved in,” Anderson said. “We feel we have a real competency in that.”

In fact, project engineering always has been the domain of dozens of small firms where talented engineers could hone their specialties. However, as more carrier personnel are laid off, it's becoming a sector that distributors are eyeing. While not providing project engineering in the purest sense, Sprint North Supply is changing its business model to provide a lot more product assembly and engineering in its warehouse.

One of the company's more successful recent efforts has been a pre-constructed remote subscriber line carrier (SLC) cabinet that includes all electronics inside. The “SLC on a slab,” as Sprint North Supply is now informally calling it, is then delivered to the construction site where it is lowered onto a concrete slab that already has been poured.

“We'll connect everything in house so you don't have techs doing a lot of work in the field,” Owens said. “We want to not be a product house, but a product and service house. One reason we've spent so much time changing our infrastructure is because you can't compete on the pick, pack and ship model.”

The new model also comes with some additional costs in the form of new equipment and, in some cases, new warehouses. Graybar, which reported $5 billion in revenue in 2000, issued $100 million in bonds in July to fund a major logistics overhaul. The company is about two-thirds of the way through that expansion, which will be designed around 16 regional warehouses and when completed will let Graybar fill almost all customer orders within 24 hours.

“The biggest thing we're seeing demand for is service we traditionally do, but the customers now want us to do it a lot cheaper and a lot faster,” Mansfield said. “We've also gotten into financial modeling and process evaluation. Customers have studied their processes and realized there's a lot of carrying costs in storing your own stuff.”

Though clearly not immune to spending cuts by carriers, the net result has been a sector that has been hurt to a lesser extent over the past 12 months then the vast majority of the industry. Anixter, one of the few publicly traded distributors, reported second quarter sales of $839.8 million, an 8.8% decrease from the same period last year. At the same time, though, the company's shares have jumped about 30% since the beginning of the year.

“The constant message from all of us is there are a lot of costs you can push out by using a distributor,” Mansfield said.

 

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Company	Description	Amount	Lead investor(s)	Purpose
AirPrime	CDMA product development	$40 million	RBC Capital Partners	Company expansion; product development
Geotrust	Internet security firm	$11.1 million	St. Paul Venture Capital, CB Capital and Castile Ventures	Global expansion
Circadiant	Optical test company	$10 million	TL Ventures	Product development and sales; company expansion
ABitfone	Wireless data software	$6 million	Nokia Venture Partners	Overseas sales and infrastructure provider marketing; product development
Ai Metrix	OSS software provider	$23 million	General Atlantic Partners	General operations
BroadWare Technologies	Digital video management for broadband networks	$7.7 million	New Vista Capital	Market expansion
Compiled by Toby Weber return to top