Customized Business Models Empower Distributors
Economic and philosophical challenges are giving rise to X-treme distributorships.
As Custom business solution aficionados, distributors are naturally going to devise unique strategies for growing their own companies. A few clearly dominant models have emerged. Among today's most influential organizations are the following:
• American Solutions for Business, Glenwood, Minn.—Larry Zavadil, president
• International Business Solutions Alliance (IBSA), Bowling Green, Ky.—Paul Keith, president, CEO
• Proforma, Cleveland—Greg Muzzillo, founder, co-CEO
Major Factors/Common Denominators
With sales revenues in the hundreds of millions of dollars, these organizations are unquestionably major companies. Each company's management team includes individuals who have prior experience working for the major directs.
With regard to daily operations and target markets, they exhibit some features more often associated with the majors than with traditional independent distributorships. For example, Greg Muzzillo pointed out that Proforma enjoys a $2 million marketing budget, while most distributors struggle just to find a little time and money to say that they even engage in marketing activities. Both American Solutions for Business and Proforma provide centralized support of accounts payable, accounts receivable, reporting functions and technology tools. And, by now, anyone with a pulse knows that IBSA and American Solutions for Business signed multi-million-dollar supplier agreements with the group purchasing organization Novation, muscling in on national account territory—once the exclusive domain of the major directs.
However, all three gentlemen stressed that there are many differences between the majors and what their particular distributor models offer independent resellers. For starters, there is the absence of manufacturing capabilities. "Our sales staff isn't forced to 'feed the monster' by selling what we produce," said Larry Zavadil. "They are doing what they like to be doing—not what they are being told to do."
Said Muzzillo, "The major directs are preoccupied with filling up presses and returns on investments for the bricks and mortar. But, Proforma franchise owners are not saddled with the expenses and responsibilities that owning and maintaining equipment entails and can function as flexible, nimble businesses."
Paul Keith agreed, and added that not owning any large manufacturing plants allows IBSA to adjust products as new technologies emerge, whereas the majors' long-term plans are put into place well in advance. He offered RFID (radio frequency identification) technology as an example. "There are deadlines now to implement bar code technology in hospital wristbands that is quickly becoming obsolete because of emerging RFID technology. Which way do you go? If you're guessing, you had better guess correctly," he said.
In addition, the contributors cited differences in philosophy, ownership and sales associate compensation with the majors—as well as with each other. Here, the executive leaders offer some insights into their business plans and future goals.
Brand Recognition
With 650 franchise locations throughout North America, Proforma believes wholeheartedly in the independent distributor model, Greg Muzzillo explained—but, one that is empowered with all of the strength of joining together under a common brand name and common operating systems. "We do significant work, such as mailing campaigns, to create a brand for our franchise owners and their businesses," he said. "There is no upfront investment involved in being awarded a franchise, and 65 percent of those who join Proforma are referrals from current franchise owners."
Muzzillo stressed that franchise owners—who simply add Proforma to their company's original names—pursue their own businesses their own way. Sometimes, franchise owners come together to share space, support staff and warehousing as a way to control expenses. And, while some owners are comfortable courting small and middle market accounts, others are more at home dealing with Fortune 500 companies.
Proforma invests heavily in sales training—including Webinar equipment—and business development functions, such as helping franchise owners identify and pursue merger and acquisition opportunities in their local markets. "Lots of people are graying and looking to sell," observed Muzzillo. "We also offer free credit insurance paid for by the suppliers."
He went on to say that the Proforma corporate entity gets a small scaling percentage of franchise owners' sales that is anywhere from 6 percent to 8 percent, with an additional 1⁄2 percent to 1 percent for the sales and marketing fund. "For us, it's not about surviving, but thriving," Muzzillo said. "Proforma franchise owners still have goals and dreams, and continue to want to build something for themselves. We help them do so with tools and resources they never would have thought were possible."
Most importantly, Proforma helps the franchise owner create an exit strategy by building a business that he or she can sell when the time comes. "Far more value exists when the distributor is part of an organization such as Proforma," said Muzzillo. The value of the customer list will transition to the new owner, and there is a wealth of value that comes from the technology tools and other resources that Proforma can provide. "We are knocking on the door of $300 million in sales right now," he added. "I look to Proforma to be the emerging model that truly becomes the first billion-dollar player in our industry."
The American Way
Its Employee Stock Ownership Program (ESOP) is the feature that most clearly defines American Solutions for Business and sets it apart from other distributor models. Today, salespeople are free to join American either as independent contractors or as ESOP employees. Sometimes, perhaps in a situation where a husband and wife are co-owners, a blending of the two options is the way to go. "We offer advice as to what would be the best approach for their volume and their situation," explained Larry Zavadil. "In the ESOP, no credit is given for any income that exceeds $170,000. This way, highly compensated people don't hog all of the stock."
Like Proforma, there are no upfront fees involved with membership, and the model seeks to provide solutions to distributor obstacles, including cash flow, technology, warehousing, competitive pricing and training.
There are currently more than 500 sales associates on the American team. "Our strength is each of the individual salespeople and the summation of their experiences," observed Zavadil. "We encourage our people to look at what others in the organization are doing, find those who are similar in their business approach, and then feed off of each other." When targeting large accounts, they often work in teams with each member contributing expertise in particular areas.
"Typically, the majors pay their sales force a 3 percent to 4 percent sales commission—or $30,000 to $40,000—on a million-dollar base of business. As part of American, they would receive $150,000 to $210,000 based on the product mix and gross profit," said Zavadil. "As a result of this philosophy, we do not require sales associates to sign non-compete agreements or franchise agreements." And, while American doesn't have assigned territories, it does protect a sales associate's relationship with existing customers.
This will be particularly important to some employees as the Novation orders get underway, since some had already established relationships with Novation members prior to the endorsement. "More than 80 percent of the customers are in rural locations and were not being called on by the majors, who didn't care about the small facilities that are 100 beds or fewer," Zavadil noted. "But, these customers are a good fit for our model."
Zavadil believes that as the majors continue to struggle, opportunities for strong, well-supported distributors to flourish will increase. "The key is to remain focused on the needs of the customers and be flexible and willing to do things that make good business sense," he advised.
To this end, packaging and promotional items are currently the two fastest-growing markets for American, and Zavadil sees the market leading his team in new directions, such as RFID technology. "Free enterprise will continue to create avenues for the distributor channel to provide these solutions for many years to come," he said.
By continuing to evolve, Zavadil believes that American can end up being the new major. "The majors will just shrink up and go away, and American will become the new model for our industry in terms of how to build marketing organizations," he concluded.
Independent, Not Alone
Paul Keith readily acknowledged that the IBSA model is greatly misunderstood by many outside of the organization. As to criticisms that the company is no more than an association not unlike the DMIA, he countered that IBSA is indeed a sales association, while the DMIA is a trade association. "The DMIA has never sold an account in its life," said Keith. "The DMIA is about teaching, education and trade shows—activities, by the way, that most distributorships offer to their sales staff. DMIA members also compete against one another; IBSA affiliates support a common goal."
That goal is to sell accounts that require a national footprint to implement their services. According to Keith, "These contracts will have a dramatically positive effect on our supply chain. They'll help IBSA to drive cost from the supply system while increasing our competitiveness and the profitability of affiliates, as well as suppliers."
Keith explained that IBSA looks for distributors who want to remain independent and who have no interest in selling, consolidating or buying a franchise, yet want to grow. Their common interest is servicing accounts they otherwise couldn't sell on their own.
Launched in 2002, IBSA is comprised of 58 suppliers and more than 115 affiliate companies with a combined annual purchasing volume of approximately $400 million. The reporting of that figure is another eyebrow-raising issue. "For years, the large distributorships voicing concerns had no reservations about re-
porting nationally their collected numbers," offered Keith. "But, now that we are dwarfing them in size, they have a problem with us doing it."
Except for national business, IBSA invoicing goes through individual affiliates. "We promote this as a benefit," said Keith. "An independent distributor sells it. An independent distributor bills it. To take away who they are and try to change that is to take away what they have built."
He went on to say that with national business, IBSA collects the money, takes its fees and sends the lion's share back to the distributors. "We keep only a small percentage," added Keith. In addition, affiliates are charged a $100 upfront fee to join IBSA. "Administrative fees based on affiliate purchases are a part of our business model and are used to further our collective and mutual interest," he said.
He explained that IBSA does make specific national account assignments. "We developed a decision award process methodology that rates and evaluates affiliates according to their personnel, expertise, warehouse space, company size and proximity to a national account. But, otherwise, they can sell as they wish," he said.
Keith pointed out that companies such as Novation are looking for efficiencies and are open to new ways of acquiring print services. "This contract is just the beginning of fulfilling IBSA's core mission to bring independent distributors together to service national accounts while operating as individual companies offering the good service and pricing that independent distributors are known for," he said.
Great Minds Think Alike
Despite their different approaches to business success, Muzzillo, Zavadil and Keith stressed that a wholesome work ethic and sound business practices are a necessary requirement for membership on their teams. "The single most important qualification is credit information," offered Muzzillo. "We want people with good business practices and sound fiscal discipline who will pay the suppliers."
At American, background checks for criminal histories and suspended licenses are also conducted, and IBSA's selection committee ensures overall quality, professionalism and financial stability.
While their respective members are free to source orders with vendors of their choice, all three gentlemen said that they depend on strong partnerships with preferred vendors to ensure the best in service, pricing and quality. "Our preferred suppliers offer 5 percent to 20 percent better buying than Proforma distributors were able to get on their own," Muzzillo noted.
Said Keith, "Although they have an option, buying from the IBSA supply chain is in our affiliates' best interest. However, all national accounts must be supplied by our approved suppliers."
Zavadil agreed that when it comes to successfully securing national contracts, the support of suppliers is a critical piece. "In general, our associates quickly realize the value of working with vendors who support the ESOP through our Partners for Progress program," he added.
And, despite the growing dominance of the super distributorships—and, in some respects, because of it—all three contributors agreed that there will always be a place for the smaller, traditional independent distributorships. "Through the success of the larger distributors, the credibility of the distributor channel continues to gain strength," said Zavadil. "Small distributors with a niche in local markets or who do not have a desire to pursue large or national accounts will be able to satisfy the needs of their customers for years to come." However, he noted that independent distributors will continue to look for exit strategies or succession plans for their businesses, and that partnering with larger distributorships is one valid way to achieve this goal while meeting the increasing demands for technology-based solutions.
According to Muzzillo, many distributors are quite happy where they are. But, in the long run, he emphasized, the industry isn't attracting new blood. "At least, not at the pace we were at when I came into the industry in 1978," he continued. "As I said earlier, a lot of people are graying, and their children are not following them into the industry. But, the young people who do come in want the Proforma-type opportunity."
Given the rapidly changing industry, Keith said that small distributors are well-suited to quickly leap to the winning side, while large distributorships that are heavily leveraged need to make the right moves at the right time, or their futures are at risk. "Make the wrong move, and you lose your company," he cautioned. "Recent history detailing Precept's demise is proof enough."
At the end of the day, the core mission at the heart of each of these three distributorships is to preserve the place of the independent distributor in the supply channel of the future.
By Maggie DeWitt