Separating Church and State: Avnet's Steve Church splits off services business - Exclusive

Electronic News, Feb 4, 2002 by Heidi Elliott

PHOENIX -- Avnet Inc. this week will unveil Avnet Global Services (AGS), a company-within-a-company that will offer services to the electronics industry and beyond.

Headed by Steve Church, AGS will offer services in supply chain, technical assistance, logistics, IT outsourcing and professional services. The group is a stand-alone unit, separate from the company's Electronics Marketing, Applied Computing and Computer Marketing operating groups. In addition, the services AGS provides will not be linked to any of the products Avnet sells. In an exclusive interview, Church sat down with Electronic News last week to outline the company's pllans for stand-alone services.

Avnet Global Services consists of two existing Avnet offerings: the company's Point of Use Replenishment system (POURS), the Promiere line of services Avnet launched in October, and a host of new services, including consulting services, IT outsourcing and technical services such as preconfigured SAP software applications. The most critical point, Church told Electronic News, is that AGS as a business offers only services --there are no products connected to its offerings. "The operating groups sell products to sell services, and sell services to sell products. AGS is independent of products. Our model is that we don't own the assets," Church said.

The group also is going after a different customer base. While other Avnet businesses target the distribution total available market (DTAM) -- about 25 percent of the total electronics market -- AGS is going after the other 75 percent. That larger piece of the pie is the directsales market -- the tier-one customers that buy directly from manufacturers, large contract manufacturers that buy parts directly from component suppliers, and the suppliers themselves.

In the IT outsourcing category, Avnet will leverage its own expertise with the SAP Version 4.6 software platform and offer to teach other companies how to build their own supplychain platform. "Well, we figured [SAP] out," Church said with a chuckle. "Our years with SAP mean we can teach customers how to do that themselves."

Another AGS offering will be the option for customers to have their own supply-chain operations run on Avnet's SAP system. Avnet also will offer preconfigured SAP modules, including one for product forecasting and usage. Church estimated that using a preconfigured module could cut a customer's time-to-market period in half.

Professional services include consulting. For example, Avnet could work with a customer in putting its request for proposals into the correct language for bidding.

Avnet is working with two outside groups to make the transition to a service organization modeled somewhat along the lines of IBM Global Services. Those groups are the Insight Group, a Virginia Beach, Va.-based management consulting company specializing in the development and implementation of services, business strategies and plans, and Arizona State University's Center for Services Leadership. Both have assisted Avnet in the AGS spin-out process. "Avnet has an excellent opportunity to bring its expertise, in a customized way, to each individual client," said Tom Esposito, CEO of the Insight Group.

AGS currently employs 80 people. It has sales of less than $100 million, which includes some product sales. Church expects to have pure service revenue within six to 12 months. He also expects revenue figures to double every year for the next five years--a feat accomplished by the Integrated Material Services (IMS) business unit. AGS eventually could become the company's fourth operating group.

AGS already has received its first order from a company outside the electronics industry, plus orders from Singapore and Australia. As it grows, the services group will hire employees from the services industry as opposed to the electronics or distribution communities.

Avnet rival Arrow Electronics Inc. ushered in the fee-for-service trend with its own subscription-based service offerings, Arrow Digital Solutions, in May 2001. It and Avnet's Promiere business unit offer services that look to improve the efficiency of the supply chain. Since then, the rest of the distribution industry and industry analysts are watching Arrow and Avnet to see how well they succeed in actually getting paid for services. Traditionally distributors have offered value-added services as a way to get component orders, and the customer base has grown accustomed to getting those services for free. Going after new customers with existing services--and offering new services to existing customers -- should speed up acceptance of these fee-for-service offerings.

In the past year, Arrow and Avnet executives have stressed that distributors must get paid for services they provide because those services cost them money. Separating out, or unbundling, the services business is the key point in making that distinction. But the industry is still waiting to see if these plans gain market acceptance or if distributors cave in to customers' demands for free service. "It comes down to conviction. You have to be willing to stand up to the customer and say 'This really is something we should be charging for.' My whole business is being paid for services. I have no product to fall back on," Church said. "There is no bundling opportunity in my model. I provide customers with a service, and I should get paid for that."