From the beginning Novell distributors and resellers didn't buy the Netware Center concept, and they had good reason to be fearful of it. Manufacturers, distributors and retailers in all lines of business must cooperate with each other, but each always sees opportunity in bypassing some of this cooperation -- engaging in this cooperation adds a substantial piece to the cost pie. The cooperation is only worthwhile if it makes the pie much bigger than it would otherwise be. Some manufacturers will "go direct" to retailers or customers. Some distributors will start manufacturing, some retailers will buy up or create a "captive distributor". In each case the organization doing the reaching out, is reaching out to capture a larger piece of what the end user pays for product. The risk of doing this is that other players in this cooperative arrangement to get product to the customer will see the "reacher" as a defector -- someone who is no longer cooperating -- and they will stop cooperating with the defector. This is the risk Novell was taking as it embraced the Netware Center program. Novell could not afford to be seen as a defector.
In the distributors and reseller eyes, every direct sale Novell made was a lost opportunity for them. There was grousing. Harry Armstrong hit the road to do some hand-holding. He had to show that this new concept was not defecting against the other sales channels. His remarks at one of these explanatory seminars were reported in the next issue of LAN Times:
We want to make it much easier to deal with Novell . . . So the idea of the NetWare Center is to put our product, our people, our technical knowledge in the field, and get closer to our dealers and distributors.
Originally we thought we'd have seven locations worldwide. I believe now there will be at least 10 and possibly more.
He dangled the systems integration services before resellers:
The NetWare Centers are going to be squarely in the middle of the systems business, and as such will require more specialists. . . . The systems engineer can be almost anything. He is generally a person that works with major end users, sits down, talks with them, finds out what their needs and requirements are, and configures the system for them. He is a consultant, he can be industry specific, he can be product specific.
Regional inventories and assembly will shorten order delivery times for resellers:
The NetWare Center operations people will be doing systems integration and testing -- almost -- what we call assembly. . . . Each NetWare Center's goal is to be able to ship products within 48 hours of receiving an order.
Resellers can bring customers to the centers for product demonstrations:
Each NetWare Center will have a product demonstration center where customers may observe our products, and receive operations demonstrations and educational classroom experience. Education is becoming a much larger portion of Novell sales as we grow.
Harry concluded by reassuring his audience that these centers were really in everyone's best interest:
The number one purpose of the NetWare Centers and ourselves is to provide excellent customer service.
In 1985 Novell's channel partners grudgingly accepted the Centers -- they had no choice -- and perfect happiness always eludes distributors and resellers in any industry.
According to the article, Harry also gave some idea of the major role the centers were expected to play in the future of Novell:
Armstrong expects the centers to be accounting for 50 percent of Novell sales by the year's end [1986]. (This would hardly have been reassuring to resellers!)
On the personnel side, Armstrong estimates that the number of NetWare Center employees located outside of the home base in Orem will equal the number at the corporate office.
By the end of the year, he projects that 80-90 percent of all products in the centers will be Novell products, with non-Novell products being such items as uninterrupted power supplies (UPS), terminals, software application programs and communication boards.
There will also be an authorized Novell product catalog, which will include all Novell products and the approved non-Novell products sold at the NetWare Centers. Non-Novell products listed in the catalog will be peripherals selected and provided to enhance Novell systems. It will be the first time non-Novell products are included in a Novell products listing. [LT Apr/May 86, pp. 48-49]
Not every member of Ray's management team was as enthusiastic about the NetWare Centers as Harry. Burton and Eliason both had misgivings, primarily because it seemed to get Novell deeper into low-margin hardware. The Netware Centers concept became part of the old hardware vs. software argument. As Burton recalled:
I didn't care if they sold hardware; I just wanted to get out of the mentality that was where our revenue was going to come from. I didn't care if they used hardware as a means to move software as long as it was understood that software was what we were after.
That is why I never tried to stop it. Not because it took a long time for it [the phase-out of hardware] to happen but that the mentality needed to change, which it did. We were motivating people to sell software, and that was really clear that was where our bread and butter was.
It was tiring having to fight the same battles over and over again -- having to remind the same people of what had been discussed and keeping them on track. For Burton, personally, it was also a bit disheartening to see Armstrong taking the lead in the centers.
Eliason was frustrated at the importance of the role the centers were cut out to play. He had been pleading with Ray to add more staff to key administrative areas such as accounting, information systems, and human resources. Ray was a brick wall. Now plans were being made to double the staff -- and all those new bodies would be in the field!
In May 1986, Ray took another step deeper into the NetWare Center quagmire. Novell acquired yet another distributor, Cache Data Products, based in St. Louis. Cache Data had 41 employees, three locations, and 1985 sales of about $6 million. The newly acquired company would change its name to the St. Louis NetWare Center.
But there was more to the story. Cache Data had been Novell's first distributor, and in the three years they did business together, Ray had been impressed with the company's president, Ken Kousky. Kousky had been a teaching fellow at the Wharton School and was a PhD candidate. When Ray talked about him in staff meetings, he called Kousky a genius. Kousky and his management team were integrated into Novell's management. This is an early example of Ray growing his management by acquisition
With Kousky on board, Ray restructured Novell quite dramatically. Corporate functions were divided between two separate operating divisions: Novell Utah, and a new, wholly-owned subsidiary company called NetWare Centers International, Inc. Kousky was named president of the NetWare Centers, and Harry Armstrong was made executive vice president and general manager of Novell Utah. (By this time, the number of NetWare Centers had expanded to 11 US locations and three international locations.)
Ray explained the changes:
The Novell Utah operating division assumes the responsibility for providing proprietary hardware and software products to all channels of distribution. Its sales focus will be on new products and new channels of distribution.
NetWare Centers will have the capability of supporting their customers with uniformity of training, field service, sales programs and inventory.
Then came the shocker: the thing that Novell resellers had feared from the first announcement happened:
The NetWare Centers will not be limited to the provision of proprietary products from Novell Utah. This gives the overall company continued emphasis on making price/performance selections of products and services to the LAN market that are not necessarily bound by Novell proprietary products.
Ray had moved beyond the original plan for the NetWare Centers. The centers would no longer be mere regional warehouses for Novell products; they would be full-fledged distributor operations. Just a few months earlier, Harry Armstrong had said that 80 to 90 percent of the centers' inventories would be Novell products. Now Ray had taken the concept a step further, and Novell would be competing directly against its distributor customers.
This new move was Kousky's idea. When Ray bought the first two distributors in November 1985, he acquired their inventories of non-Novell products. The Cache Data acquisition brought in additional non-Novell inventory stored in the company's three warehouses in Chicago, Minnesota, and St. Louis. As a result of the acquisitions, Novell had become a de facto distributor, and now Ray decided to make it official.
This is a good example of what happens when a new manager is brought in to an organization, and particularly when the manager is brought in through an acquisition He or she is brought in to the organization to make change. The most usual first change such a manager will attempt, is to try implementing his or her past success in the new organization. Ken Kousky had made a name for himself as a distributor, and Novell had the tools and business connections in place to become a distributor (Kousky's Cache Data and the two previously acquired distributors). Ken took these tools and ran with them, with Ray's blessing. Another example of this is when Ray's successor [name] brought Java ideas from his previous work at Sun, and had Novell implement them.
Implementing these old ideas in a new organization is always a challenge to the new manager. Sometimes the implementation is completely successful, but only sometimes.
Novell's selling partners grew increasingly uneasy at the evolution of Netware Centers. One example of this dissension was revealed at an August 86 meeting.
"Much of the concern and speculation regarding the NetWare Centers as relevant to our resellers has centered around the role the centers play in sales of Novell products. We believe we are proposing a program of appropriate levels of channel management and intend to maintain your business loyalty through providing sound economic value in the marketplace." Kousky, Aug 21, 86 in St. Louis -- Radisson Hotel. River boat ride, dinner
In his speech, Kousky gave a brief history of Novell's NetWare Centers. In 1985, he said, the first real roots of the NetWare Centers were put in place when Novell's field service offices began expanding their functional responsibilities.
"From the fall of 1985 through the spring of 1986, numerous variants of NetWare Centers were established in the marketplace. Some of these experiments were dictated by economic necessity. In New York, the loss of a distributor in a crucial market area forced Novell to respond instantly with sales and marketing resources capable of fulfilling the lost channel. In Memphis and Atlanta, a distributor was acquired, giving Novell broader product offerings and presence in the market.
There were many other efforts to soothe the unease of Netware Centers.
"Authorized distributors will deal directly with the regional NetWare Centers, thus receiving more personal attention. Authorized resellers may purchase products and receive support from authorized distributors or, by making a volume commitment, from the regional NetWare Center. "NCI's support of resellers will be based wholly on the reseller's volume and, therefore, specific need for strong support," explained NCI President Ken Kousky.
In addition, for any authorized reseller that begins to buy directly from a NetWare Center, Novell will pay his distributor a commission for having found and trained that reseller, Bills said.
As the computer industry grows, Noorda said, so will Novell. Challenges Novell will meet in the industry are lower hardware prices, copycat products from competitors and new technology. In order to combat these challenges, Novell will concentrate on marketing its software systems and customer services.
"The marketing of non-Novell software emphasizes the value added to a LAN installation. A LAN is only as useful as the increased productivity it can provide. The catalysts for LAN productivity are the software applications that directly support day-to-day activities." -- Ken Kousky at NetWorld 86 announcement that NCI will distribute Data Flex, a 4GL application development tool.
Another important anomaly of the integration of Cache Data and the creation of Netware Centers was that the St. Louis facility became a center for Novell's MIS operations.
Ron Eliason explains how that evolved:
Two of our distributors went bankrupt the same month. One was Jersey Micro in New Jersey, and the other was Carl Orellano's distributorship out of Memphis, Tenn., called Micro Source Technologies. So we lost a few hundred thousand on the Jersey Micro one, and we merged Carl's business into Novell, because Ray wanted Carl.
In May of 86 we acquired Cache Data Products in St. Louis. That was the Ken Kousky company. It was in August of that year that Ray transferred all of the shipping and marketing and accounting functions for sales out to St. Louis -- the MIS function, everything. Cache Data Products had been a business that was doing about $5 million a year. And in August of 86 when all this got dumped on them, we would have been doing about a $90 million annual rate. So naturally they came out with a list of about a hundred people they wanted to hire to deal with this. And over a period of months, Ray gave them everything they asked for. Which was very disturbing to me.
Craig Burton also had problems with this evolution:
First of all I didn't think it made a lot of sense to put all that out in St. Louis; secondly, I was just desperately needing people all along to handle the growing network in Provo. It was like pulling teeth to get anybody. I think we got John Strang hired in the fall of 86, but he didn't -- none of us -- we didn't have the accounting support or the MIS support that they ended up having in St. Louis. This was crazy. We're the headquarters, and he's sending all the resources out to St. Louis, to a company that was doing $5 million a year. It made no sense to me at all.