Changing Nature of Specialized Services Providers

The role that specialized members play in channel operations has been undergoing significant change over the past decade. The traditional notion of a support member providing a passive service designed to facilitate operations of primary channel members has gradually given way to an image of a more dynamic participation in channel affairs. To better understand the changing role of specialized channel members, four aspects of their participation are examined: (1) economic justification, (2) risk involvement, (3) concentration and alliances, and (4) potential leadership. The section concludes with a classification of specialized channel members in terms of their involvement as providers of functional or support.

Economic Justification:

The Historic justification for including specialized businesses as channel members is economically based. Widespread realization that specialists can often perform a specific activity for primary channel members at a lower cost as a result of specialization and division of labor is a long standing economic principle. Based on a combination of experience, focused performance, business relationships, and economy of scale, the specialized organization can often provide a service more efficiently and/or effectively than can a primary channel member internally. While economic foundations remain the bedrock of the specialist organization at least three additional trends have encouraged the more active involvement of specialized businesses in overall channel affairs.

First, changing managerial attitudes and philosophies of primary channel members has made them more willing to outsource the performance of essential services. Or a considerable period of time the option of vertical integration of operations was widely accepted among primary channel members. Vertical integration of channel functions by virtue of ownership was appealing both for economic and control reasons. A belief that absorption of functions could reduce channel cost and increase direct control led to the establishment of internally owned and managed services such as warehouses, transportation research, and advertising. During the 1980s the attitude of “do it yourself” came under serious challenge. Perhaps the most persuasive force encouraging the return to favor of the specialist organizations was a growing awareness that primary channel members needed to refocus their managerial talents and resources on the core requirements of their basic business. The business of retailing, for example, is to operate well managed stores that appeal to the consuming public. Managers began to fully understand that the potential gains in operating efficiency that resulted from such operations as warehousing and transportation were significant in comparison to the potential dilution in primary business focus that could result from preoccupation with such operations. The overall appeal of getting back to the basics of the primary business reestablished a positive attitude concerning using outside specialists.

A second force that justifies increased use of specialists is resources driven. Whereas the variable expense of performing a specific function may not be significantly different among internal performers or external service specialists, the resources required to support the service are often significantly different. The use of a specialized service firm means that a primary channel member need not devote scarce human a financial resources to performing the services. Widespread problems related to maintaining a work force to perform front line service tasks such as warehouse order selection and truck driving make the use of a specialized service firm appealing. Likewise, the ability to, leverage the financial assets of a service firm has great appeal. The cost of a single heavy duty over the road truck and trailer can easily exceed $100,000. If a primary channel member can avoid the purchase or not use credit lines to lease such equipment, financial resources can be employed in the basic business. The use of specialized service suppliers amounts to off balance sheet leveraging.

In summary, the basic justification for using a specialist organization is economic. The recent increased utilization of high performance service organizations has resulted from three trends: (1) a shift in managerial attitudes in which attention is now focused on core business requirements, (2) the opportunity of primary channel members to leverage the human ad financial resources of services suppliers, and (3) increased confidence concerning the primary cannel members’ internal ability to coordinate the performance of service suppliers in the channel value added process.