Distributors Really Bad?
There seems to be a growing sentiment that the independent Orthopedic Distributor is one of the biggest problems that Ortho Companies face today. “They are disloyal.” “They are dishonest.” Often having back door deals and shell companies that they secretly sell competitive products through. The list of complaints that I hear from orthopedic executives goes on and on. I get to see the full spectrum of distributors, some good and some not so good, yet they are all too often painted with the same broad brush of disdain. I’ve wondered if anyone has really thought through why our industry has arrived at this common and unfavorable view of those who are the “life-blood” of orthopedics.
There’s all kinds
First off, let me state that I have worked for three orthopedic distributors during my ten year selling career for Zimmer. One of them was derelict in his duties and within 18 months after my joining his firm, he left the business. Another was an honest but committed “penny pincher” who loved the power of the almighty “debit” so much that it was legendary. And one Distributor was a benevolent man with great character, the likes of whom this great industry was built upon. Ironically, it was the benevolent distributor who was terminated by Zimmer after more than 30 years of building a formidable business presence in a major city. I also spent three years running a direct Branch for Stryker which further informs my opinion. I’ve spent the past 15 years as an Orthopedic Industry Search Consultant and listened to countless Corporate people lament their intense frustrations and often disdain for having to work with the dreaded Independent Orthopedic Distributor. I’m fascinated by the common view by so many that the Ortho Distributor is nothing more than a “Necessary Evil” when it comes to building their businesses. It is as if, to them, these Distributors have independently run amock on the industry and tainted it by their unscrupulous and self-serving behavior.
The Plight of the Ortho Executive
Here is a typical plight from the perspective of the orthopedic company Sales Executive: “We have given these distributors an incredible opportunity to be financially enriched by representing OUR amazing products in their local market. We have given them exclusivity for the product within their territory and all we ask is for them to put everything they have into selling it and driving sales growth and market share. Yet, when one of our Regional Managers comes to their local markets, they find them focusing on other companies’ products rather than ours. What is worse, they often discover the Distributor selling other companies’ products to OUR CUSTOMERS that are in direct competition to what we have given them to sell. Some Regional Managers have discovered that their exclusive Distributor had another side company under a spouse’s or child’s name that they used to circumvent the non-compete agreement that they signed.” That Distributor is seen as untrustworthy and is sometimes fired on the spot and most definitely “thought bad thoughts of.” (Flight of the Conchords reference) This is always an unwelcome discovery and it begs the question, “Why?”
The Rest of the Story…
Why do companies seem to have to fight for the Distributor’s selling time? And why are the Distributors so untrustworthy? Why would a Distributor jeapordize their existing base of business by “moonlighting” with competitive products?
We don’t have to look far for the answers to these questions. One core reason can be understood by an event that happened a few months ago. The market watched Wright Medical acquire Solana Surgical and Orthopro, two foot & ankle companies. The fine people in the field who distributed for BioPro and Solana Surgical did a very good job of driving enterprise value for these companies. So good in fact that they were “taken out” by Wright Medical. Where does that leave those distributors? If they didn’t have a diverse product portfolio, they are in a world of hurt. In either event, they need to scramble to find a new company to represent to continue to provide their customers safe and innovative products. In fact, the better that a distributor does with a product line, the more likely it is that the company is sold which forces them to have to start the process of finding a new product line all over again.
With this threat a very real and present danger to the distributor, is it reasonable for company executives to accuse the Distributors of being dishonest and self-serving? If the shoe was on the other foot, would they do it any differently? It is truly a matter of survival and anything a Distributor can do to hedge against the risks that their business will suddenly go away, they should do. There is another unspoken risk that exists for Distributors and that is one of the company simply moving on to a bigger, more established Distributor who they believe will do a better job of driving growth. If this should happen, the company typically has the option to exercise its 30 day notice period and the Distributor loses the product line and all the sales pipeline they’ve developed. They are then in a race to replace their lost revenue.
Rules of Engagement
Even though some companies offer their distributors a “Change of Control” clause in the agreement that enables the distributor to participate in the upside if and when there is an exit. These deals range from stock options to extending commissions from as little as zero to a year or more after the close to the acquiring entity. When done right, this can ease the pain and burden but it doesn’t fully remove the risk. So as long as you have companies buying other companies and companies upgrading distributors you can expect that these independent Distributors will do what ever is necessary to survive. They are the life blood of our industry and the vehicle most small to midsize companies use to gain entrance and scale in the market.
A New Way to be Human?
As long as manufacturers see Distributors as the enemy, they will be at odds with them and fail to build the level of trust that brings about a healthy long-term relationship. When companies exhibit little to no transparency with the field, it compounds the skepticism and the need to hedge against all the obvious risks. When there is a true partnership, and trust is high, sales will thrive. This is still a business based upon solid trusting relationships although much is changing. These relationships will only become more important. If either party feels like they are being taken advantage of, the relationship breaks down. Let’s get over the blame game and get back to good business which is built on the Golden Rule. “Do to others as you would have them do to you.” (I yield the soap-box)
– Drue De Angelis
Originally Published 05/14/2014