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Partner Study: Going Against the Gray

Attention, partners, researchers have an urgent message for you: Your industry loses billions every year to gray-market activity, and they're encouraging you to fight back.

In 2007 alone, gray products represented a $58 billion market, according to the study, which was conducted by consulting firm KPMG LLP and the Alliance for Gray Market and Counterfeit Abatement (AGMA), a nonprofit IT industry coalition. That figure translates to somewhere between 5 percent and 30 percent of all IT sales, the study indicates.

The study defines the gray market as "the unauthorized alternative channel where branded products have been intentionally diverted from authorized sales channels into the hands of unauthorized dealers, brokers, or the open market for gain." (The black market, in contrast, usually refers to illegal goods.)

As a result, customers who think they're buying new authentic products-often at an attractive price-may actually receive used, remarketed or even counterfeit goods, the study says. As a result, the product's true brand holders may "unwittingly suffer from price erosion, brand damage and the hidden costs of handling end-customer issues resulting from inadequate customer service, product handling and installation, lack of warranty cover or other potential discontent with gray-market resellers."

In their report, the researchers call on IT companies to adopt several best practices that they say will help halt the growth of the IT gray market. Among their recommendations:

  1. Review incentive programs for weaknesses that might be exploited; strengthen those areas as needed.
  2. Draft a comprehensive channel policy that outlines expectations for reporting and spells out penalties for noncompliance-and be prepared to follow through.
  3. Monitor the channel reporting; look into any unexplained sales spikes and other unusual activity among business partners.
  4. Develop robust methods for conducting due diligence on all new channel partners.
  5. Designate a point person to oversee channel integrity efforts both internally and with partners and to serve as a liaison to industry groups such as AGMA.

AGMA, a 7-year-old organization whose founding members include 3Com Corp., Cisco Systems Inc. and Hewlett-Packard Co., is offering the gray-market report free on its Web site. To download the 36-page white paper or a seven-page executive summary, visit www.agmaglobal.org.

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