Column/The Way Things Work
- By Scott Bekker
- May 15, 2001
Has anyone ever wondered how goods and services in the IT industry make their way from manufacturers to end user customers? The theoretical sales channels in the IT industry are logical and hierarchical, with well-established rules. The de facto sales channels are extraordinarily messy and the official rules often don’t apply.
Smart consumers should understand how all this works because some incredible discounts are out there for anyone willing to put in the research time.
It starts with the manufacturers. These are companies like Cisco, Compaq, Dell, Gateway, HP, IBM, Microsoft, Sun, and others that build finished end-user products. Most manufacturers long ago realized it costs a fortune to carry a direct sales force to call on all end-user customers.
So they have a few direct sales reps that call on very large customers and they use distributors such as Avnet, Ingram Micro, Pioneer, Tech Data, Wiley and others for the rest. These distributors claim to only sell to “Solution Provider” companies, who are supposed to wrap some kind of total solution around manufacturer’s products and deliver to end users. Dell and Gateway are exceptions because they figured out how to efficiently sell directly to end users via the phone and the Internet.
Here is how things really work. First, just like manufacturers, some distributors quietly sell directly to end users, sometimes competing with the very solution providers who represent them. And when hardware manufacturers have excess inventory, they frequently dispose of it with special brokers at fire-sale prices, who in turn resell it at very steep discounts to anyone willing to buy. Many times, these brokers or their agents can sell product to end users for less money than solution providers can buy through formal channels for resale.
Cisco routers and switches represent a great example of this issue today. I talked to people from many of the large organizations over the last several months that say they won’t even consider buying Cisco hardware for anything less than 36 percent off list price.
Smart solution providers know about these informal broker channels and often forge behind-the-scenes relationships with them. So in competitive situations, instead of buying product through officially sanctioned channels, they might buy from a broker for ultimate resale to end users. Manufacturers don’t like it, and solution providers risk their relationship when they do this, but many do it anyway to survive.
Sometimes manufacturers intentionally cut out their solution providers. A friend of mine, let’s call him Dave, is a reseller for a well-known software manufacturer. Dave and his company found a customer who needed a large-scale solution based on this manufacturer’s product set. Many manufacturers, including this one, don’t allow solution providers or resellers to sell their large-scale products without special authorization, so Dave contacted them.
Next thing Dave knew, the manufacturer was selling product directly to this customer, leaving Dave and his company out in the cold. Dave complained and the complaint got lost in the manufacturer’s bureaucracy. Eventually, somebody from the manufacturer called and said Dave’s complaint came in too late for the manufacturer to fix the problem. Instead, they offered Dave two tickets to a Minnesota Timberwolves game. I wonder if Dave’s company will bring any more deals to these guys?
To be fair, solution providers do their share of shenanigans as well. I know of several stories where a manufacturer brought in a solution provider, only to have that solution provider ultimately recommend another manufacturer to the customer.
And, of course, how many customers have exploited the goodwill of naive solution providers by asking them to spend significant presales time putting together detailed quotes and proposals, only to send those proposals out to the lowest bidder?
What does all this mean for the various players? For end-user customers, don’t assume that sales channels are orderly. Solution provider companies might bring in products from a variety of sales channels, depending on who has the best price. This isn’t necessarily bad. However, beware that some solution providers might bring in certain products because they happen to generate more profit, not because they do the best job.
Respect the integrity of good solution providers. If you ask a company to invest presales time planning and putting together configurations, don’t send that company’s hard work out to the lowest bidder. This is unethical and downright wrong.
For people who want to become solution providers, beware. The market is cruel, often unforgiving, and most of the players want you to fail.
Manufacturers and distributors also have tough choices. Should these guys sit on millions of dollars of excess inventory or should they get rid of it while they can at fire sale prices? Either option has tough consequences. However, I have absolutely no sympathy for manufacturers who complain when people buy their product at steep discounts from brokers. If they don’t want their product discounted, they shouldn’t dump them on the market. -- Greg Scott, Microsoft Certified Systems Engineer, is chief technology officer of Infrasupport Etc. Inc. (Eagan, Minn.). Contact him at email@example.com.
Scott Bekker is editor in chief of Redmond Channel Partner magazine.