VCE is holding its second annual partner confab in Dallas this week -- an intimate gathering of top-ranked VCE solution providers from across North America who will discuss VCE's ongoing channel expansion and priorities for the new year. CRN is pleased to highlight this story that dives deep into VCE and its parent companies and which originally ran as an exclusive on the CRN Tech News App.

VCE employees were restless. It was the fall of 2011, and questions were being raised about the long-term viability of the much-hyped, much-criticized Cisco-EMC-VMware union. The company's human resources team had abruptly announced out-of-season employee evaluations, and there was rampant speculation that layoffs at the company were imminent.

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To quell employees' fears, VCE President Frank Hauck and Executive Vice President Todd Pavone -- neither much known for cheerleading in their management styles -- decided that an upbeat, rallying cry was exactly what was needed.

As VCE insiders describe it, there were Hauck and Pavone -- both well-regarded EMC veterans -- front and center, meeting with teams of VCE employees based in Silicon Valley, in Texas, and in Massachusetts, partly to reassure VCE-ers that the company was in good shape. It went as well as it could have, insiders said: Hauck talked largely about how VCE's numbers and growth were on track, and Pavone went on about how VCE was primed to go on a sales tear.

But those claims of a bright future for VCE were falling on deaf ears.

At around the same time, Cisco executives polled partners at its semi-regular Cisco Partner Executive Exchange (CPEE) meetings to gauge their levels of success and engagement with VCE. According to sources familiar with the feedback, some two-thirds of CPEE attendees -- an exclusive group that represents elite Cisco solution providers, telecoms and distributors from all over North America -- responded that if given the choice, they'd fold VCE and that they favor the model many partners refer to as simply "V plus C plus E." In other words, they'd rather design and custom-tailor the integration of products themselves.

"VCE doesn't matter, and I wouldn't expect it to be around in a few years," said the CEO of one of VCE's top channel partners, who was polled at the Cisco event. "The value to customers is in the VAR's ability to aggregate these products and services and make it work. The customers do want one throat to choke, but they want to be able to tell us, 'Here is what I want, and can you do everything?' They don't want to work with multiple companies or coalitions of companies or be locked into this or that product. It's that simple."

Based on dozens of interviews conducted by CRN over the past nine months with various stakeholders and observers of the company, it's clear that VCE faces huge challenges in its quest to remain a stand-alone venture. Not least among them: Many of the channel partners it counts on wouldn't bat an eye at its collapse; the number of potential customers best served by VCE seems decidedly finite; the sales reps from its respective parent companies find themselves at odds a lot more often than they're cooperating; and their own parent companies are caught up in selling competitive offerings, including EMC's VSPEX and Cisco's far more flexible and less arcane partnership with EMC rival NetApp known as FlexPod.

"I acknowledge that we will need to listen carefully to our partners, and I'm 100 percent committed -- the partner strategy, for me, is top priority," Praveen Akkiraju, CEO of VCE, told CRN. "We are aligning very closely at the senior management level and making decisions to ensure we get past these challenges."

Several former executives that have left VCE question whether the VCE experiment ultimately will be folded back into the respective companies. "That's the $64,000 question," said one former VCE executive, who did not want to be identified. The crux of the matter, he said: "What percentage of sales from VCE are incremental?"

In other words, exactly how many more customers, opportunities and returns are available to VCE and its partners that they wouldn't be able to find otherwise?

It's a question that Cisco and EMC top executives are focused on, according to current and former VCE employees. The problem is there is simply no way of knowing how much of the roughly $1 billion in run rate sales that VCE is getting would disappear or continue to go to a V plus C plus E reference architecture solution if VCE disappeared, said the former VCE executive.

NEXT: The NetApp Conundrum

The feedback Cisco received from its top partners was hardly a shock to its senior sales management executives. They had been dealing with rancor from Cisco sales reps for some time regarding the lengthy and complex sales cycle necessary to sell, build and finally deliver the preintegrated Vblock cloud environments. The way Cisco's hyper-aggressive sales force saw it, the complexity to put together a VCE Vblock deal from start to finish was costing them big money.

To compensate, Cisco reps were pushing deals to the NetApp-centric FlexPod model, or urging partners to go the V plus C plus E route so they could make their Cisco quotas and not deal with the VCE administrative headaches. By Cisco's own count, FlexPod had accounted for some 850 engagements vs. 450 engagements for VCE, according to a Cisco presentation delivered at the Cisco Partner Summit this past April. And that was with VCE given an 18-month head start on FlexPod.

According to NetApp, FlexPod had 1,300 customers as of Oct. 1, up from 175 last year. VCE declined to provide data on its customer count.

VCE channel partners, too, see the benefits of the FlexPod approach, particularly in different vertical markets.

Sudhir Verma, vice president of consulting services at Force 3, a Crofton, Md.-based solution provider, said Vblocks have not caught on with the federal government, which represents the vast majority of Force 3's customer base. That's problematic for VCE given its focus on markets where data center consolidation is a high priority.

"I know VCE will hate me for saying this, but it's been a challenge," Verma said. "I love the idea of Vblock -- it's forward thinking -- I'm just not sure the execution is right. Shouldn't it be more of a partner play, with more flexibility and more architecture to pick from? The federal marketplace is different. People buy storage when they need it. They buy servers when a new application is needed, so server buys are frequent and storage buys are not that frequent. We have to deal with that."

To serve its customers' need for flexibility, Force 3 recently made a seminal move: It signed NetApp as a storage partner, where up until this year it had sold EMC exclusively. Verma emphasized that it's important to separate the concept of the Vblock -- a good one, he said -- with what VCE the company is trying to do. '

"We've been Vblock resellers since late 2009 -- we've been at this for a while, and I don't think the federal market is where they're working. They've got wins, don't get me wrong -- they've got service providers in the cloud market -- but in the traditional selling model in the federal market, going agency by agency, there are more sales as V plus C plus E, maybe individual sales as a single P.O.," Verma said. "As a single sale to agencies, though, the whole solution, customers are not opting for that. They want it more flexible. It's 'I want the features I want today. I don't need the Cadillac. It's nice that you have it. I don't need it, and I don't know if I will.' "

NEXT: The Numbers Game

What's clear is that VCE, which launched in 2009 and entered its present form in 2011, has had some success. As of the fall of 2012, the company claimed it is approaching a $1 billion run rate, and is not only closing high-profile deals -- and seeing more than 40 percent repeat customer business, according to Pavone -- but also has expanded its base of global channel partners to nearly 150.

A run rate approaching $1 billion fewer than three years into such an ambitious experiment is one of several metrics the company's true believers use to silence both its internal and external naysayers. But it's difficult to paint VCE's current financial picture with any certainty because the company has made little actual revenue data available, and what numbers are available make VCE appear to be something of a money pit.

As stated in EMC's own filings, "Our portion of VCE's gains and losses is recognized in other expense, net, in the Consolidated Income Statements." Based on the various EMC and Cisco Securities and Exchange Commission filings, EMC in fiscal 2011 invested $383.2 million in VCE -- compared with $29.6 million in 2010 and $19.2 million in 2009 -- and recognized $133.9 million in VCE revenue for the year. Its cumulative loss in VCE as of the end of its 2011 fiscal year was $253.8 million, including $209.2 million in 2011.

As for Cisco, which has a 35 percent interest in the venture, it has a cumulative investment in VCE of $392 million as of July 28, near the end of its fiscal 2012. Its share of VCE's cumulative loss as of that date is $239 million.

"Over the next 12 months, as VCE scales its operations, we expect that we will make additional investments in VCE and may incur additional losses proportionate with our share ownership," Cisco said in its latest 10-K filing with the SEC in September.

Looking at the VCE numbers as "losses," its stakeholders say, is deceptive. With VCE set up as a joint venture, Cisco and EMC both recognize revenue from sold Vblocks on their respective P&Ls, even with those noted VCE expenses. In other words, while VCE appears to be operating at a loss, the revenue gained from Vblocks is bolstering individual lines on Cisco and EMC's corporate balance sheets anyway.

But that's not a terribly enlightening metric, either. "VCE's costs show below the operations expense lines at EMC, but its revenue is shown in the top line. So the details are buried," said Jayson Noland, senior analyst at financial services firm Robert W. Baird and Co. "We're only seeing half the financial picture of VCE. The parents have to show the costs, but they don't have to show the revenue."

"I have no idea how it works on cost," said Ehud Gelblum, managing director at Morgan Stanley. "But it goes down to what is the advantage of doing that vs. buying your storage from EMC, your networking from Cisco and your virtualization from VMWare, which most of these [customers] are doing anyway. I imagine that VCE's value-add is the network design -- the extra software and the glue they put together. But it's hard to put a value on that. If you're buying this, you should be looking at VCE and then look at what [your] straight costs [are] from Cisco, from EMC, from VMware. And the VCE person selling this is very much aware he has a counterpart at Cisco, or at EMC, selling against him."

NEXT: V Plus C Plus E

VCE is a galaxy of questions. Channel partners want to know -- even channel partners that have had success knocking down $1 million-plus Vblock deals with VCE behind them -- whether all the time and energy spent winning Vblock business is making them more money than if they sold and integrated the individual Cisco, EMC and VMware parts -- or other vendors' wares -- and then added custom integration, management and other services on to fully aggregate solutions. In other words, can they make more with Vblock than they can doing what they do best as channel partners: integrating, aggregating, building and attaching value-added services?

"There are more opportunities available where V plus C plus E is a better solution than Vblock or VCE. That's the truth," said the CEO of a major West Coast-based solution provider and VCE partner, who requested anonymity. "I agree that there's a very strong value proposition behind all of the component parts coming together as a stack. But you may have a customer with Dell servers, for example, who doesn't want to take them out. Vblock is an effective, sweep-the-floor type of solution. But there just aren't all that many instances where that applies."

Meanwhile, Wall Street wants to know -- in the midst of its usual concerns about how Cisco and EMC will remain appealing to investors as the lumbering tech giants they've become -- is simply how often VCE is getting Cisco, VMware and EMC into opportunities those companies wouldn't otherwise have.

It's understood that EMC and Cisco make money regardless of how their wares are sold. But if the frequency of Vblock deals eclipsing customer purchases of Cisco and EMC solutions as individual pieces -- the so-called cannibalization rate -- is at all significant, then why bother with the time, energy, corporate rigmarole, channel headaches and operating expense of VCE at all?

"We just don't have enough information to know if this makes sense," Baird's Noland said. "There seem to be scenarios where a VCE-like solution works. But traditional corporate environments need flexibility; they have lots of applications and a lot of problems to solve."

Morgan Stanley's Gelblum put it thus: "How many switches did Cisco sell that would have been sold anyway but are a transfer from a direct-from-Cisco vs. VCE? How much did they really add in incremental value? That's a harder thing to tell. But really, how many customers that Cisco wouldn't have otherwise gotten into? My guess is it's very low. I have a sneaking suspicion there are not a whole lot of incremental sales here."

"You have this VCE alliance they talk about so much, and yet, if you remember, Cisco was very quick to get their server technology with NetApp," said the top sales executive at an East Coast solution provider and longtime Cisco and EMC partner. "If you talk to the Cisco guys over a drink, they'll say, 'Yeah, look at VCE but you know what, it can be a NetApp or a Citrix Xen hypervisor; we really don't care.' And then you have EMC guys saying, 'Yeah, it doesn't matter if it's Lenovo or Dell servers.' They just want it working for the customer's wants."

These are the types of questions that have dogged VCE since its inception, and that the company, despite legitimate financial, channel and customer mind-share gains over a three-year period, still can't seem to answer.

"It's going to be very interesting to see where VCE really ends up," the East Coast solution provider said. "This VCE thing is an alliance that makes sense for EMC and Cisco, or did at one point, but this is vendor lock-in. Let's call it what it is. A lot of customers see that, and they really don't like the smell of it."

"VCE is a cumbersome channel and way to go to market," the aforementioned West Coast solution provider said. "It just all seems like a very expensive marketing play."

NEXT: Confronting VCE's Channel Challenges

VCE as of May 2012 has 153 Vblock partners, and 40 more that are in various stages of the qualification process, according to the company. Solution providers agree that VCE's engagement with channel partners has improved from a year ago, attributable to several moves VCE made in 2011 and then early 2012, not long after Acadia and the VCE Coalition became the currently structured VCE.

One was the introduction of VCE-specific deal registration, in which solution providers can register Vblock sales with VCE under one program rather than wrangle the various deal registration processes of each of the vendors involved. Another was VCE making available a global price list, and a third was the launch of training options and other forms of support, pre- and post-sales.

But another important move, less obvious, is what partners described as a much more concerted effort on the part of VCE's channel-facing executives to seek out partners and listen to both their concerns and solicit feedback on how to incentivize VARs to sell Vblocks vs. source the individual components through their various vendor partnerships.

"We know the things we didn't do well and, ultimately, it's about listening to our partners," said VCE's Pavone. Top VCE partners singled out D. Martin, vice president, global channels, and Andrew Lickly, senior marketing manager, global channel marketing communications, in particular, as channel advocates within VCE that have made themselves visible. Both of those executives met extensively with partners at the various Cisco, EMC and VMware partner conferences in the past year.

"Both [Martin and Lickly] are very responsive to email and direct calls," said Kent MacDonald, vice president of converged infrastructure at Long View Systems, a Calgary-based solution provider. "Their team support of the channel is truly appreciated, as is their help managing field engagement with the EMC sales teams." Martin and Lickly hosted about a dozen VCE partners at a small conference in Boston last fall, where many of VCE's top North America solution providers had a chance to offer the company's top managers their unfiltered feedback. Another such conference is scheduled for Dallas in November 2012.

Partners who attended the Boston meeting called those discussions productive.

"It was not, 'Oh my god, VCE is totally in trouble,' " said Long View's MacDonald. "It was a very focused group and a very frank conversation. I think VCE heard a lot and I think they listened."

"We've been a partner with VCE from its Acadia days. All along, I've said that VCE did a good job of listening to the channel. And it continues to make changes all along. It has changed its deal registration and discount programs for partners in a good way. We have no concerns at all," said Bob Olwig, vice president of business strategy and marketing at St. Louis-based World Wide Technology.

Rob Lloyd, Cisco's president, development and sales, told CRN in July 2011 that Cisco was well aware of the channel challenges with VCE and that Lloyd -- previously Cisco's executive vice president, worldwide operations, who was on the Cisco executive team that investigated how to stand up the VCE venture with EMC and VMware in the first place -- was personally involved in how to solve those challenges. A year later, in further interviews in April 2012 and September 2012, Lloyd said he was convinced VCE had straightened itself out and that Cisco was behind its ongoing VCE investment 100 percent.

"VCE is a huge success," Lloyd said. "We made a market and achieved all of the objectives we set out, and achieved them probably faster than we expected."

NEXT: What The Future Holds For VCE

Ultimately, the sale of converged data center infrastructure comes down to flexibility and what the customer wants, said the president of a top East Coast-based solution provider. Because Vblock opportunities can't really be "modularized" -- that is, easily reworked and customized based on changing customer conditions -- they don't appeal to the majority of customers who want to make changes throughout their infrastructure depending on the workloads they need to support.

VCE Vblocks can be tailored to customer specifications, sure. But because larger, enterprise-focused VCE partners also have relationships with the individual vendors' reps already, it's often easier to go the V plus C plus E route or customize a customer opportunity using other networking, storage or virtualization products and services.

"If you have an opportunity, those various reps have quotas -- they have to forecast that opportunity, and they want you to keep them in the loop," the executive said. "So it's easier for us to leverage these relationships we've already had for years, especially when VCE has had all that turnover. It's just easier to do business that way. VCE still has a lot of work to do to figure how they become more appealing."

"I don't know that VCE means a whole lot to us," added the CEO of a well-known West Coast solution provider and longtime Cisco partner. "We have had some success with it, and yes, these are $1 million deals that are nice to have. But at least as many opportunities we have become un-integrated solutions, and what we strive to do is enable what the customers want. We're able to have flexibility around the solutions and apply the technical aptitude."

Other partners describe VCE's future in practical terms. "VCE is in the middle of a couple of big parents, and between its parents and its partners. So customers actually deal with four entities: EMC, Cisco, VCE, and the VAR," said World Wide Technology's Olwig. "There are multiple sales managers and account managers. But on the flip side, it brings in more resources to customers from the vendors and World Wide."

"It started out rough, but it's gotten better and better," said Gary Alexander, CEO of Alexander Open Systems, an Overland Park, Kan.-based solution provider. "We had a heck of a time early on getting pricing and responsiveness from VCE. We had one deal I remember where we could have sold a Vblock and on the way down to the customer, VCE called us and said, 'We're not too sure about the pricing.' So we sold some Cisco, VMware and EMC separately and made more money. They had to get more sophisticated, and they have."

VCE has continued to attract new partners. Denali Advanced Integration, a Redmond, Wash.-based solution provider, started working with VCE in 2011 and positions Vblocks for high-end customers with growing demands for VMware services who are looking at implementing cloud infrastructures.

"We held back from VCE for a while to see demand. But by the second half of 2011, we saw we would really need to get in the game," said Jerry Pezzino, Denali managing director. "We were seeing customers look for purpose-built solutions, especially if customers work with those three vendors."

Pezzino sees the fact that Vblocks are shipped fully integrated as a benefit.

"We get to stand behind the fully integrated offering. We don't have to worry about what version the customer is on, or which upgrade."

FlexPod is more flexible. "If the customer swears by XenServer, I have to make the argument for VMware to sell a Vblock. That's a challenge. It's not a red flag, but a yellow one. But it just so happens the VMware is the most popular hypervisor by far. But as Microsoft Hyper-V and Citrix XenServer grow popular, it will be more of a battle."

Pezzino said he isn't worried about VCE's future. And if it folds?

"I look at their investment, and see [the vendors] are in it for the long term," Pezzino said. "They said they didn't expect to make money for five to six years. In a worst-case scenario, we already sell VMware, Cisco, and EMC products, and could always go back to selling the individual parts."