Exposed: Dangers of the Gray Market

American Data was presented an opportunity two years ago when Lockheed offered it the chance to participate in a U.S. Navy deal that required a small business to take on a portion of the contract. All American Data had to do was deliver 30 network switches, 38 Gigabit switches, 536 network adapters and 68 connector cables.

"There was nothing unique about the switches that would require any sort of value-add," Castro says. "It was simply a piece of off-the-shelf, standard hardware that Lockheed required. Sure, it was an expensive piece of equipment, but no special type of configuration [was required]. The lowest bid price was going to win."

While an authorized Cisco partner at the time, American Data was not large enough to buy direct from Cisco, which requires its smaller, low-volume partners to source through distribution. But the price quoted by Tech Data was too high and would've been similar to what all other small businesses would bid on the contract, undercutting American Data's competitive position. American Data solicited quotes from a variety of alternative sources, which is frowned upon by Cisco but is still a fairly common practice. In fact, Castro claims he was unaware of Cisco's policy against partner sourcing. (See "Rules Meant To Be Broken?")

"Some suppliers are hungrier than others and will sacrifice [some] margin to win business," Castro says. In this case, American Data's marching order from Lockheed's Southeast Material Acquisition Center was to source product from any of its established suppliers that could fulfill the requirement at the lowest price.

Enter Gulfcoast. The reseller is a subsidiary of Relational, which is a Cisco Premier Certified Partner and No. 105 on the VARBusiness 500. Just months before the American Data deal, Gulfcoast began marketing to other solution providers its ability to deliver lower-priced Cisco products through its parent company.

"We knew virtually nothing about Relational, except that they were the parent company of [Gulfcoast] and that they were an authorized--and large--Cisco partner," Castro says. "It actually seemed like a good move on their part to take advantage of their respective strengths. So we did what we always do, [bidding] it out to several suppliers, including Gulfcoast/Relational to give them a shot. This was a longtime supplier of ours; we had about a 10-year relationship with nary a problem."

Gulfcoast did not win the American Data contract, initially. The winning bid first went to Rice Integration of Anaheim, Calif. American Data backed out of that deal after Rice required a 50 percent prepayment of $250,000--more than American Data could afford. Gulfcoast then matched the price, guaranteed terms of Net 30 Days and won the deal.

Gulfcoast, Relational and Lockheed declined to comment, but Castro maintains that he always believed Gulfcoast would deliver genuine Cisco products. He provided GovernmentVAR with copies of a November 2004 e-mail from Gulfcoast's account manager, Drew Warner, stating that Gulfcoast placed the American Data order directly with Cisco because distribution did not have the products in stock.

"Procuring direct was the only way to get the order moving," Warner wrote to Jamie Starnes, account manager at American Data. "According to Cisco, it will take a minimum of three weeks to fulfill the order, with an average ETA of four weeks. This was recently explained to us over the past few days from Cisco, and we confirmed this through Tech Data and Ingram."

Despite such statements, Gulfcoast's court filings against American Data tell a different story. "At all times, American Data was adamant with Gulfcoast that the Cisco equipment had to be procured from outside of Cisco's authorized distribution channels," the Gulfcoast complaint states. "American Data never disclosed its customer's equipment requirements to Gulfcoast. Had Gulfcoast known that the end user required authorized Cisco equipment, it would never have entered into the transaction with American Data."

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