Damned If You Don’t, Damned If You CDW

At first blush it would appear that the sun and stars are aligning for if not a new dawning of the Age of Aquarius for the technology supply chain, than at the very least a collective group hug. The U.S. economy appears well on the way to recovery. The GDP surged 3.3 percent in the second quarter, capital spending on technology expanded 13 percent, and solution-provider optimism on overall sales is at its highest level since December 2000.

But, with credit to Credence Clearwater, there's also "a bad moon rising" that seems completely out of context. Overall channel satisfaction with software publishers is headed south, and partner satisfaction with hardware vendors has slumped to its lowest level in two years. Simultaneously, the number of solution providers building custom-server solutions, a.k.a. white boxes, has soared 23 percent in the past four months, and the number of channel players building custom desktops is up 22 percent.

While these would appear to be disparate symptoms, they actually point to a singular malaise -- the growing conflict between velocity and volume channels and the challenge vendors face in identifying, and crediting, brand influence as compared with brand fulfillment.

In essence, one might term it the CDW syndrome. But there are strains known as Insight, PC Connection, PC Mall, buy.com, and even the Pomeroys and Forsythes of the market. This highly public, intrachannel spat generally focuses on the perceived price advantages that the velocity players have based on the discounts they extract from manufacturers and distributors, in essence, an unlevel playing field at the street price level.

Truth be told, I don't believe that's the real issue. Any logical business person -- and for more than 20 years I have presumed that solution providers were both -- must grasp the economic leverage of a company that sells $5 billion worth of equipment as compared with a company that moves $5 million in product. It is the same logic that allows a small VAR to offer a discount to a customer that buys 20 systems vs. one that buys a single desktop or server.

Indeed, the kernel of this conflict lies in back-end soft dollars and other channel program benefits. Market development funds, co-op, rebates, spiffs, training credits .. call them what you will. Vendors believe that if 20 percent of their channel moves 80 percent of their product, they should receive 80 percent of the available soft dollars. Hard to argue with that train of thought. But because they can't compete on price at the street level, small solution providers are losing sales to the velocity players. More important, they are becoming smaller and smaller blips on the collective radar screens of the vendors. And this comes in spite of the fact that nearly everyone involved agrees that high-value solution providers are setting the technology and brand decisions for the customers who ultimately purchase at the lowest possible price.

It presents a challenging conundrum for the vendor community. How do you track and reward influence? One solution might be deal registration, so that the point of brand decision is compensated for his or her role in the process. Problem there is that many solution providers -- especially those who have been around for some time and fundamentally believe that vendors will steal their customers -- refuse to play. Another strategy might be for a wholesale revamping of discount structures by the vendors from a volume approach to a value model. That is not likely to happen, but it's interesting to note that in recent partner satisfaction surveys, Cisco, which adopted that tactic, is the only one of 11 vendors that has seen its overall channel-satisfaction numbers increase in recent months.

It's a highly complicated and clearly volatile issue, and CDW is merely a lightning rod for the rising frustration among solution providers. John Edwardson, CEO of CDW, has been highly visible and quite vocal that the real conflict lies in vendors' selling direct, and stated recently that his greatest competition is the local VAR. This stance appears to be designed to deflect criticism, and it must not be allowed to shift the focus away from the fundamental problem. Because it's abundantly clear that the love fest the supply chain so rightly deserves will never take place until someone figures out how to track and reward those who set the brand agenda for end customers.