Channel Fraud Still A Big Issue For Vendors

While some distributors and solution providers bemoan the fact that vendors want more information on end users, unauthorized sales in the channel by some of those same companies are a big reason why vendors say they want the information in the first place.

Vendors believe too much of their product is ending up in the wrong hands, and in at least one instance a vendor took the drastic measure of ending the relationship to stop what it considered fraudulent activity in the channel. Seagate last November deauthorized its top U.S. distributor, eSys, after it grew suspicious that eSys wasn't accurately reporting sales. The vendor wanted to bring in a third-party auditor, but eSys said no.

Seagate says eSys refused to provide sales records to the vendor and would not cooperate with an audit. For its part, eSys said it declined Seagate's requests for an "intrusive" audit because of its commitment to the confidentiality of data relating to its customers and other vendors.

"The audit would not be justifiable to our worldwide business partners under normal business practices," according to a statement from eSys.

Neither Seagate nor eSys could be reached for comment for this article.

The incident highlights a growing issue for the channel: How do you strike a balance between protecting customer information and vendors' rights to protect their revenue and profits? It's an uneasy subject for all parties, but one that needs to be addressed, said Jonathan Elster, executive vice president at distributor SED International.

Unauthorized sales are an increasing problem, despite advances in sales reporting systems, he said.

"This is a story that needs to be told. We deal with it on a daily basis," Elster said.

Problems arise when product is sold to a different customer than for which it is intended, executives said. In such cases, vendors often won't support the product, leaving customers screaming to solution providers, even if the solution provider was not at fault.

In the past few months, Post Computer Systems had at least two customers buy whitebooks that were meant for foreign markets and thus were unsupported by manufacturers, said Art Torres, owner of the Wilbraham, Mass.-based PC solution and service provider.

"We said you can return it where you bought it, or you can pay us to come in and do any work on the units. They chose to pay us," he said.

The end users bought the whitebooks from other sources because Post Computer could not match the price, Torres said. In both cases, it was the end user that learned the lesson. "We look like the hero more than anything else," Torres said.

Arlin Sorensen, president of Heartland Technologies, a Harlan, Iowa, solution provider, said stories like that outweigh concerns about vendors calling a customer. It's best to run your business as if vendors can get any information, he said.

"I'd love for them not to have a direct marketing touch, but that's just not real. The customer relationship is the key driver to dong business with us anyway. We're never the lowest price. The burden is on us to maintain strong ties to the customer," Sorensen said.

"We run into channel conflict at times. We always get the channel sides of the [vendor] organizations involved. They intervene and get the direct side to take the customers out of their database," he said. "The concept of doing business with generic customers is not going to happen. They can get it anytime they wanted anyway."

Another solution provider who learned the hard way said it pays to pass on deals that seem too good.

"I used to work for a company that jumped around from distributor to distributor. I was working with a high-end customer putting [Seagate] hard drives into medical devices. [Another executive at the solution provider] finally convinced me to use eSys. The pricing was great and they swore up and down they were U.S. drives. Then the thing blows up in my face," said the solution provider, who asked not to be named.

The VAR sold its customer drives marked for Asia and Seagate told the end user, without the VAR's knowledge, that it would not support the drives. The irate end user called the solution provider and its role as trusted adviser to his customer was damaged.

The solution provider called Seagate and told the vendor where it had sourced the drives. All parties worked a deal to make amends with the end user and a reputation was repaired. "We have a better relationship now [with Seagate]," the VAR said.

Still, it's a situation the solution provider now proactively tries to avoid.

Next: Cleaning up the channels