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Solution providers say aggressive pricing is one thing, but pricing below their costs damages their relationships with customers and ultimately impacts vendors' profits.
One East Coast solution provider, who requested anonymity, said that in the first quarter CDW came into one of his largest accounts and bid HP ProLiant servers at 13 points—or about $1,000 per server—below what he could buy the same servers for from Ingram Micro. "I found out that CDW had an HP Big Deal letter for the account," the solution provider said.
Big Deal authorization allows HP solution providers to sell products at substantially reduced prices in order to win a deal against competing vendors such as Dell or IBM. But it wasn't intended to shift share from one HP solution provider to another. The solution provider was ultimately able to obtain his own Big Deal authorization for the account and ward off the CDW incursion. But the upshot of the deal was that HP, Palo Alto, Calif., lost double-digit margins on an account it was already locked into.
"The only way I can figure out that CDW got a Big Deal letter for the account was that CDW's HP rep didn't do his due diligence on the deal before authorizing it," said the solution provider.
Another solution provider said CDW's HP pricing is so aggressive he's essentially stopped selling HP products. "I have experienced the same thing over and over with CDW [selling below my costs]. We have nearly stopped selling HP hardware," said the solution provider, who asked not to be identified. "We do a lot of configuration work and at the last minute CDW swoops in and steals the deal. CDW is the 900-pound gorilla with suppliers and always gets the sweetheart deals that the rest of us cannot touch due to their volumes."
Other solution providers say they are seeing a similar CDW pricing issue in Oracle products. But the below-VAR-cost pricing is prevalent at Dell as well as CDW. After word surfaced about CDW selling HP wares at below-VAR cost, several Oracle partners said they are seeing similar scenarios with Dell. One said that "Oracle plus Dell equals HP plus CDW."
The issue here is essentially the same. An established Oracle partner is in a deal, gets down to brass tacks negotiations and loses the deal at the last minute when Dell or CDW offers below-VAR-cost pricing.
Oracle, Redwood Shores, Calif., is aware of the issue, which it says tends to ebb and flow. The company tries to protect VARs, said Judson Althoff, Oracle vice president of platform and distribution alliances, "but if at the end of the day if it's a CDW or a Dell deal and Oracle is a line item in a bigger deal, it becomes very hard for us to manage that."
Oracle's approach is that neither Dell nor CDW gets rebate money. "They get the same discount on Oracle that other partners get," Althoff said. CDW and Round Rock, Texas-based Dell also have to buy through distribution, just as other partners do, he said.
And, beginning two years ago, said Althoff, Oracle started to control dispersal of MDFs much more closely. "It used to be a carte blanche. We don't any longer just cut a check for $250,000 in marketing funds at the beginning of a quarter. We now do a line-item check on those marketing programs and we negotiate all that. And we get a lot of pushback on it."
Another Oracle partner said he sees similar conflicts with both Dell and CDW. "I have been directly impacted by both," said Scott Jenkins, CEO of EBS Group, a solution provider in Lenexa, Kan. "Dell actually sold a deal under their cost to get the hardware [sale]. CDW cut their margin with a non-value-add partner and we lost a $2.4 million deal to them in the third quarter."
Jenkins said he thinks both CDW and Dell are able to sell all of Oracle's technology products—middleware and databases—from the low-end Standard Edition One up through the Enterprise Edition.
"That's a problem for value VARs like us," he said. "Customers do a price check and they see they can buy it cheaper at CDW than with us, and if we want to keep the deal, we have to match or beat CDW. Arguably, this is okay at the SE/SE1 level, but not for VARs who invest six, nine, 12 months in an enterprise sale cycle only to see it cannibalized by CDW or Dell."
Cisco Systems solution providers, for their part, say they have seen little change in the competitive landscape since CDW acquired high-flying Cisco VoIP provider Berbee Information Networks for $184 million last October.
"We haven't seen any fallout from that," said Tim Hebert, CEO of Atrion Networking, a Cisco Gold partner in Warwick, R.I. "I'd be more concerned if I was in the Midwest, which is their [Berbee's] home territory. They are very strong and very good at what they do."
He said he hasn't seen CDW undercut him with low-ball pricing that he cannot match. "Does CDW sell at low margins?" asked Hebert. "Absolutely. Do they make it hard for other people to keep their margins high? Absolutely. But I believe Cisco has made the playing field pretty even so I am not competing at a disadvantage from the get-go. It is pretty much an even playing field. They've done a very good job policing it and trying to manage that."