Who's Threatening Your Business?

"The trend to direct sales of IT products likely means that the long-term growth rate of the IT distribution industry will be below that of total IT spending," the report stated. "A major factor weighing on the distributors has been HP's goal of taking a significant portion of its U.S. PC and server sales direct."

These days, solution providers are competing with more than just stingy CIOs and tight IT budgets. The industry has become a cutthroat Thunderdome where threats are coming at VARs from every turn, whether its direct-sales competition, the gray market or channel conflict with vendors.

Ironically, Dell is one of many Ingram Micro customers supporting the PC company's DellWare business for peripherals. You know the saying: Keep your friends close and your enemies closer. But it doesn't take an MBA to know that the adversaries of Ingram Micro are the enemies of its VAR customers. In fact, Ingram Micro and many other IT distribution houses have been laser-focused on helping channel players beat direct vendors in today's market.

VARBusiness' 2004 State of the Market research shows that more than one-third of solution providers perceive direct vendors as a high threat, second only to other competing VARs. Many solution providers have shown increasing concern over Dell and the PC company's infringement on their margins and their customer bases. Similarly, VARs are also fearing more direct sales from their vendors, especially HP.

Still, the line between friend and foe can be blurry. For example, Dell is now attracting VARs with a new (gasp!) channel strategy, while vendors like HP have been bombarded with complaints about direct-sales pressure. How will they respond?

The Enemy Within
Let's turn for a minute to the group you consider the biggest threat--each other. Not surprisingly, our research shows that more than two in five VARs consider competing channel companies to be the top threat to their businesses. It makes sense; since the economic recession began in 2001, IT dollars have become increasingly scarce, leaving solution providers to fight tooth and nail for pieces of the pie.

Brian Keane, CEO and chairman of Keane, a Boston-based solution provider that specializes in application integration and outsourcing, says his company, which isn't exactly small at more than $800 million in revenue last year, goes up against the biggest companies in the industry--Accenture, EDS and IBM Global Services. "We're seeing fewer small, local firms competing with us, but more global integrators," Keane says. "IBM Global Services is everywhere."

Pogo Linux, a 5-year-old systems builder based in Redmond, Wash., has seen a number of different competitive threats during its short history, but, for the most part, the company loses business to other solution providers.

"Other VARs are the top source of competition because they are in the same mindset," says Tim Lee, co-founder and president of Pogo Linux. "They know that it takes flexibility and fanatical support to win and keep a customer's business."

However, Lee says that competition with other solution providers is a double-edged sword that can often yield benefits. Pogo Linux, which prides itself on being a premier Linux-based systems builder, believes competing VARs help create innovative solutions, new technologies and better business strategies.

"All in all, competition is good because it keeps ideas fresh and challenges customers to find the best deal," Lee says.

Direct Attacks
But when you ask most solution providers which single company is taking business away from them, the answer will probably be a four-letter word. Indeed, Dell has continued to grab market share in the PC and server game at the expense of the channel's biggest vendors. Oddly enough, Dell is no longer content to just take business through its direct-sales model; now the company is focused on wooing VARs and white-box makers.

Last year, Dell made an unexpected splash with its Solution Provider Direct (SPD) program, which offered systems builders and VARs unbranded Dell PCs. The company also issued a 31-page "welcome kit"' earlier this year for prospective VARs inquiring about the SPD program. In the kit, Dell states that despite its direct-sales model, "we do believe that there is a valuable place in our model for solution providers who add value to our hardware."

The Round Rock, Texas-based company is merely dipping its toes in the channel's waters, but it's taking an unusual approach. Dell, for instance, has no partner program or certifications and, therefore, doesn't allow members of SPD to brand or refer to themselves as "Dell authorized" VARs. The PC leader says it is intentionally setting VARs' expectations low with blunt messages. "You may not always like the answers you hear from us," Dell states in the welcome kit, "but you should always know that we will be absolutely truthful with you."

Still, many VARs are fearful of Dell. Paul Thompson, CEO of IPT Northwest, a solution provider based in Portland, Ore., says direct vendors like Dell are pinching his business. "We run into Dell a lot," Thompson says. "Even though its delivery and support quality have really gone south, its pricing continues to be very aggressive."

Brian Okun, director of marketing at Chips Computer Consulting, a VTN member based in Lake Success, N.Y., says that solution providers have an advantage over Dell because the PC giant sells commoditized products and low-end, pre-packaged products rather than complete solutions.

"The direct-sales vendors and wholesalers will be a threat for VARs that focus on product sales, but we try to make our money with integration services and building actual solutions," Okun says. "IT is about solutions, not the lowest-priced product."

Although Chips isn't affected by gray marketers--only about 20 percent of solution providers surveyed consider it a high threat--Okun says the competition is similar to Dell because it creates pricing that VARs simply cannot compete against. But, Okun says, the gray market is often worse because unauthorized and secondhand products erode quality and value for customers. And vendors are taking the problem seriously before it becomes the No. 1 threat to the channel. Earlier this year, several vendors, including Cisco, HP and Xerox, formed the Anti-Gray Market Alliance, designed to educate the public on the gray market and promote authorized technology sales only.

Solution providers such as Pogo Linux are also warning customers about gray-market goods. Lee says he tells his customers that buying those goods usually comes at the expense of good delivery and support, customer service, flexible lead times and product quality. Lee says VARs should stick to their game plan of delivering solutions and not be tempted to compete on price.

"When a customer comes to us and the only thing they're concerned about is pricing, we oftentimes throw that fish back in the ocean," Lee says. "A smart customer knows that pricing is only one component."

Venial--Or Venomous--Vendors?
Dell certainly makes no excuses or apologies for its direct-sales strategy. HP, however, is another story. Ever since "The New HP" assimilated Compaq, the company has been wrestling with finding the right channel strategy for the thousands of partners under its umbrella. Following the megamerger, HP decided to retire its Hard Deck policy, a named-account system that had garnered much love from HP VARs, who saw their vendor wrenching away clients with direct sales. The response from many solution providers was, "Et tu, HP?"

HP partners were in temporary limbo until last year's introduction of PartnerOne, which consolidated more than 40 different subprograms between Compaq and HP. PartnerOne is still maturing, and while VARs commend the effort, the program has a long way to go. HP officials admit as much, too. Kevin Gilroy, vice president and general manager of commercial channels for the Americas, spoke at Ingram Micro's VTN event in Hollywood, Calif., and said that HP is trying to make its PC and enterprise systems groups profitable, which entails making direct sales.

"The problem for me is getting the economics right," Gilroy told VARs at the event. "The pain for HP is that we're losing market share quarter after quarter to Dell."

One VAR, who wished to remain anonymous, says that HP seems to be "schizophrenic" in its sales approach. "HP has problems that go beyond Dell. They're trying to make up too much share by selling direct, and it's at the expense of their channel," the VAR says. "Gilroy is a true channel advocate and has a solid reputation [with partners], but there's corporate-level stuff that's making his job almost impossible."

While HP is certainly the most visible--and perhaps most criticized--example of channel conflict today, there are plenty of other top-line vendors that have been accused of selling out their partners while trying to make some direct sales. Cisco, EMC, Microsoft, Sun Microsystems and just about every major vendor has at one time or another during the past few years been seen competing with their own channel partners. Still, according to VARBusiness' research, 41 percent of large solution providers and small VARs say they don't consider direct vendors any threat at all, while 34 percent of midsize solution providers shared that outlook.

There are signs of progress with many vendors. For example, EMC launched a bona fide partner program this summer, while Sun revamped its iForce program and built closer ties with partners. And according to analysts, HP is content with its current ratio of direct and indirect sales for PCs and servers. But as long as the current economic state continues, expect VARs to be looking over their shoulders for the next threat--direct or indirect.