Loyal To a Fault: Why Loyalty May Not Be All It's Cracked Up to Be

Still, the gimmicks continue. Meanwhile, certain vendors persevere in R and D labs and in management suites where partner programs are devised. The best efforts to build allegiance among partners has indeed increased partner loyalty. But what we have found is that increased loyalty hasn't necessarily led to partner satisfaction.

Against this backdrop, VARBusiness set out recently to define the parameters of loyalty. We did so in a groundbreaking study that polled more than 4,500 solution

providers about their loyalties to the industry's top vendors. The study was done as part of VARBusiness' 2002 Annual Report Card (ARC) survey. We set out to determine how loyalty contributes to the satisfaction among VARs of all kinds. We also wanted to find out whether the slumping IT economy has turned loyalties upside down. One question we tried to answer: Is there a link between a VAR's loyalty to a product and that company's sales of the technology?

Some of our results will surely surprise you. Others may frustrate you. Regardless, we hope our findings persuade you to reconsider your loyalties and rethink your business relationships. Read on to find out why.

Counterintuitive Results

The thousands of solution providers we surveyed clearly

stated there is a disconnect between loyalty and satisfaction. In many cases, solution providers gave a high loyalty score to a particular vendor partner, yet said they were dissatisfied with that vendor's product, support or partnership programs. That made us wonder what the value of loyalty is in today's world.

Consider the following: Vendors that received top marks for loyalty also received a top overall ARC score for partner satisfaction 60 percent of the time. Other attributes, however, turned out to be better predictors of success. Vendors that received top marks for supporting their partners always outscored their rivals to capture the ARC category win.

The disconnect reveals something that smart solution providers have known for some time and something many vendors are beginning to realize: There's a significant difference between fidelity and loyalty. Any vendor or partner that confuses the two runs the risk of being loyal to a fault.

"Things do change; you can't just be loyal," says Ben Tandowski, president and CEO of Hackensack, N.J.-based Ness USA, recalling that he was once the largest Borland VAR in the country. "Are you going to say, 'Use Delphi instead of Visual Basic or C++ because I'm loyal to Borland?'" What kind of statement is that?"

According to our study, the five vendors with the highest loyalty among partners are Avaya (networking gear), IBM (iSeries servers), Western Digital (disk drives), Cisco (voice and data products) and Macromedia (Web and Internet applications server software).

In contrast, Fujitsu, Lexmark, BEA Systems, Sony, Dell and EMC all received flagging loyalty scores from VARs.

To better understand what separates one type of company from the other, we asked Answers Research, an independent market research company in Solana Beach, Calif., to examine the loyalty VARs have to these 11 companies. Interestingly, Answers found a significant correlation between ROI and loyalty.

Companies with the lowest loyalty scores in the survey, such as EMC or Fujitsu, were also companies VARs gave poor marks to in terms of ROI. The reason? Those vendors quite often sold commoditized products, were new to the channel or were in the throes of rearchitecting their channel organizations. Their loyalty scores and their ROI scores were below average and trailed those of their rivals and other IT companies.

In contrast, those with the highest loyalty scores were among those viewed as having the highest profit potential for partners. One big reason for this is because these companies often demonstrate stable, predictable channel behavior. Furthermore, they tend not to compete with their partners, but instead provide them with unfettered access to lucrative customer territories.

Avaya may the best example of a company with a loyal following, albeit one that cannot meet the expectations of its partners when it comes to technical support and communication. Out of nearly 70 vendors, the Basking Ridge, N.J.-based vendor of communications equipment came in dead last in partner satisfaction in our voice and data networking category. It's competition: Cisco, Nortel and 3Com.

Avaya's plight is best examined through the eyes of a long-time partner, DigitalPhone USA, which is now recommending rival products to customers. Although DigitalPhone mentions only Avaya on its company Web site, the company offers certain clients IP telephony gear from AltiGen Communications, says Eric Blake, DigitalPhone's director of operations. Despite the fact that DigitalPhone, based in Stamford, Conn., has been an Avaya partner for more than a decade,its local account reps used to routinely play golf with DigitalPhone officials,Blake says he had no choice other than to offer alternative suppliers. One reason: Avaya has started charging for technical support. Another: personnel turnover in the field.

"There wasn't that close-knit relationship anymore," Blake says, so he switched his allegiance. So did Gary Morrissette, vice president of marketing at Tel-Net Systems, Salem, N.H. Like Blake, Morrissette has begun recommending AltiGen because he believes Avaya itself is shifting its loyalties. "They are starting to pull products and services direct, and they are going to open distribution, so all the large major wholesale distributors are selling the product now," Morrissette says. "These are things you have to take into consideration."

How Loyalty Shifts On a Dime

The story of Avaya underscores that loyalty goes only so far today. When direct sales are great and new partners abound, vendors tend to abuse the loyalty of their traditional allies. That's not the case today, savvy partners note.

"From a loyalty perspective, we are way ahead of where we were in 1999," says James Hunt, CEO of EYT, recalling the days when a handful of vendors would undercut the channel. "They tended to swoop in at the end of quarters and do unnatural things, and cut the channel folks out in the end. There's less of that right now. I think [vendors are sensing they need us more and their programs are more channel-friendly."

Nevertheless, many vendors aren't cultivating loyalty in ways that translate into increased sales or customer satisfaction. One reason is the Internet, which has given customers access to information previously available only to industry insiders. That includes pricing and margin information, plus intricate explanations of the costs associated with product distribution, notes Indrajit Sinha, assistant professor of marketing at the Fox School of Business at Temple University, Philadelphia. As a result, many companies have put new-customer acquisition ahead of ongoing customer satisfaction.

"To some extent, companies have been deficient in defensive marketing," Sinha says. He cites Palm as an example of a company that had a huge customer following but lost loyalty as other devices, including Microsoft's PocketPC and Research In Motion's BlackBerry, caught on.

Conversely, Microsoft works hard at leveraging loyalty into increased sales, partners say. Tom Fornoff, vice president of alliances at Sapient, says Microsoft provides substantial benefits, programs and connections to his company. They are sufficient to keep the company true to Microsoft, even when the company's software is lacking. "There are some companies we have become closer and closer with and others we have drifted further apart [from, and there is less of that middle ground," he notes.

That's especially true in an era when revenue growth and market share are more highly prized than loyalty. But that doesn't mean the harsh realities of economics need overshadow the finer points of partnership. "I believe our best VARs are focused on their own revenue and market share. It's the alignment of our interest toward those goals that lets us work together so well," says Avaya chairman and CEO Donald Peterson.

Despite that sentiment, Peterson harbors no illusions as to why his company vies for the loyalty of its partners.

Likewise, the more savvy solution provider realizes that vendors that implement loyalty programs do so because it suits their own agendas.

"I'd be less than candid with you if I said we were loyal for reasons other than our enlightened self-interest," Peterson says.

Where Loyalty Matters

Although all vendors profess a love for partners and a keen interest in cultivating loyalty, the plain truth is that some vendors go about it better than others. In fact, entire categories of vendors do it better than others, according to VARBusiness' study of loyalty. In some categories, partner loyalty is perceived as exceptionally lower in importance than in others. That includes product categories such as database software and application development tools, in which investment costs are steep.

PC Mall, which carries database software from IBM, Microsoft and Oracle, recommends database software that is best suited to the customer's environment, regardless of any feelings of loyalty and without fear of recrimination, says Gertrud Pillay, PC Mall's director of product management. "We want to keep the customer loyal to us, so we want to make sure we make the right recommendation."

All things being equal, however, PC Mall tends to lean toward Microsoft's SQL Server due to the number of Microsoft certified systems engineers it employs. "We have a broader knowledge base in the company," Pillay says. "The more familiar we are with the product, the easier it is to recommend it."

One category where loyalty counts for something is in mid-range servers, the IBM iSeries line of product, in particular. While regarded as a legacy platform, fully 90 percent of iSeries' revenue is generated through indirect channels, says Buell Duncan, IBM's general manager for the iSeries. Certainly in the case of this product line, loyalty counts for something. One reason IBM is so interested in sustaining the loyalty partners have for the platform is due to the number of customers that continue to rely on the hardware platform.

"The iSeries represents a quarter of a million customers worldwide, and the relationships we have with them are really vital to IBM," Duncan says. "This is a franchise of loyal customers that offers a lot of business opportunities."

Product age, indeed, may be one key factor in determining loyalty. Take Avaya, for example. According to the ARC, Avaya achieved a loyalty rating of 87,the best among all vendors. That compares to an 82 for Cisco Systems, which won this year's voice and data networking category. Why the higher score for Avaya? Some argue it's longevity. Many of its partners are traditional telecom VARs, whose ties to the company stretch back to its days when it was a division of AT&T. At that time, AT&T had a dominant number of global companies tied to its PBXs,many of which still use the systems as their primary voice communications platform. Because Avaya's larger-enterprise Definity PBX is still proprietary,customers must purchase the company's handsets and back-end hardware,and because of the huge investment required to certify an engineer on its products, many Avaya partners remain loyal, if not trapped.

But not for much longer, experts believe. IP telephony, after all, is changing the balance of power in the world of enterprise voice communications, just as it did in the data-networking world in the 1990s. As it does, companies have more freedom to mix and match telecom gear. That means companies, including Avaya, may have to work harder to gain loyalty.

Avaya's Peterson believes he still has time to stem defections. He points out that Avaya is coming out with new gear that runs over IP networks and argues that it is more open than comparable products. In the coming years, IP will continue to increase the pressure to try to cultivate loyalty and play in the new balance of power. "Any time you enter into more open architectures and more standardized protocols, you no longer have people tied to you in these other areas," Peterson says. "You have to continue to make the case and deliver the value in order to deserve the loyalty."

That goes for support and partner programs, too. That's why Avaya is addressing the issue of the depletion of expertise from the company's ranks. It's also looking at shortcomings associated with its partner Web site. "We have not had as robust a Web site and partner portal as Cisco and others have," says Jan Burton, vice president of sales for Avaya's partner organization. She promises those issues will be rectified in the coming quarter.

Delay any longer, however, and Avaya could find itself playing catch-up with Cisco for some time to come. Cisco, this month, launched an online partner-satisfaction tool, allowing channel partners to give the vendor feedback about its relationships in such areas as presales, tech support, training, global services, development tools and overall satisfaction,an extension of the same metrics used to measure customer satisfaction, says Kevin MacRitchie, Cisco's vice president of worldwide channels operations.

"As we focus on the longer-term picture of customer loyalty and now partner loyalty,our partners' loyalty to Cisco,we want to make sure we begin to ask the right questions of our partners about what we can do better at Cisco, then operationalize or systematize that information so we can track it better and be more effective in the way we resolve those issues," MacRitchie says.

That may not be enough to flip some Avaya loyalists, however. Tulsa, Okla.-based Xeta Technologies, Avaya's largest VAR, is unwavering in its support for the vendor's new IP-based wares. "If Cisco calls me up and says, 'We'd like you to test this out,' I tell them, 'Right now, I can't ride two horses,'" says Larry Patterson, senior vice president for sales and services at Xeta. "We are extremely loyal to Avaya."

Whether that remains true for much longer is largely up to Avaya and what it does next.