VARBusiness 500's End-Of-Quarter Grind

"Stuffing the channel" is a dirty phrase. Most vendors with channel programs of any substance will insist that they don't force unsold inventory on their solution providers to meet their own sales goals. And any vendor worth its salt will deny ever dumping product on its solution providers.

But according to the VARBusiness 500 survey for the fourth quarter of 2006, 94 percent of the biggest solution providers in the channel say vendors are pressing them at the end of fiscal quarters to buy more products so the vendors can make their quotas.

This isn't the channel stuffing of old, though. Vendors and distributors rarely pressure VARs overtly to buy unneeded product or to carry inventory--though it does happen. Channel programs, however, are now designed with incentives for solution providers to meet revenue expectations to maintain status with the vendor.

Slide Show: VARs' Quarterly Conundrum

When the end of the quarter comes, vendor field managers will often be more than ready to help close deals or get special pricing if it helps solution providers meet their numbers, and the vendors meet theirs. Many vendors will offer special discounts, sales incentives and SPIFFs to solution providers that boost their end-of-quarter sales. Some call it "programmatic stuffing."

"Our partners are our lifeline; they're trying to purchase stuff on the expectation of closing a deal at the end of the quarter," says John Gunn, president and CEO of ISG Technology (Integrated Solutions Group) in Salina, Kan. (VARBusiness 500 No. 378). "Some managers would say it's pressure, but it's mostly vendors trying to help close deals."

The problem many solution providers say they're running up against, according to the VARBusiness 500 survey, is being caught in the middle of deep-discounting vendors and bargain-hunting customers. Seven in 10 of the VARBusiness 500 respondents said that customers pressure them for end-of-quarter discounts and price breaks because they know the vendors are trying to meet their numbers. Some say it's akin to people shopping for cars--most think they'll get a better bargain if they wait until the end of the month, quarter or year.

"We're kind of stuck in the middle of trying to partner with the vendor and service the customer," says Mike Thompson, president and CEO of Groupware Technology, a Campbell, Calif.-based solution provider (VARBusiness 500 No. 431). "It's a problem because it changes the sales cycle and the customer knows he can pressure us. We get pressure from both sides."

VARBusiness 500 solution providers say the most common end-of-quarter incentives are deep discounts and special promotions. Sales incentives--lower prices or higher channel status--and volume rebates are the second-most frequent tools used by vendors to press solution providers.

NEXT: What the VARBusiness 500 say is most disruptive -- and potentially damaging -- to their businesses.

Whether vendors are stuffing the channel or just using programmatic sales incentives to drive channel business, solution providers say inconsistent pricing practices are actually more disruptive to their businesses and potentially damaging to their future sales. If solution providers pick up discounted products at the end of a quarter and pass the savings along to their customers, those customers will expect similar pricing on future deals. Such inconsistencies erode price integrity across the board, driving down both gross revenue and profit. Worse, it makes it more difficult for solution providers to forecast sales.

"For many solution providers, the peaks and valleys can be problematic since we'll be focused on the pricing and can't be focused on the solutions we're selling," says Austin Parks, vice president of infrastructure services at Paragon Development Systems in Oconomowoc, Wis. (VARBusiness 500 No. 235). "A quarterly focus forces everyone to...play the game."

Vendors steadfastly avoid any label that would imply that they stuff the channel or unduly force solution providers to pick up excess inventory. Most agree that channel stuffing or similar practices undermine partner confidence and trust, and ultimately work against channel objectives.

"It certainly creates volatility in the marketplace," says Chris Franey, vice president of commercial sales at Samsung's Information Technology Division.

"It teaches bad behaviors," agrees Bill Lipson, senior vice president of worldwide channels at CA. "[Solution providers] might get better margins, but it creates issues with costs and credit lines."

Deal registration and more long-term sales forecasting and inventory planning help mitigate the quarterly crunch, solution providers say. And the problem is typically confined to point solutions, such as software and commoditized hardware. Vendors and solution providers that deal in high-end systems, such as storage and network infrastructure, say the complexity of their products and their build-to-order frameworks prevent stuffing.

Some solution providers say the problem isn't as prevalent as in years past. Yet, when it does happen, most VARBusiness 500 solution providers will either cave to vendor pressure or work the system to their favor; some will get discounted product and hold it in inventory until it can sell at a higher margin.

"Typically, it's not a practice that's supported by [vendor] management; it's more of something that happens on the field level," says Ken Yannick, president and CEO of IPLogic, a data-and voice-networking solution provider in Latham, N.Y. (No. 416 on the VARBusiness 500). "If we're looking to get a little more of a discount, we'll use it to our advantage."

Survey respondents say greater consistency in channel planning, discounting and incentives, and business planning would provide more stability for their businesses, and for vendors' businesses too.