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Gray Matter

Gray market products accounted for between 5 percent and 30 percent of total IT sales in 2007, with a value of about $58 billion, according to a new report by audit firm KPMG LLP and The Alliance for Gray Market and Counterfeit Abatement (AGMA). There is a small silver lining: While gray market activity has increased since AGMA's first gray market study in 2002, it has not grown as fast as overall IT spending, according to Marla Briscoe, who serves as vice president at AGMA and is also brand protection-Americas manager for Hewlett-Packard Co.

audit

The study defines the gray market as the unauthorized reselling of branded goods as the result of diversion from authorized channels into the hands of third parties, including the open market.

Nearly two-thirds of respondents in the study believe gray market product availability has increased over the last two years, and more than half of survey respondents believe the increase is greater than 20 percent. About 13 percent of respondents said they are buying gray market products and selling them in another country, according to the study.

According to the study, 66 percent of solution providers say they make gray market purchases. Most claim it makes up less than 5 percent of their annual purchases, but about a quarter of respondents say it represents 11 percent to 30 percent of their annual purchases. About 17 percent of solution providers who make gray market purchases say they have received counterfeit products.

In the study, KPMG and AGMA make several recommendations for vendors to implement to reduce gray market activity, including taking steps to review and strengthen incentive programs; issuing a comprehensive compliance and reporting policy to all partners; monitoring and acting on unexplained sales spikes from business partners; putting automatic alerts in place and acting upon these alerts; and implementing a robust process for performing due diligence on new channel partners.

And to VARs? "If you're simply sourcing cheap product and have no idea of the provenance of the product, then it's likely you can impact your end customer relationship," Briscoe said. "I think there's growing awareness that it is a real risk."

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