Sun Profit Push Spurs Surprising Channel Changes

However, new moves by the company to attain that goal threaten the financial health of many of the very same channel partners Sun depends on for more than 60 percent of its sales.

Trying to balance its profitability with the strength of its channel has resulted in several moves by Sun to tweak channel policies and programs, the net result of which is a series of give-and-takes with its indirect sales partners.

For instance, the company early this month surprised partners with a plan to cut the discount it offers to the channel for maintenance renewals by half or more and followed it with another surprise at last week's Arrow Electronics' MOCA Net@Work conference by increasing that discount on the initial year of the maintenance contracts.

Sun also is trying to push its partners to focus more on services, especially managed services from the company's acquisition last year of SevenSpace. And while Sun has been increasing its Web sales and cutting its channel marketing funds, it has been testing a pilot program to cut partners' costs by reducing the time it takes to ship products.

While this balancing act can be frustrating to Sun partners, they understand Sun's need to control costs. "Sun is looking at any angle to cut costs," said Mike Shook, president and CEO of Sun VAR Strategic Technologies, Cary, N.C., and co-director of Sun's partner council. "But I'm unaware of any lack of commitment to the channel."

Partner trust in Sun continues despite the shock solution providers got in a report they have been passing around in which Toni Sacconaghi, an analyst at Sanford C. Bernstein, in August paraphrased Sun CEO Jonathan Schwartz saying that one way to get incremental cost savings was "migration away from the channel." Three days after that report, a modified version was released in which Schwartz said incremental cost savings could come from a "consolidation of/efficiencies in SUNW's two-tiered distribution channel," among other things.

"Thank God [Schwartz] requoted himself," said John Varel, CEO of FusionStorm, a large Sun solution provider in San Francisco. "We are a strong value-added partner of Sun. We have 55 engineers working with our 45 sales reps, engineers that saved money for Sun and us. No one at Sun is so shortsighted as to want to cut the 'V' in 'value-added' resellers."

For many Sun solution providers, the main concern is Sun's push to cut the discount they receive for reselling renewals to about 8 percent from 15 percent. Distributor discounts are being halved to 2 percent.

However, Sun is increasing the discount to 20 percent for the first year of new maintenance contracts and is putting in place an opportunity registration program to protect partners who bring in customers under a new maintenance contract. Sun also is giving partners until Feb. 1 before the changes begin.

Tom Wagner, Sun's vice president of partner sales, said some solution providers focus on renewals to the point to where they poach contracts from other partners.

"Renewals have a healthy margin. Our discounts are among the highest in the business. But this is becoming a commodity, so we are making that change," he said. "We are providing some real exciting opportunities to sell services and managed services. We feel that moving to higher value-added services benefits both Sun and our partners." Sun isn't being subtle about finding a way to modify partner behavior, according to Bill Cate, Sun's director of U.S. partner programs. "The encouragement we are trying to apply, not too subtly, is for partners depending on renewals to shift to services," Cate said.

"Before, we saw some resellers go out of their way to grab renewal opportunities from other partners," he added.

"It's a good message if it can prevent people from coming in and low-balling price and adding no value," said Mark Teter, CTO of Advanced Systems Group (ASG), a Sun solution provider in Denver. "ASG has a great maintenance and services department to help customers with maintenance terms. It's good to stop VARs from just flying in and grabbing the renewals without adding any value," Teter said.

However, cutting back on renewal discounts will hurt many partners, said Strategic Technologies' Shook. "Americas is the only area where Sun pays full compensation for renewals," he said. "Obviously, the move hurts the pocketbook of resellers, and we told Sun that. But Sun told us they are looking at other ways to neutralize the impact. They told us, 'We know it hurts. We're looking for ways to remove the sting.' "

One solution provider called the impact for Sun's channel huge: "It might take a lot of resellers from being profitable to being unprofitable. Some resellers' growth strategy is based on maintenance. If their only growth strategy was based on maintenance renewals, they are in trouble now."

Varel said FusionStorm has a staff of five people just to handle maintenance renewals and that the discount cuts could turn that part of the solution provider's business into a money-losing operation.

Sun also is trying to take the sting out of the cut in renewals discounts with a push to roll out new services for solution providers.

Sun is weaving three layers of services for partners, Cate said. The first layer is the resale of packaged services, including first response, remote monitoring and system monitoring, based in part on services from its acquisition early last year of SevenSpace. At the second layer, Sun will offer enhanced services such as response, backup and restore, managed storage, patch management and system management through solution providers that become certified for such services.

"To make it easy for partners to get certified, we will go on an aggressive, face-to-face, free training road show for them," Cate said.

Sun also is offering co-delivery of services based on certain business practices, he added. On the storage side, for instance, Sun will work with solution providers to co-deliver such services as TCO (total cost of ownership) consolidation, tape backup and restore and implementation of Sun storage arrays.

"The partners can work with our practice engineers to quote services and then go out and deploy the services," Cate said.

On the system side, such services include enterprise consolidation, high-performance computing and business applications. On the software side, Sun will work with VARs to deploy services related to such areas as ID management and the Java Composite Application Platform Suite (JCAPS).

Sun also is considering an opportunity registration program for managed services, Cate added. The impact of Sun's services push could be limited by the fact that many of the vendor's channel partners already have their own managed services offerings.

Ed Gogol, director of enterprise systems at Solarcom, said the Norcross, Ga., solution provider already offers managed services like network monitoring but is interested in how Sun could support more partner services with the vendor's professional services capabilities. "We will be discussing this with Sun," he said.

One solution provider said Sun's managed services play is on a wait-and-see mode. "The program is not fully baked yet," the partner said.

Varel said the main problem is that most big Sun partners already have a managed services offering. His company, for instance, directly competes with Sun's SevenSpace offerings and has quadrupled its managed services business over the past three years. The other issue is that bringing services through distribution is expensive, Varel said.

"I have a 75 percent margin on managed services. Sun can't offer me that. My sales reps won't sell Sun services even if Sun rams it down their throats," he said.

In another cost-cutting move, Sun is looking to consolidate its global distributor network in a move that will positively impact its U.S. distributors and VARs but which may hit some of its international distributors.

Under the strategy, Sun plans to sharpen its distribution channel efficiencies by trimming its distributors' capital requirements, which will be done through changes in the supply chain, said Jeff Barteld, director of Sun's U.S. channel sales. Sun is piloting a program called Rapid Customer Deployment that aims to have 80 percent of products from Sun's internal and outsourced manufacturing centers move to the customer within four days of an order, he said.

A key issue in the program is how Sun can ship products from the manufacturing centers to VARs and customers without making the products a part of the inventory of its "channel development partners" (CDPs), which is what Sun calls distributors, Barteld said. The pilot already has hit its initial target of 45 percent, he said, declining to specify the figure before the program began.

"We are now shipping products into CDP inventories," he said. "But as we move toward our goal, we can cut CDP inventories. This will release our CDPs' capital and cut expenses for everyone in the channel."

Wagner said the move to shorten the supply chain will benefit Sun and its channel partners. "We are looking to share the wealth with our CDPs," he said. "They like the idea of reducing inventories and freeing up the capital associated with inventories. It's a win-win situation."

Any manufacturer initiatives to boost supply chain efficiency are welcome news, especially given their increasing dependency on outsourced manufacturing, ASG's Teter said. "The main problem with distribution is not the time of the shipment but the logistics, things like what will be shipped where and when," he said. "Customers understand there are delays, but they want to know where their products are. We've had to play middleman to our customers to provide the ship times. We'll appreciate the change."

Sun also is seeking ways to consolidate its distributors worldwide, Wagner said. Sun has four CDPs in the United States and 80 CDPs globally, including several instances where one country is served by a single distributor.

"From a financial perspective, our opportunity to get our arms around our distribution is significant," he said. "In the United States, we have Access and [Arrow Electronics'] MOCA, plus two specialty distributors. It's much more efficient."