Does IBM Matter To You?

For an increasing number of solution providers, IBM, once the undisputed dominant force in the channel, has become irrelevant.

At a time when IBM has launched a push to double its market share in SMB, these solution providers say that the Armonk, N.Y., company has lost touch with them and their customers, that the cost of doing business with IBM is going up as sales are going down, and the vendor, once the partner of choice and a clear channel leader, simply doesn't matter anymore.

First, Hewlett-Packard last year took away the top spot from IBM as the world's largest technology company. Now, surveys conducted by CMP Channel show that IBM's channel footprint and influence is shrinking in the highly lucrative SMB market, while HP grows at IBM's expense. A recent CMP Channel survey of nearly 200 IBM hardware resellers found that those that are authorized and sell products dropped from 25 percent to 16 percent from June 2006 to April 2007. Among the 25 IBM partners CRN interviewed for this story, 19 said their total IBM sales are flat or down for this year. What's more, in a poll question on ChannelWeb.com, 78 percent of the respondents said their IBM system sales were about the same or down in the first six months of this year.

David Hudgins, president of PC ProductsServices, a Greensboro, N.C., IBM partner, said his HP business is up this year, while his IBM business is flat to slightly down. "The channel is feeling more love from HP," said Hudgins. "IBM just doesn't have the field coverage out there they were always known for. We just don't see the IBM people like we used to."

Michael Demars, president of Competitive Computers, an IBM Premier business partner in Claremont, N.H., with annual revenue of about $2 million, said his IBM business is actually up about 30 percent this year vs. 2006. But Demars, like many other IBM partners, said the vendor needs to rethink its definition of small business.

IBM defines small businesses as companies with 1,000 employees and below. As a result, solution providers say, IBM tends to focus more on the medium companies and doesn't have a clear understanding of what it takes to capture share in smaller businesses. "It's like a guy with a size 8 foot being asked to try on a size 12 shoe," said Demars. "IBM has a hard time realizing that there is something out there called very small business."

One senior executive for a one-time large IBM partner said his IBM and Lenovo business combined is down as a percentage of total sales by 20 percent to 30 percent in the past two years. This comes as the solution provider has grown overall sales by more than 100 percent during that same period. "They are a non-issue," asserted the executive, who asked not to be identified.

"There is no articulate, clear message driving down to the channel from IBM's channel leadership," said the executive. "At HP, the message is clear, everything is defined and everything runs smoothly. At IBM, the left hand doesn't talk to the right hand. They don't know their own programs. The IBM channel reps working with the resellers are not working functionally with the product reps. It is a disorganized, ugly mess. It is clear to me that there is zero leadership."

The executive said that with Dell making overtures to the channel and HP riding high, IBM, for his business, has become "an afterthought." Simply put: "They are not part of our strategic business."

Ravi Marwaha, IBM's general manager, Global Business Partners, told CRN, however, that the fall-off in the number of partners selling IBM products could be misleading. "Our business in SMB is, in fact, doing very well," said the nearly 40-year IBM veteran. "Hardware grew 7 percent [in IBM's second fiscal quarter]. Within that, SMB grew, and business partners do somewhere between 85 [percent] and 90 percent of our hardware business in SMB. As you think about these lower numbers [of solution providers selling IBM], our business is in fact growing and our growth rate is accelerating over time."

Marwaha acknowledged that IBM lost a number of SMB partners when it sold its PC business to Lenovo more than two years ago. "We are in a little bit of transition when we look at an absolute number of partners, and that is because we came off a period where we had a lot of PC partners," he said. "We sold that business to Lenovo, and over time partners who were very significantly PC and had a low performance in servers ended up not being certified, extended, etc."

He said, however, that IBM is now in a recruitment mode in an effort to attract more SMB partners as it seeks to double its share there over the next 10 years. IBM added 750 business partners worldwide during the second quarter, 193 of which were added in the U.S, he added. An IBM spokesman said the vendor also added 190 revenue-generating partners in the U.S. during the first quarter.

Next: Too Focused On The 'M' In SMB

Too Focused On The 'M' In SMB
Despite these results, many solution providers express ongoing frustration with IBM over a variety of important issues including administration costs, sales rep coverage and getting price quotes in a timely fashion.

Distributors have noticed the problems, too. Both Dell, Round Rock, Texas, and HP, Palo Alto, Calif., gained share from IBM in sales through the channel in the sub-$2,000 server market from June 2006 to May 2007, according to NPD Group, the Port Washington, N.Y.-based firm that tracks sales through distributors.

One top distribution executive, who asked not be named, said HP now has a much clearer partner strategy than IBM. "Resellers know where to get help, where to escalate issues and where to get field support when they need it. That, in and of itself, is clearly superior to where IBM is at right now," said the executive. "There is some stuff that the distribution community can provide, but there will always be a need to have a badged employee of the manufacturer for support. At IBM, that is harder to find, particularly when you're not selling higher-end boxes. If you're truly focused on the SMB, there is a gap in coverage there. And they have suffered to a degree."

If IBM doesn't have enough problems competing with HP in the SMB space, Dell now is also generating excitement since Michael Dell proclaimed that direct is no longer his company's religion. "I think Dell will be another viable option out there," said the distribution executive. "That's a factor that IBM has been slow to react to. HP behind [Chairman and CEO] Mark Hurd has been beating that loyalty mantra like a drum. As much as HP has ruffled feathers sometimes, there's a degree of comfort there. If HP says they have your back, they will be there. [Meanwhile], Dell is the new guy. They're pretty fresh and want to get into opportunities they've never been around before. You don't get that excitement around the IBM brand right now."

Some solution providers have gone so far as to say that IBM may in fact be abandoning very small business—those companies with fewer than 100 employees—choosing instead to focus on midmarket companies that more closely match its heritage of enterprise sales.

But Marwaha denied that claim. "Absolutely not," he said. He did acknowledge, however, that IBM has a set of resellers that tend to focus on the higher end of the SMB market. But he said that the changes in IBM's channel structure to better focus on SMB are designed, in part, to address those issues.

Next: Shaking It Up

Shaking It Up
Still, IBM solution providers wonder if the vendor has enough SMB partners and a clear understanding of SMB customer needs as it embarks on its ambitious plan.

At the heart of that plan is a sweeping shakeup that IBM claims will make it easier for VARs to do business with the vendor. The changes include the integration of IBM's Global Business Partner organization with business partner teams from its Systems and Technology Group—which along with related services and financing accounted for 80 percent of IBM business partner sales in 2006—and its Global Technology Services Group. IBM said this will result in a single team and sales coverage model that will present one unified face to partners. The shakeup also includes a new Small Medium Business Systems Business Unit—but the unit does not include the popular System x Intel servers. The restructuring also does not include the IBM Software Group, which continues to show strong sales growth on its own—separate from the hardware organization.

Partners are hoping the SMB shakeup will help. But they are far from confident, given the gap between public channel statements and their actual experience in the sales trenches.

One formerly exclusive IBM Premier software partner with less than $10 million in annual sales said he has added Microsoft, BEA Systems and Red Hat to his product portfolio after what he called his worst year ever as an IBM partner in 2006. "We have had to dump exclusivity with IBM," he said. "We were loyal true blue partners. We wouldn't sell anything else. Loyal to the end. After all the changes in IBM's policies, we are now best-of- breed. We had to do that or we'd be out of business."

He estimates his costs associated with being an IBM partner have climbed 20 percent over the past three years—and it was already incredibly expensive and difficult. He estimates his total sales, general and administrative costs associated with being an IBM Premier partner at about 35 percent of sales compared with about 10 percent for Microsoft.

The partner also pointed to the high costs associated with mapping into so many different brand managers and IBM reps. He says he has about 15 IBMers he must deal with, including brand managers and territory reps on a regular basis. On a $20,000 IT deal, he has had as many as 10 IBMers on a conference call with the client. "The customer flips out," said the partner.

Another solution provider executive said that after selling more than $20 million in IBM product during the first quarter, his IBM business fell off the cliff in the second quarter. "I've done almost nothing in the second quarter; it's frightening," said the solution provider, who asked not to be identified. He said the biggest problem is that IBM seems to want to take all large deals direct. "There is a 20 percent delta between IBM direct pricing and channel pricing," he said. "Channel pricing should be cheaper, not more expensive than IBM direct."

He noted that IBM is slow when it comes to providing him with server pricing, often causing him to miss out on deals. "I don't know whether they are screwed up or purposely dragging their feet so they can take the deal direct," he said.

Some See A Silver Lining
Yet, it's certainly not all doom and gloom in the small-business segment, where some solution providers have thrived with IBM even though they are anything but happy with just how difficult it is to deal with the vendor.

Competitive Computers' Demars said that not only is his IBM business up this year, but that his IBM channel reps understand his business and help him work through issues. It's upper management at IBM that shows less understanding of small business, he said. Still, he's chosen to stick with IBM as his primary server vendor. "We are like the chef who views IBM as a high-quality ingredient in our restaurant," he said.

Also, he said, IBM has a real opportunity to differentiate itself in SMB. "The only [server] options out there are HP, IBM and Dell," he said. "Too many guys I know say, 'Dell's direct; IBM's too hard to work with; I'm going with HP.' I want IBM to get better at this [SMB] so they can stay in the game."

PC Products' Hudgins is hoping IBM's new streamlined sales coverage model will reduce both partner and customer frustration. "Imagine if you went into a fast food line and you had to order your drink, hamburger and fries from five different people," he says. "That's the way doing business with IBM is like. Finally this gives one point of contact for me and my customer so that I don't have to have five conversations with five different people over the same solution."

Although he does sell blade servers and Intel System x systems, Hudgins said IBM may view it as economically unfeasible to touch partners like him. "Maybe IBM is testing the water to see if they should move back up the food chain to i and p systems away from Intel servers, which are becoming more commoditized," said Hudgins. "They got out of the desktop business. Is there a long-term strategy in place to possibly sell the Intel base or anything below blades as it becomes commoditized?"

Solution providers said IBM's ambivalence and HP's channel charge is showing up in quarterly results. In the most recent quarter, HP's industry-standard server revenue was up 17 percent, with blade server revenue up a whopping 58 percent. Compare that to IBM, whose Systems and Technology Group sales was up only 2 percent, with blade servers growing at a 15 percent clip year over year.

Rick Chernick, CEO of Camera Corner Connecting Point, a solution provider in Green Bay, Wis., stopped selling IBM servers this year after selling about $200,000 of IBM's servers in 2006. "IBM used to be a force in the channel and they aren't anymore," he said.