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Lenovo Partners: Channel Program Changes Will Drive Sales To HP, Dell

Solution providers say partner sales reps are "furious" about a 30-50 percent cut in profit margins resulting from Lenovo channel program changes.

Lenovo is slashing back-end payments, spiffs and program discounts in its $30 billion PC business in a series of moves that partners say will dramatically cut profit margins and ultimately result in them shifting business to competitors like HP Inc. and Dell Technologies.

One major change is that Lenovo is eliminating the cost-minus pricing structure that allowed distributors to offer discounts to partners while still maintaining gross margin, sources said. Solution providers expect the changes to cut their profit margins in some cases by as much 30 percent to 50 percent.

Lenovo North America Channel Chief Sammy Kinlaw confirmed that changes to the company's channel program intended to push partners to sell higher-end products and services went into effect Oct. 1 but would not comment on specific details of the new terms and conditions.

[Related: Lenovo's Kinlaw On Channel Program Changes, Cost Increases, CDW And The E-Tail Threat To Partners]

The program overhaul comes just months after Lenovo ceded its position atop the global PC market to HP Inc.

Both HP and Dell made gains in the second quarter while Lenovo's market share dipped in a period that saw the market contract more than 4 percent, according to Gartner.

Several of Lenovo's top partners, who did not want to be identified, said the margin cut is going to result in Lenovo notebooks and systems being displaced by HP and Dell because competing products from those vendors will be more profitable for solution providers to sell.

"Lenovo has taken as much as one half to one third of the profits away that we were making on Lenovo with the change in distributor pricing," said a sales executive for a Solution Provider 500 company, who did not want to be identified. "Our sales reps are furious and are ready to move that business to HP or Dell. What Lenovo is saying with this move is they don't care about the channel. They have made a decision that they do not want the channel to make a sustainable profit on Lenovo product – only on services."

Another partner, who did not want to be identified, expects millions of dollars in sales from his Lenovo PC business to move to HP or Dell.

Other changes include the elimination of Lenovo's spiff program, the reduction of back-end funding and alterations to program discounts affecting all distribution and master contract pricing.

The distribution channel program changes decimate profits in an already thin-margin business – making some special bid contract business unprofitable, said several partners.


"Lenovo is removing the [distributor] back-end money, eliminating an average of four points," said one solution provider executive familiar with the changes. "If Lenovo drops what they're giving distributors, they can't give us minus three [points], and we would be losing money on every project sold."

Kinlaw wouldn't disclose the specifics of the changes made to partner program rebates, saying he didn't want to reveal his strategy to arch PC competitors HP and Dell.

He did concede that he is against cost-minus channel programs. "I do not want programs created that allow for cost-minus pricing," he said. "I think cost-minus pricing is not a healthy behavior, and it masks the needs of what our end-users require to close business. I would rather be more transparent in understanding the real cost to the end user that's needed to close the business rather than working within a model that's cost minus one, two, three. That's not healthy, and to be blunt, that's where we were going, and I had to course-correct that."

Kinlaw said the cuts aren't drastic, but are rather part of a balancing act intended to move partners toward products like workstations, high-end PCs and services.

The changes were sparked by increased costs of memory, solid state drives and even a pending operating system price increase, and partners must "share in some of the pain" of those increased components costs, Kinlaw said.

"That's going to transition itself into lesser back-end monies in some of these opportunities, program-wise, not in cost to the customer," he said.

Kinlaw said the aim of the program changes is to maintain a "level playing field" that enables smaller VARs to compete with larger VARs and smaller distributors to compete with larger distributors. "I will make specific investments with partners who have capabilities in the area where I am most interested," he said.

"What we're experiencing is supply and demand, and costs are not decreasing, they're increasing," said Kinlaw. "We've held as best we could those costs because we know that our end-user expectation is to get more for less money, and that, frankly, has been the case for years, but that's [no longer possible] this year."

Kinlaw said the changes are aimed at moving partners toward products like workstations, high-end PCs and services while maintaining customer pricing on most PCs.

"I would highly encourage [partners] to make sure they can fully articulate the value of premium-type products," Kinlaw said. "Workstation is becoming a big piece of our business."

They're also intended to stave off channel competition between solution providers and e-tailers and the increasing crossover between commercial and consumer PC buyers, Kinlaw said.


"It's moving over commercial products, the desire for commercial products to be sold in consumer markets and the consumer products to be sold to the commercial market," Kinlaw said. "The e-tail community is on fire. E-tail is important to me, and it's growing, but I know where my bread is buttered, and it's with VARs, where Lenovo has its roots. Our VAR community needs to know how to compete with e-tail. That's where the value-add piece is going to become very important. End users are shopping in this growing world of e-tail."

"I know partners don't like change. None of us likes to have any change," Kinlaw said. "But we're in an environment where we're going to have to change, and they're going to have to change with us. They're going to have to change with us because everything is moving at a pretty fast pace in terms of cost increases."

The channel changes strike some partners as an about-face for a vendor that does about 90 percent of its business through the channel and has a reputation for being channel-friendly.

"When you go to Accelerate [Lenovo's annual channel partner conference], they really center a lot of their break-outs around spiffs and back-end and how you can create all these back-end dollars, but now it sounds like they're getting rid of all those programs," said a top executive at one solution provider who works with Lenovo in the in K-12 education market. "HP is not doing that. They have a spiff program, back-end rebates."

Lenovo's spiff program offered partners as much as $10,000 per quarter in the form of pre-paid debit cards. Back-end rebates on PCs started at $2 per unit and topped out at $60 per unit.

With the latest program moves, the solution provider executive said, Lenovo is making a classic channel mistake: rather than eliminating competition, as Kinlaw argues, the changes will spark channel conflict with retailers like Best Buy, solution provider behemoths like CDW and even Lenovo itself, which does offer limited product sales from Lenovo.com to "consumers only."

"Lenovo is always talking trash about Dell competing with the channel. You would think they would know better, but they've made some boneheaded moves in the last 12 months. If a customer is buying from you and the discount isn't as good, they're going to check with CDW, or Best Buy or look at going direct. They're going to question the resellers more."

Partners said Lenovo's spiff program ended abruptly a few weeks ago, without notice.

"It was a big money-maker for the reps, and if they're not going to get those per-unit dollars, they're going to go to someone who does, like HP or Dell. [Lenovo] said not enough people were claiming it, which doesn't make sense, because if that were true, Lenovo would just keep the money and it would be the reps' fault for not claiming it," said one partner, who did not want to be identified. "It was a red flag for me."

Lenovo's product portfolio and executive ranks have been roiled by change in recent years, but most of those changes, from the tortured integration of IBM's x86 server business to turnover among high-profile executives, have been focused on the company's data center business.


Last June, the company rebranded its data center products as ThinkSystem, and its plug-and-play, software-defined product line as ThinkAgile. Less than two months after rolling out the new branding and a stable of new data center products, North America President Emilio Ghilardi resigned.

At the time, Lenovo partners said the company hadn't done enough to solidify its presence in the data center market.

Lenovo's PC business had been a bright spot but has recently lost some luster.

For the full fiscal year ended March 31, Lenovo's PC and Smart Devices, Mobile, and Data Center groups posted 2.3, 5.4 and 10.6 percent sales declines, respectively, continuing a recent trend.

"I understand the pain that a programmatic change can cause," Kinlaw said. "A partner looks at a manufacturer like Lenovo, who is channel-friendly, as a predictable, consistent and profitable program. When I make a change like this, it upsets the environment. I'm going to own it."

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