North American solution providers have been battling the margin squeeze for many years. The margin crunch was one of the main reasons why high-profile solution provider NexInnovations shut down operations late last year.The margin crunch was one of the main reasons why high-profile solution provider NexInnovations shut down operations late last year.
Rebates have always been welcomed by channel partners because it helps drive profitability. Recently, rebates have come under scrutiny. Some solution providers insist that front-end rebates are vital to ensuring necessary cash flow.
IT vendors such as Cisco Systems, on the other hand, believe back-end rebates prevent resellers from taking potential profits to the street and will ensure long-term partner profitability.
Then there is Dell who is asking the channel to unburden themselves from the rebate processing nightmare and focus instead on other more profitable endeavors.
Computer Dealer News invited Don Bialik, CEO of Long View Systems of Calgary, Yves C. Hebert, vice-president of Chicoutimi, Que.-based Telenet Informatique Inc., Paul Goldman, president of IT Methods of Toronto, Mike Gazdic, vice-president of Ingram Micro and Dan McLean, IT World Canada’s editorial and research director to participate in a panel discussion on the best opportunities for partner profitability in 2008.
CDN: What are the best methods for distributing rebates for channel partners?
Don Bialik: I think that your preference for one or the other, back-end or front-end, probably it’s a matter of whether you prefer profitability or cash flow. Those are related but a front-end rebate is a lot better for cash flow and at some point in our history what we realized was that the only profit that we ever made was from when the back-end rebate cheque came in. In fact, in a lot of cases, with HP for example, the back-end rebate was bigger than our margin from the deal and, therefore, every time we sold something, we were out money until the back-end rebate came in. That was really hard on cash flow. It was hard to grow a business that way.
Yves Hebert: Six months later, often six to nine months later and that’s the problem with back-end rebates.
Bialik: If you get them in 90 days, you’re probably lucky. On the other hand, Cisco’s VIP Program is probably the best example of a back-end rebate that really bumps your profitability up. What they do is they’re trying to keep you from just sending it to the street so you get a lower price and you try to be competitive so the client gets a better price. It’s the uncertainty on whether you’re actually going to get that back-end rebate so you have to hit a certain quality score on the surveys in order to actually get your VIP number. Cisco’s VIP Program, to me, is the best back-end program for ensuring profitability but that’s whenever you get it; well, I suppose, it could be up to nine months after the deal, right?
Hebert: Well that depends. With Cisco it’s a little slower. We get it maybe within 120 days.
Mike Gazdic: It depends when the period ends. Exactly.
Bialik: It could be six months so you could be up to nine months from the first day sold. And that could easily be your profit.
Hebert: It is also the time. If it’s not your profit, like with HP on certain occasions, it’s the extra profit that you’re making so you can re-invest in training, certification and stuff like that.
Paul Goldman: I have just a question about the two examples that you gave. It seems to me that in the case of HP, where the rebate is front-ended but you don’t get paid for some deferred period of time, I would imagine that the sales people are getting paid on the gross margin regardless of when you’re getting paid.
Hebert: Well, that’s another thing; yeah, you’re right.
Goldman: Which takes me back to Don’s comments around Cisco VIP which my understanding typically that is really an investment fund for the partner to use to grow the business so those rebates are being used for very different purposes in the business end and driving behaviour at the sales rep’s level potentially vary differently.
Gazdic: The argument over the years has been and Don you raise a very good point, if the profit that you’re making is really the value of the back-end rebate, which the manufacturers have said to us over the years in not so many words, then rebates saves the channel from ourselves. So basically, if we’re selling product just to get the back-end rebate they would argue that the back-end rebate makes us profitable. If it was an upfront discount off of price, then we’d just be giving away that particular portion as well. That argument does hold true in some cases.
At least I’ve seen in the last couple to three years particularly since we’ve come through a pretty heavy wave of consolidation, whether it’s bankruptcies or other things, is that rebates tend to be very laser-focused in terms of growing specific product categories, technologies or customer set. So everybody wants the SMB space. Everybody will pay some kind of back-end rebate and/or other investment type of funds in order to go after that space. Unlike in years past and again marketing funds were the same thing where you’d earn it just because you’d sold it, now you don’t anymore. You earn it because you sell either a specific technology to a specific customer set and that applies to both the back-end marketing and rebate dollars. So I think that’s kind of the argument they’ve used. The business has come a long way with back-end dollars not, just rebates again, to address those types of situations that we’ve been as a group, whether it’s distributors or solution providers, have been talking about it for a long time, i.e. we’re not making any money selling you product because it’s a commodity item. They’ve addressed that in some respects and I think you guys have done a good job creating value around those areas that they want to make some progress in.
Bialik: I guess this falls into this category. The registration programs I think are generally really good so if you are able to register a deal and you get five per cent more discount off that deal than somebody else, then it keeps you from having to fight over margin and squeeze the margin, so I really like the registration programs. The one issue that we have is that as soon as one comes out, we have one particular competitor who goes out and essentially registers the phone book.
Hebert: That’s where the PAM (Partner Account Manager) has to do his job.
Bialik: That’s right so we would suggest that most registration programs that we’re involved in need a tougher policing in that you really ought to be adding value if you’re claiming that. There has to be a mechanism for the manufacturer, in this case, to say no, you didn’t add value and disqualify that registration.
Hebert: Something I would like to add to Don’s comments about different markets. We are in a small market. SMB in Chicoutimi is not the same thing as SMB in Calgary. SMB in Chicoutimi is five to 25/35 seats, but SMB in Calgary is 50 and up to 100 seats. When you’re playing against the big boys and I’m talking about the Bell’s and Telus’ of this world, then it’s different also because they’re trying to tell Cisco, the vendors and also sometimes the distributors that they’re really aiming at SMB to get all the rebates they need to win. They’re not really aiming at SMB. They’re trying to, at a certain period of the year when they need to make numbers, throw a few quotes at a certain SMB market. At the end of the day, they don’t win really; they don’t do the job and most of the time what happens is a company like Cisco loses the deal to a ShoreTel.
Gazdic: And, those are the guys that the bigger you get and Don, you can comment on this because you’ve seen terrific growth in your company, the bigger you get the harder it is to serve those small customers and it’s harder to get to those small customers.
Hebert: Maybe I would add also to what Don said is the VIP Program from Cisco is more than a reward program or a rebate program. It really compensates you if you work on a deal. If you bring a deal with not just the hardware or the software but all that comes with it, the time that you’re going to spend and the solution itself, that’s how they give you some money for that. I think that’s the good pact for big vendors like HP, Cisco or IBM. The reward dollars that you can get on a credit card from build-to-order vendors, that’s another game and for me that’s not a rebate.
One thing I would like to point out. For a smaller company of 50 in a regional market, the problem that we have with the back-end rebate is the administration of all that. It’s about the cash flow. Maybe others don’t need the cash flow, but we do. Sometimes when you’re big enough you can be self-sufficient with cash flow and not really have to take care about whether HP’s coming in or is Cisco coming in. For a small company, cash flow is very important.
Goldman: For any company if you have your cash sitting idle tied up in a low margin transaction that’s trouble.
Hebert: That I understand.
Bialik: If you’re not growing, it’s less important but if you’re growing at one point you need it to finance your growth so it starts to matter that way.
Gazdic: But even though, you’ve raised a good point again. I know we’re here talking about Cisco but if you look at the HP ARM Program, the applied rebate model, as an example, is so good for you because now instead of buying it at X, you’re buying it at X minus directly from us. Now that’s put a lot of its downloaded cost on the distributor to finance that and like you, we’re growing too and we need working capital to finance our business. Now again, if you look at the timing of that, you’re talking about anywhere in the area of 90 at a minimum getting our money out to six to nine months in some cases as well.
I think HP felt when they put that in place that it would be for you a good way to again not have to use your working capital to finance that rebate portion. What it’s done is it has put the pressure on the distributors to do that instead. That’s been tough for us to adjust to. We’re kind of working hard with them on trying to get the process down so it’s not 120 days, it’s 60 days and we can build that into the models slightly so that we’re not just selling a product; we’re selling a solution. We can make that work. That’s a newer type version of the rebate that flows through that doesn’t require these guys to use up their working capital.
CDN: Is there a reasonable argument for doing away with rebates, and, if so, what might be the more compelling – and profitable – alternatives?
Bialik: I’m thinking there will always be a role for them. Every manufacturer who designs a program is trying to achieve something and depending on what they’re trying to achieve with that program, rebates will be a part of it. It will just be a part of what their marketing department comes up with to say to you overall we want to incent distributors to carry our product; we want to incent resellers to emphasize our product and not even just our product but specific parts of our product suite and their dollars are going to be the way they do that. So I’m thinking it’s there forever. I want to swing back to the complexity side of things. The complexity is huge on these and I have one full-time person who does nothing but registrations and rebates making sure that we’re capturing every dollar out there that are available to us. We probably have at least 40 manufacturers of software, hardware or something. They have multiple programs each so there are over 100 programs that could change from quarter-to-quarter and she has to stay on top of that in Canada. Then in the U.S., there’s a whole different set of programs. There are very few programs that are the same in both countries so now we have another 100 and that’s a complex world to stay on top of. Did we actually get every dollar?
Hebert: I’m sure all of us around the table are losing some dollars. Even the distributors I’m sure are losing some money.
Gazdic: Very much; it’s high cost again to us as well for administration purposes and Don is right; one of the biggest fears we have as a distributor is not knowing the program details so not knowing whether we’ve left money on the table or we haven’t known the program details enough to go after certain pieces that would have been good for us and good for you as well.
Goldman: Isn’t that an opportunity for the vendors to move to Web technologies and collaboration? Cisco I think was one of the early companies to figure out that partner profitability is absolutely paramount to their growth success. I believe the next wave of innovation is going to be vendors continuing to innovate on enabling those partners financially through reducing complexity. The end technology that we’re building certainly in the Cisco world is getting more and more complex. It requires tremendous investment just to train and retain your teams and I think they’ve done a great job on the VIP.
One of the things that I think Cisco should look at and I haven’t sat in enough of the VIP sessions to kind of hear their feedback on this point, but there’s a huge barrier to get to the advanced technologies even by communication, security, etc. There’s a huge commitment of resources, certification and training. Once you get there, you also have to meet minimum revenue volumes. Well, there’s kind of a gap between the investment day and execution and converting that to revenue that I think there should be more of an alignment to and Cisco is being challenged right now to actually bring on more partners to fulfill the demand. If you look at the landscape here in Canada, it still continues to be the same companies that are changing chairs; as some go, some are consolidated and there are new companies.
McLean: Could they do more to help you get there?
Goldman: I think they’re doing it. They’ve done a great job. That’s one of the things that I’d like to see is just less of a barrier on some of those advanced technologies.
McLean: And the barrier you say is in sort of the commitment that they put in front of you that gets certification to get the expertise.
Goldman: The barrier also works for you as well once you get in the program, but as you ramp your revenue, I think there are thresholds and other things that you know maybe for the first six months you might not even hit them. In the case of Cisco, they’re real dollars that they’re contributing to that investment.
Gazdic: But in their quest, in Cisco’s case particularly, to get that SMB space and make big strides in that space, I think they’ve made it easier on you though, have they not?
Goldman: That’s a whole other discussion around the Select Program whether that will be successful and whether the solutions can actually be deployed by those partners that are fitting into that slot. I mean there’s a lot of complexity when you get into the SMB space with an advanced product. It’s not a point IT solution any more; it’s really almost outsource IT. SMB, you’ve got to do everything. I think that’s one of the challenges that faces the entire market today.
Bialik: I’ll just say what you said maybe from a different point of view though. Five years ago Cisco sold SKUs that were products and it was just a product. How many do you want and how do you want it configured so that was one world. By and large today, they are now selling solutions so a voice system is a whole different thing than hey, I need to update my core router or something like that. They’ve gone from selling products to selling solutions and they’re telling us how that evolution is going to continue along that continuum. I would suggest that today’s set of programs in terms of how you do marketing development funds, how you do rebates, etc. and how you invest in trading is probably lagging what they’re actually selling by two to two-and-a-half or three years and understandably enough because hey, their world is moving really quickly. I think that there will have to be an evolution in terms of reseller programs as their solution set also changes and they’re not doing a bad job. They’re probably the best ones, Cisco but they’re still behind and then eve
Bialik: I also think that the manufacturers must be saying to themselves or asking the question of, so giving all these rebates, how effective is that? I don’t think they’re asking that of us as individuals, they’re asking that of the industry. They’re scratching their heads and saying, we gave away $47 million in rebates last quarter. Geez, did we really get what we wanted? We sort of knew before what we wanted but after the fact, did we actually get what we wanted? They must be wondering themselves.
McLean: They must be tracking that too though. I mean it’s a simple sort of number crunching equation really and the rebates, you could look at the rebates and from their perspective say, well it’s kind of a sales commission really. What we’re paying out is just the commission to you for the sale and what we want to do through the rebates is to generate as much volume as we can generate. I was even going to ask the question that there was a discussion around perhaps taking volume out of the equation sort of levels the playing field. Would any vendor do that because giving volume discounts is a way to get the volume numbers up so why would I take that away?
Bialik: I think you would have to reward those organizations that make you the most margin. I think you have to. That’s almost universal in commerce. It has nothing to do with our industry; it’s just the way it is.
McLean: Sell a lot, yeah, absolutely. That’s the way it is.
Gazdic: We’ve been having this discussion for a long time about value and volume. I’ve always taken offence to Ingram being called a volume distributor when we’ve got a configuration centre and we do a whole lot more than just pick, pack and ship.
Hebert: Pushing boxes.
Gazdic: Exactly pick, pack and ship products. Now that’s partly our fault in terms of selling our value to you guys as well as to the end users through the system. Back to what Don said, I don’t think you’re ever going to be able to eliminate some kind of rebate program and I think what’s happened is there’s a differentiation between the volume rebates, which is a classic you are rewarding for selling a lot of your product and the value rebates, which are built around solutions and/or registrations and/or technology again in wrapping products and solutions around something as opposed to just selling a switch or upgrading a switch as you eluded to before.
Bialik: Somebody recently has a program, it might even be Ingram, where it might be on a certain deal and the way we would understand the pricing is X. Then we’d take that to whoever this is and say okay are we missing something? They have their services that they’ll go and see if there’s any other programs and if they do, if they find it, they take a percentage off the difference. So as a reseller, you’ve done the best you could based on what you understood and then the distributor went searching for and found other stuff. Is that an Ingram program?
Gazdic: You know what? I guess I should know that but I don’t.
Bialik: Well, it could be the U.S. Ingram I’m not sure.
Hebert: I’ve never heard of that in Canada.
Gazdic: No, we haven’t done anything that complicated in Canada, but that’s kind of a unique way to go.
Bialik: What I liked about that concept is that it forces the distributor to; instead of forcing thousands of resellers to do this research, you are forcing a half dozen distributors to do this same research and then you’re finding a mechanism to pay them for having done that research. It just would seem to be making the whole industry more efficient if we could do that. Now I don’t mind the way it is now that we’re going to win a bunch of deals because we’re more competitive at figuring out which programs work. I’m okay if that’s the way it is, but to be honest, I’d rather not. I’d rather someone else did that work and we could compete on other things. We’ll take it as it is if that’s the way it’s going to be.
Goldman: Well Don, you have critical mass in your company; like you have one dedicated person so think about every other partner is going to have a slice of a resource that has to pretty much cover the same effort not necessarily in volume but in terms of scope, which is a huge undertaking.
Gazdic: I can add to that by saying when you look at unique programs and Paolo, you were asking about if you see a day when they’re gone or what could replace them, I think again they are around for another bunch of years. The thing that really needs to continue to happen is the rebates and/or the back-end dollars,
call them what you want, have to be focused on selling the product through as opposed to back in the old days of selling product in. That’s really, whether it’s a product or a solution. It has to be built around whether you get a customer and apply a solution to it and we help you enable that. That’s where the rebates need to be paid on as opposed to just as we’ve heard recently. There’s been behaviour in the marketplace that’s rewarded and given out rebates for the wrong reasons. I hope, the manufacturers and the rest of us have learned our lesson in terms of how those dollars come and what they should be paid through on.
CDN: According to a recent study by the CMO Council, channel partners believe they are an afterthought of most vendors. Does this outlook concern you as you try to build a profitable business with these vendor partners?
McLean: That’s the do you feel loved question. That’s what it leads to.
Bialik: I can comment for Long View that we’re big enough that we get lots of love. We get lots of love and we can go find lots of love. In other words, if we don’t feel like we’re getting it, we can go to that particular manufacturer and sort of say we can do big enough numbers that they’ll give us the time of day. I certainly think that’s okay but I actually believe that most manufacturers carry way too many resellers and I wonder why they do it.
It must be a real pain for them to be able to deal with, in some cases, thousands of resellers and the last thousand or so hardly, like they can’t be adding margin for them for the cost of having them and even recognizing that they’re a partner and paying some attention to them. They haven’t got the resources to show the love to the bottom obviously 75 per cent. I think that’s so absurd because they probably do 80 per cent of their business through the other 25 per cent.
CDN: The 80/20 rule.
Bialik: Sure so that last bunch gets ignored and I don’t know why they do it but on the other hand, I remember eight years ago when we started, if nobody had let us be a partner, we wouldn’t have been able to get started in the business so perhaps that’s what they’re doing. If it’s hard to tell who’s going to be a good partner 10 years from now, you’ve got to let a bunch in.
Goldman: It’s about focus. IT Methods is a young company and we committed a lot of energy to Cisco. They’re the leader in their space. It’s a big part of our solution set and we committed a lot of resources and energy. With that, we’ve enjoyed a fair bit of love considering our size and there’s a plan to grow.
I think for a lot of the partners that maybe responded to that survey is that maybe those companies need to also decide who their go-to vendor partners are versus just shopping technology almost on a transactional basis. I think that’s also symptomatic of some of the business issues that those companies have in that they’re predominantly reactive to customers’ requirements and maybe not being proactive in building solutions and then dragging or pulling their vendors with them consistently. That’s certainly the direction that we’re going. We’re going to continue to add vendors but it will be also with the same level of commitment until we reach Don’s critical mass.
Bialik: Are you just going to quit and go live in Miami or something?
Goldman: Well, just like Long View, Don and I have actually had this discussion but you know having built and sold a business once, my view with IT Methods is a long view. Sorry, I didn’t mean to plug your name, Don.
Bialik: This industry is fun. Understanding that I’ve got all kinds of hassles about it, but it’s fun.
Hebert: It is. It’s somethi
