At a recent event at London Business School, IT entrepreneur Jos White outlined his early formula for success in supplying IT to big corporations. His career in selling had started in Thailand when he bought bogus certification for teaching, he told his audience. He got into IT knowing nothing about it but was soon sourcing equipment from grey importers and selling it at massive mark-ups. A leading firm one might presume to be fairly savvy on procurement matters was paying £2000 for memory that cost the supplier £100 to source.
The memory brand alerted its lawyers and wrote to customers instructing them not to buy from White’s company, RBR Networks. But the customers ignored them because such were the inflated demands of IT manufacturers at the time, RBR was actually driving prices down. Eventually, The memory seller dropped its legal challenge and instead made RBR an authorised supplier. As some IT suppliers go, White’s firm was one of the more scrupulous players.
Welcome to the strange world of the channel, one of two polar opposites of the IT industry. There are IT managers and CIOs, who tend to be bookish, thoughtful and almost anal in their attention to detail. At the other extreme are the people who supply them, the IT resellers and dealers, who don’t share their clients’ commitment to red tape and conservatism, but work the angles and, unlike White, not all of them are merely clever, ethical operators.
All manufacturers would rather deal directly with customers but few have the capacity to do so. So they use third parties, the channel, to cover more ground and bring them to market quicker. IT resellers, however, can be like estate agents only with a narrower, uglier vocabulary and fewer scruples.
This can lead to some sharp practices. For example, every new model of IT brings a wave of smoke-and-mirrors merchants. Seven years ago, during the height of the frenzy for application service provision (ASP), which was the cloud computing of its day, there were some outrageous deceptions being planned. IT suppliers, with no service infrastructure at all, were pitching for the business of multinational corporations, according to market analyst Clive Longbottom, service director at Quocirca, hoping that, having won the business, they could rapidly get up to speed and use their client as a learning process.
This is standard practice in IT. Indeed, one anonymous veteran supplier who has launched and sold several IT distributors sees nothing wrong with this.
“I can’t see the problem,” he says. “We all do it. After all, London pitched for the Olympics and they didn’t have the infrastructure. Nobody criticised them. What’s different?”
Customers of collapsing ASPs or telecoms providers might not see it that way after they were left without an system or even the data on which to rebuild one. Behind their carefully presented facades, your suppliers are often a house of cards. They may have appeared respectable in your initial meeting but that’s because the venue you met them in wasn’t actually their property but was borrowed or hired for the occasion. Often a reseller is one late payment away from a fatal cashflow crisis that would sink it, and take your IT systems down with it.
Another frequent cause of collapse stems from false promises, explains Longbottom. “The vendor sells to the customer base, based on all of some other party’s promises,” he says. For example, a virtual ASP (vASP) – which is often a white-label two-man-band that resells excess space in someone else’s datacentre – is naturally dependent on the IT equipment owner for its capabilities. But the IT equipment owner is dependent on the datacentre owner’s capabilities, and the datacentre owner is in turn dependent on the connectivity vendors. And so on. It’s not illegal but when something goes wrong, as is increasingly likely in today’s market, the vASP is at the bottom of the pecking order. After all, it’s a company selling another’s spare capacity.
Though RBR’s grey imports enabled companies to get approved equipment at competitive rates but it doesn’t always work that well. RBR could only offer cheap kit because the company approving the memory was selling kit in the UK at double the price of that available in the US. Grey importing (where a company sources equipment that, for whatever reason, is not intended for the UK market) is one of the biggest dangers in dealing with price-competitive resellers.
The most frequent problem is where they buy brand-new kit that comes in the manufacturer’s box with all the right paperwork but, when you come to register it for a vendor’s warranty, or need full support, you are like to find that it’s a ‘special’: a box that was destined for an emerging market, hence the unique price. This can be as false an economy as buying second-hand because any malfunctions may cause problems down the line.
Another growing menace is short sellers, resellers who sell goods that they don’t have in stock or even have the powers to order. They take the order on the premise they will be able to deliver it when they have the money in the bank. This works fine until a weak link in the supply chain causes a collapse of this on-tick economy. The reseller goes into administration and there is no legal redress for the customer who ordered the kit. “Some resellers don’t bother with the pretence and proceed straight to the ‘take the money and run’ stage of proceedings,” says Longbottom.
Frequently, manufacturers try to influence who you should buy from, but non-recognised resellers shouldn’t necessarily be an issue. If the goods aren’t grey, then they will have to be supported by the vendor under its own rules.
Many resellers are clueless in understanding what they are selling, but if you know exactly what you need there are economies to be made by sourcing your IT from an ‘order taker’ rather than a ‘value added reseller’. VARs expect to be compensated for the money spent on the manufacturer’s training courses, which are an expensive but sure-fire way to ensure they get certification. These certification training courses are a great source of revenue for manufacturers. Nobody ever fails these courses, as long as they pay in full, so whether certification is always a guarantee of anything is a moot point. But as a buyer, you can be sure that the price of achieving accreditation will be passed on to you.
All the issues around resellers seem to stem from the relationship you have with them, and that the people you have formed a relationship with soon move on higher up the food chain to a manufacturer.
But it’s the intangibles that hold the most danger. Difficult-to-pin-down concepts like cloud computing can mean everything and ultimately nothing. It’s hard to fix service level agreements on such ethereal business models.
Like the previous incarnations of outsourcing, cloud computing has minefields waiting for CIOs to walk into.
“Many companies who sign service deals have no idea their site is hosted abroad,” says Dominic Monkhouse, European MD of host Peer1.
“From a web perspective this would have serious implications for their Google rankings.”
Some IT chiefs can sleepwalk into contracts that lock them into a three-year obligation to put up with terrible service.
“Many hosting firms seem to design contracts to mitigate for the bad service they’re about to deliver,” Monkhouse adds.
The good news is that, legally, many hosting contracts that lock a customer in for three years are not enforceable. The bad news is that few CIOs dare to mount a legal challenge. Often everything is skewed in favour of the bad host with all obligations going one way. “The assumption is that companies are tied into a contract they can’t get out of,” Monkhouse adds, “but that isn’t true.”
Still, the IT channel doesn’t have things all its own way. Monkhouse tells of a scam played on him by a recruitment company. “I was about to appoint someone I had already interviewed, when a recruitment company emailed me his CV. Naturally I opened the email. But tucked away in the small print, was a note saying that if I opened this email, I was accepting their terms and conditions. Which meant I had to pay them a big commission for appointing someone I had found independently,” he says. “It’s a rotten scam. I tell you, IT suppliers are boy scouts when you compare them with the recruitment industry.”