Partners' poaching of customers on the rise 15 January, 2009 By Liam Lahey

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Recently, rs-unix, a San Francisco-based solution provider and an IBM Premier Business Partner, ceased operations due to increasing competition with other IBM partners.

Jeff Medieros, CEO of rs-unix, said he had invested aggressively in IBM's direction and through IBM programs that compensates partners for going after new business in the SMB space. The company was "extremely profitable and more successful in finding new business in 2008 more so than we had in our entire 13 years of history; net new customers, not revenue.

"We were an IBM Premier Partner the entire time. We were very integrated into the IBM organization. We had no intention of not being in business . . . at the end of 2008 we looked at our financials and we saw that over the last couple of years . . . the profit for the net new business was higher than any other business we were doing," he explained. "This business was being challenged regularly by existing IBM business partners. Through the IBM channel program there was not enough protection for our investments. We could go win those customers but we're winning them at a precipitous fall . . . my drop in profitability on existing run rate was greater than 50 percent. You play that out over time and you ask yourself, 'is this a good business model?' . . . we couldn't make money."

Denise Sangster, president and CEO, Global Touch Inc., called the demise of rs-unix "sad" and "shocking."

"First, to look at it from the manufacturer's perspective, in a down market they need to find a way to sell their gear. But at the same time, they must ensure their go-to-market compensation for partners encourages good customer behavior not predatory practices," she said. "IBM is unintentionally encouraging its partners to bid the prices down. What we're seeing is a lot of poaching of existing customers and rs-unix is a good example of this."

All manufacturers need to ensure the channel maintains a healthy, viable status, she continued.

"Partners work on very thin margins and they need vendors to be as smart as possible right now and make sure they're helping protect a quality partner and maintain the best results for the customer," she said. "Manufacturers need to step up and take a hard look at their business practices and decide what to do. If they don't want to do anything, fine, indicate that and then the partner can make a decision as to whether or not invest in that company."

In the case of rs-unix, Medeiros said the company earned US$200 million since its inception. When asked if he had approached IBM and explained rs-unix's predicament to it as a means of seeking help, Medieros said Big Blue's response was simply "it's survival of the fittest."

"They were heavily involved in the conversation, but at the end of the conversation it's just 'survival of the fittest', and that's cool. I'm a very aggressive competitor . . . but it's not the business I want to be in: to broker and take down IBM business from other IBM people," he remarked.

Rob Enderle, principal analyst, The Enderle Group, said in a down market there is a huge focus on capturing a shrinking pool of customers.

"Think of musical chairs and not wanting to remain standing when the music stops. It's that kind of market and one of the reasons why a large number of firms are using metrics like NPS (Net Promoter Score) to discover the customers they simply can't lose," he said. "If there was ever a time to assure loyalty this year is it."

Sangster said rs-unix's Medeiros' reputation in the industry is stellar. But loyalty between vendors and partners is a complicated question to answer.

"It's really sad to see a longtime IBM partner have to close its doors for the reality they can no longer make enough money to survive. That's really quite an indictment. It's one thing if you see an inefficient company go out of business . . . but when you see a quality partner say 'we can't make enough money' and they walk away, that's quite a statement," she said. "This is potentially a canary in the coalmine; when a guy like (Medeiros) has to leave the market that should be telling you something.

"But vendors need to sell products . . . it's hard to know what is the best formula for success for today. What is not a good formula for success is watching your longtime partners go out of business."

Separate from the IBM-rs-unix issue, partners too need to take a long look at their services model to determine how they're making money, she added. "How much of their money is coming from professional services? That's a soul-searching question most partners have not taken a hard look at and that's where the revenue is going to come from this year."

Michelle Warren, principal analyst, MW Consulting, agreed the case of rs-unix is sad but it is one that is probably indicative of both competitive channel conflict and the current economic state.

"Increasingly, channel partners have to look for new business opportunities, opportunities that lie outside of the vendor realm," she said. "Channel and partner programs are one way of increasing and conducting business -- and often valuable ones -- but organizations should look to other avenues."