The Wall Street Journal (subscription required) reports on a federal whistle-blower suit that shines light on a high-tech industry practice that I’ll bet most customers don’t know about.
Here’s the deal.
Tech companies sign agreements to cooperate with major integrators such as Accenture or IBM Global Services. These deals include lots of things that you’d hope they would, like expedited access to core engineering resources, volume discounts, national coordination and local support. All good.
Can “objectivity” be bought?
The manufacturers also offer incentive payments for things like replacing a competitor’s equipment with their own. Vendors also offer rebates directly to the integrators based on total purchases.
In one instance cited in the WSJ article, Sun offers members of its “Government Alliance Program” a 10% rebate on purchases for a “competitive knockout” and a 2% rebate on total purchases. Other vendors have similar programs.
Two different issues
The Justice Department is suing several integrators because they believe the practices constitute illegal kickbacks. A judge and jury, and perhaps several years of appeals, will decide that.
As a taxpayer, I’d like to know that the world’s largest consumer of IT equipment, the US Government, is getting volume pricing on the $150 billion it spends each year. The integrators and vendors say the practices are legal and they may be correct.
The issue for private companies is a little different. You hire an integrator because you don’t have the in-house expertise to manage a big project. You rely on the integrator to provide a solid solution at a good price.
So the big question for you is: do the vendor payments directly to the integrator affect the integrator’s objectivity?
The lesser question is: am I overpaying for this solution so the integrator can earn more from the vendor?
The StorageMojo take
These disclosures should and probably will lead to some changes. Integrators typically are on the hook for performance and maintenance of the systems they install, so they have no incentive to knowingly buy something stupid. But in a world where Windows servers and low-end arrays are commodities- a 10% rebate might affect vendor choice at the margin. There must be some reason for offering the rebates besides charity.
But shouldn’t that rebate get passed on to the customer?
Whether the rebates are legal or ethical, the optics are iffy. Disclosure of these payments, or their elimination, is the right path for vendors, integrators and customers.
Comments welcome, as always.
even more funny:
According to a reseller “somewhere in Europe” – a leading hw-manufacturer from Armonk,NY will give the reseller an additional 20% off – called “branded discount” – if the partner has registered the project — AND — the offer (to the end customer) is 100% from this vendor.
So for a reseller – a 20% lower price is a good ticket to win the deal.
But it’s normal, that other vendors have similar programs, where registering the deal on a partner-site gives 10-20% more discount to the first one.
>> should the rebate get passed to the customer ?
It depends … typical hw-reseller margins are often below 5%.
so you anyways can’t make a profit just by selling tin.
So for a reseller/partner to be profitable – the service must do it…
And that’s then the typical result:
You bought a mega-cheap commodity HW, but whatever kind of service you need – prepare to pay …
There is no such thing as a free lunch 🙂
A simplier picture is this:
HW can be manufactured in China – and MUST be cheap, because whatever
quality the customer compares — he compares it to the lowest price.
But some services cannot come from China – you need local personel.
(for example you cannot remotely swap powersupplies)
And here is then the chance to catch up on margin …
hirni
There are many more things aside from discounts, rebates, etc. that may affect a VAR’s decision on which product to pitch a client.
What a supplier, VAR, vendor or grocery store pay for something that they then sell to me is none of my business. As long as I’m comfy with whatever it is that they provide for me that’s all there is to it.
As with IT and other areas that are hardware (stuff) and service intensive I can find cheaper stuff but maybe not the service I need, be it the quality of service, the timelyness of the service or the amount of service e.g. 7x24x365.
Maybe I can get loads of service but the # of bodies on site doesn’t equal actually getting my problem fixed.
I can also spend tons of time revisiting each and every vendor’s contract looking for ways to economize, maybe even switching from a long time vendor to a new vendor. This may not be cost efficient in the long run.
At the end of the day every vendor, VAR, grocery store owner and car mechanic have to make a profit. We all have to eat.