VAR-VAR partnerships: Trust isn't enough

Entering a VAR-VAR arrangement without a contract is never a good idea.

Sometimes the best way to increase your reach and profit is by collaborating with other resellers. Often, the benefits of partnering to grab an opportunity are simply too hard to resist -- benefits like the potential of greater profit, higher margins, new customers and new markets.

But as enticing and profitable as VAR partnerships can be, they can also leave you at risk, both financially and professionally. Not only might a collaborating VAR end up wooing some of your customers, but unscrupulous resellers might claim your intellectual property as their own.

The solution isn't to shy away from VAR partnerships; the benefits are too great. Instead, make sure to fully protect your company.

One way of doing so is with a formal VAR partnership program, like the Ingram Micro Service Network (IMSN) or Avnet's OneTech Connect. In both programs, the distributor facilitates the matching of partners by geography and skill set, makes sure partners are up to snuff, and offers remediation services if problems arise between partners.

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But there are plenty of times when, and plenty of reasons why, you might want to proceed without the benefit of a formal VAR partnership program. Perhaps you found the partner yourself, or maybe the partner you have chosen isn't affiliated with your distributor.

In these cases, spelling out everything -- from who "owns" the partnership relationship, which party any intellectual property will belong to and who will act as first responder when the client calls for service -- before beginning the joint engagement is crucial. That means developing a real, binding, legal contract. Although it isn't cheap and can be uncomfortable -- much like a marital prenuptial agreement -- it's the best way to protect yourself and your customers.

"A written agreement is a way to ensure that your communications aren't ambiguous. For example, they might say, 'We'll take care of you,' but that can be interpreted different ways," said Peter Moldave, a partner at Gesmer Updegrove LLP, a Boston-based law firm that focuses on technology clients. "And having a written agreement gives you redress; you can point out a clause in the agreement that spells out what should have been done by the other party, and they can't argue with it."

Contract specifics

Not all written VAR-VAR partnership agreements are created equally, and despite the claims of some online-only companies, experts agree that there are simply too many variables to make a boilerplate approach to reseller-reseller agreements acceptable. Depending on your situation, however, there are many things to consider including in your agreement.

Before you sit down with an attorney to decide how to construct the contract, make sure you understand both your objectives and your partner's objectives, said Gregg Kirchhoefer, a partner in the intellectual property transactional practice of Kirkland & Ellis LLP, a law firm with offices in many countries.

The first set of potential inclusions are procedural -- things like how payments will work, who will be the first responder for the customer, and who will own any jointly developed products or intellectual property.

The first step, then, is to spell out these facts:

  • A clear statement of compensation. "You've got to get it in writing so there is no disagreement about who gets what percentage of each part of the work performed," Moldave said.
  • A clear understanding of who "owns" the customer, who is the primary VAR and what the relationship of each reseller is to the customer.
  • An explanation of who will deal with the client first during implementation, and who will handle client issues after the implementation for ongoing issues and support. "The customer always wants one reseller to be responsible for addressing issues, so it's important to identify who bears the initial burden of investigating a problem, and who bears the burden when something goes wrong," said Peter Kinsella, a partner at Faegre & Benson LLP in Denver.

The second part of the equation is to delineate how each reseller will be protected. That involves defining:

  • Warranty claims and indemnities. "If part of the product breaks or data is lost, how is that loss apportioned between the resellers?" Kinsella noted.
  • Confidentiality issues. "When you put a piece of software on a piece of hardware there is confidential information that must be shared to make that happen; what is the scope of permissible use of that information?" Kinsella said. "And what happens when this arrangement is finished? Does each party have to destroy the other party's confidential information?"
  • Statement of limitation of liability. Language that makes it clear that each reseller is an independent entity, and that each is free to price their own products and services, helps limit the liability of both.
  • A written understanding of who owns marketing materials on jointly developed products or intellectual property (IP). If you create products or IP together, who owns them afterwards? In other cases, there may be trade secrets that one reseller wants to keep secret from their partner/competitor, because disclosing it may put the IP at some risk, according to Kirchhoefer.
  • An explicit noncompete or nonsolicitation clause or equivalent. "If you've got something like that in the contract, it says that when we go for a mutual opportunity, you won't take the opportunity away from me," Moldave said.
  • Antitrust issues. "Pricing and cost information shared between competitors creates antitrust concerns, so whenever you have two competitors cooperating, it's important to alert people as to general antitrust issues," Moldave said.
  • Indemnification. In other words, who will pay if a lawsuit takes place?

Although these contract negotiations can be adversarial, negotiate in a way that builds trust, Kirchhoefer advised. "Use respect, understanding and interest. Remember that you have to work with these people."

But regardless of what ends up going in the VAR partnership contract or who you choose to consult, the most important thing is to have a contract in the first place -- something experts say isn't a do-it-yourself project.

"Sometimes [VARs] want to get to the romance without bothering with the premarital counseling and prenuptial agreement," Kirchhoefer said. "That's a bad idea."

Must-haves in a VAR-to-VAR contract:

  • Statement of limitation of liability.
  • Compensation terms.
  • Description of who "owns" the customer, along with who is the primary VAR and who is the secondary VAR and who functions as the "first responder."
  • Description of who is responsible for each task during the specific engagement.
  • Who owns what if intellectual property is developed jointly.
  • Description of who owns existing intellectual property, products, marketing materials, copyrights, trademarks and clients.
  • A noncompete or nonsolicitation clause.
  • Indemnification terms.
  • Procedures for ongoing issues after the engagement is completed.

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