Vendors allege partner program misuse feeds gray market problem

Gray market alliance contends that abuse of channel programs and funding contributes to a $54 billion problem.

The abuse of vendor channel market programs -- including partner rebates and other incentives -- plays a bigger role in the sale of gray market IT gear than previously thought, according to an industry group made up of IT vendors.

Gray market resellers sell used products as new or counterfeit products as the real deal.

According to The Alliance for Gray Market and Counterfeit Abatement (AGMA), a group backed by Hewlett-Packard, Microsoft, Cisco Systems and Deloitte Development LLC, a majority of the 12 vendors surveyed think abuse of channel incentives such as special channel pricing feed the gray market.

“We’re always looking for root causes, and we found that channel incentive program abuse had a bigger impact than we thought,” said AGMA spokesman Scott Olsen. Improving partner programs, but tightening up reporting requirements, could help ease the problem.

Some VARs agreed that fine-tuning partner programs could bolster VAR-vendor relationships and keep partners on the straight and narrow.

“It might help. It’s just another form of enticement, and it does help build a better line of communication,” said David Dadian, CEO at PowerSolution.com. “I can understand why vendors are trying to tighten partner programs.”

How rampant is gray market abuse?
One of the problems here is that few VARs or customers admit to using the gray market to sell or buy IT gear. But if that were truly the case, why is the gray market so big? AGMA contends that IT vendors lose $54 billion a year in product revenue to gray market sales.

The problem is aggravated by some vendors’ wide-open return/replacement policies. For example, if an end user or VAR has a broken switch, HP often doesn’t ask questions before replacing it.

“Someone can get a 10-year-old product from eBay that breaks, and HP will send a new one out immediately,” he said.

The executive said that approach emboldens distributors and partners to turn to the gray market. And, while he normally buys product direct or through the channel, he admitted to turning to the gray market occasionally.

“Business is a battlefield. I don’t like it, but there were a few instances where I used it for HP switches because of the small volume of the deals,” he said. “Name me a company with a data center and I guarantee it’s used the gray market.”

Vendors don’t help their own case when they rush product end-of-life policies. In those cases, budget-conscious companies may turn to gray market goods as replacements or replacement parts for discontinued gear that they still see as valuable.

Dadian said the gray market is something partners need to be aware of. “It’s still prevalent and there are two things driving it: the economy, because people still want to save as much cash as possible, and greed,” he said.

The appeal of HP ProCurve switching 
A Mid-Atlantic VAR said he has lost HP ProCurve switching deals to competitors pitching gray market alternatives.

“We’ll lose deals where customers come in at some crazy price, like 10% to 20% less than what we’re offering,” he said. “It’s often ProCurve, which makes sense because of the lifetime warranty.”

While losing such business hurts in the short term, Dadian said partners still need to be cautious of refurbished goods because of the harm they do to partner-customer relationships.

“We were approached by a West Coast company that tried selling us some inexpensive [HP] ProCurve switching,” Dadian said. “We dug deeper and asked HP what it thought … we were told to just stick to our normal distributors, Tech Data or Ingram Micro.”

Paul Shoberg, director of sales at WorksComputing Inc., said he occasionally gets -- and rejects -- offers for inexpensive HP networking gear.

“We don’t run into it much, so it’s not something we think needs to be addressed,” Shoberg said. “Though we did get a call from some bozo recently saying he had some cheap HP stuff for us.”

Will technology catch up?
Olsen maintains that new technology, including electronic records versus the old paper documentation, can help vendors catch and stop gray market deals.

“Now, companies can use stronger analytical tools to track sales,” he said.

The IT executive likened today’s IT gray market to what’s happening in the music and video realm where people download torrents of free or cheap content. He agreed that technology will help stem the flow—over time.

“There’s a lot of barking, but no biting. Who are you going to investigate?” he asked. “The guys who limit themselves to $2,000 to 3,000 per deal will never get caught. In the future, with improved traceability, we’ll start to see it go away…but that’s so expensive it’s damn near impossible to do.”

Vendors are not taking the threat lying down. A Massachusetts man who defrauded Cisco of $15.4 million under its SMARTnet program was sentenced to four years in prison in a warranty and service abuse case. The defendant used fake names to contact Cisco and claim that parts supposedly covered under Cisco's warranty program failed and needed to be replaced. He then sold them off.

Let us know what you think about the story; email Pat Ouellette, Associate Editor, at pouellette@techtarget.com, or follow us on twitter.

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