As the Feb. 1 deadline draws near, Sun Microsystems Inc.'s channel partners are openly worried about how much they stand to lose and what their alternatives will be once Sun enacts its plan to cut the discount on service-contract renewals.
Certainly, the decision to cut the margin on maintenance renewals from 15% to 8% has sent value-added resellers (VARs) back to their business plans as they mull over ways to make up for the expected shortfall in revenues.
But Sun's VAR partners are also thinking further ahead, and wondering whether Sun's decision will ultimately reduce its own revenues, as VARs lose incentive to sell highly profitable maintenance contracts.
"We stand to lose about $2 million," said John Murphy, CEO of Advanced Systems Group, a Denver, Co.-based company that is a Sun Microsystems partner. "You'll see fewer resellers making investments in the Sun business model," Murphy predicts.
Another Sun VAR said the decision might cause resellers to take matters into their own hand.
"It makes you think about… well… maybe we'll just do it ourselves," said William Dean, director of professional services for Applied Computer Solutions, a systems integrator in Huntington Beach, Calif. "Why should we resell your services and lose that kind of money? It has an impact on how you think about what you're going to present to your customers."
Nevertheless, Sun executives are sticking by their claim that higher discounts encouraged multiple resellers to compete on the same contracts, undercutting Sun VARs and distracting them from what they should be doing – looking for and securing new business deals. As much as 20% of some VARs' total revenue comes from managing their renewal business, according to Sun estimates.
"Sun resellers have done an outstanding job in helping Sun manage our installed base of annuity renewals, but that's not the growing part of the marketplace," said Bill Cate, director of US partner programs for Sun.
Cate also said that, by bringing its rate down to 8%, it is bringing its service renewal contracts in line with standard rates within the industry.
Though the rate will be lower, Sun is implementing a registration program to make sure that the VAR who worked on the renewal gets the benefit. The system will require that reseller partners report to Sun's sales team to verify meetings and log other contacts made with the end customer.
In addition, the company is increasing the discount for new services sold at point of sale from 15% to 20%.
"The opportunity for new services sales is huge. What we are trying to do is refocus our resellers off of the service renewal market and onto the growing market of new systems sales," Cate said.
Still, some VARs don't think these plans go far enough.
"What Sun is telling us is we still want you to have all the certifications and credential, but we are cutting back to 8%. Now we are going to have to take the people who were dedicated to that line, and shift them to other responsibilities besides doing just that," said David Olson, vice president of operations at Information Management Group, a Sun VAR based in Albany, New York.
In addition, Olson said his company's profit margins have been shrinking as a result of Sun's discount programs to the state of New York, which is an IMG client.
"Over time Sun has negotiated discounts with the state of New York to bring prices down to less than half the list price. So a list price for a contract of $500,000 for example, is now $240,000. So now I'm moving from a 15% discount on $500,000 to 8% on around $240,000," Olson said.
However, VARs that provide solutions and are heavily dependent on government, education and other verticals that experience heavy discounts should look elsewhere, Cate said.
"Diversification is something we all need to do, and there are certain things we won't be able to help maintain a profit margin for partners unless they are willing to expand where they are going to sell and what they are going to sell," Cate said.
Some VARs are looking at diversification in other ways.
Advanced Systems Group's Murphy says he's always looking at other vendors, but Sun's discount cut has given him an added impetus to do so.
"Sure, we're looking at redirecting resources to other programs or other offerings from other vendors. We are more of a storage-focused company so we are continuing to invest in our relationships with Hitachi and Network Appliance," Murphy said.
That's a scenario Cate hopes never happens, but he notes that Sun's channel grew about 16% during the fiscal year that ended in June
"I hope that our VAR partners will sit down with our partner directors and take a look at the whole business model and the landscape for opportunities. We don't want to have partners that disinvest in the Sun platform," Cate said.