Value-added resellers (VARs) in the networking channel don't shy from competition, but what happens when partners, or people who look like them, play dirty? Corruption hurts vendors and honest VARs, who are forced to compete with bogus pricing standards -- such as those set by a North Carolina couple who flooded the gray market after defrauding Cisco Systems' SMARTnet program, according to the FBI.
"We can't compete against creative pricing," said Gary Berzack, chief technology officer and chief operating officer of TribecaExpress.com, a Cisco-partnered solution provider in New York City. "Hardware customers buy on the lowest price, squeezing one or two percent as the difference between us and the next guy."
The issue came to light last week when the FBI arrested a North Carolina couple on suspicion of defrauding Cisco of $23 million in a replacement parts scam and reselling those parts on the gray market between 2003 and 2005.
The couple allegedly defrauded Cisco's SMARTnet program, which allows partners to obtain advance replacement parts without having to return the defective parts first. The FBI said the couple created 21 fake company names and 80 false personas to have parts shipped to mailboxes in eight states. They are accused of depositing their profits from reselling the parts into a bank account for a bogus business, Synergy Communications Corporation.
It is not the first time the SMARTnet program has been fleeced. In 2007, a Massachusetts man pleaded guilty to using SMARTnet to ship replacements for equipment that didn't exist to false identities and private mailboxes in 39 states. Cisco estimated the scam cost the company $15 million.
Cisco declined to comment on the most recent case and did not return a request for comment on other legal protections the company takes to guard against fraud. But VARs say the North Carolina case is just a more blatant example of deceit they see all too often.
"I do due diligence for good customers quite often, comparing other resellers' quotes to find any errors," Berzack said. Sometimes, what appears to be an error is something more sinister. The competitor is actually selling customers refurbished products or products acquired improperly in international theaters, he said.
Networking gear listed below cost should be an immediate red flag to partners that the products were obtained illegally or are being resold under false pretenses, said the CEO of a Cisco and HP ProCurve VAR in the Northeast, asking to remain nameless for fear of retribution from vendors.
"We see this stuff all the time," he said. "It's a competitive market out there and there really isn't that much margin in it, so you know where the limits are…. When [a reseller] comes in with something that's too good to be true, there's probably something wrong with it."
In an economy of guarded spending, Berzack said, it is hard to stay afloat when unfair competition drives down prices.
"Cisco has reduced us to competing on price, and the differentiation for price plus service is an afterthought," he said. "There is a trust level with your customers, in which case they're almost impenetrable … [but] if you're the lowest-bid type client, you don't have an attachment to any partner, and these days that's a big chunk of business."
The anonymous Northeast executive said he doesn't hesitate to report suspicious channel activity to vendors -- though he wished it were the other way around.
"If you try to play by the rules and somebody else is not, you lose business," he said. "Sometimes we lose business and we try to understand why, and if it looks like something may be fishy, we'll seek better understanding from the vendors. But they really should be the ones that police this."
Berzack said he has sniffed out partner scams on his own but also would like to see vendors take more ownership of the problem.
"Their idea of catching criminals is guys like me having to spend the time contacting them," he said. "I want a flash report sent to us or a plug on a website where I can put in the contact name and company and if they have been compromised. It comes back with a contact at Cisco to talk to. I think given I have been a valuable partner for over 10 years, they can trust us."
Let us know what you think about the story; email: Jessica Scarpati, News Writer