IBM Faces Tough Choices to Bring iSeries Channel Back to Health

At first glance, the options open to IBM for restoring the iSeries reseller channel to health, particularly in small and midsized businesses arena, are slim. Although we’re not privy to IBM’s internal market data, Big Blue is certainly aware of the problem, which seems to have originated from having too many companies trying to sell iSeries servers to a slowly shrinking installed base. But IBM and its channel partners do have options, and there are possible solutions to the problem.

The first article in this series, “iSeries Resellers Struggling to Survive in Overcrowded Channel”, laid out the problem affecting the iSeries reseller channel, as related by various iSeries resellers. According to those resellers, the problem is money. First, resellers up and down the iSeries reseller chain have quotas that they have to meet in order to retain partner status, and for the past couple of years it has been hard for many to meet those quotas. Resellers spread themselves thin trying to drum up new business. That means that often there isn’t enough profit from selling iSeries hardware to support 2,000 U.S. resellers anymore. And things will get worse, those resellers say, as commodity Intel servers continue to improve, thereby chipping away at the (still superior) value of the iSeries and making it (or any Power-based, OS/400-capable successor, for that matter) more of a commodity sell. Times were once very good for the reseller channel, and some made outright killings in the AS/400’s heyday. But the easy money is gone, and for some smaller resellers, healthy competition has evolved into a struggle for survival.

IBM acknowledged the problem last year at its annual PartnerWorld conference. According to resellers in attendance, former iSeries general manager Buell Duncan, who by then had already taken his new job in developer relations, told iSeries resellers, “We have to get the channel profitable.” While some resellers had a good year in 2003, a good number of them did not, and it would be safe to say that the channel as a whole is just as unhealthy today as it was at the start of 2003–if not worse, due to the steep iSeries price reductions that IBM put into effect January 2003. These price reductions are great for customers, but they make it hard for resellers to make ends meet.

If the problem is too many resellers chasing what amounts to a fixed amount of revenue and profit, the solution would seem simple: reduce the number of resellers. While this seems a simple solution, it is fraught with pitfalls and potential legal complications. IBM (which sets the rules among its master distributors and resellers governing who can sell what to whom, and when) does not want to be in the precarious position of deciding who stays and who goes.

One solution, say resellers that spoke to Guild Companies on the condition of anonymity, would be to let the markets have their way and to let struggling resellers fail. This would spur consolidation in the reseller channel, with the bigger, stronger resellers and distributors near the top of the food chain gobbling up the smaller, weaker resellers. This is already happening to an extent, but it could be accelerated if IBM gave its blessing with a wink and a nod–or outright silence.

Another solution, which is a variation of the first, has the smaller resellers becoming agents of the three master iSeries distributors, Avnet Hall-Mark, Support Net, and Agilysys. In this scheme, resellers would no longer own their customer relationships, and would not have the freedom to compete on price. The resellers would receive a commission on their work, and their primary source of income would be providing services, as opposed to selling hardware.

Specialization will also likely come into greater play as the number of resellers is culled, and generalist “mom and pop” shops are replaced by larger and more sophisticated organizations. Some larger resellers with capital to invest, such as Sirius Computer Solutions and MSI Systems Integrators, have opened WebSphere Innovation Centers, where customers can learn about WebSphere and test it on IBM servers.

Vertical consolidation could also lead to greater efficiency in the channel, one reseller said. For example, Avnet Hall-Mark is already very strong in the retail industry, a reseller says, while Agilysys, with its acquisition of OS/400 software developer Inter-American Data last week, now has a large presence in the hotel and casino business.

Some resellers disagree that the problem in the iSeries channel is that there are too many resellers in the channel. One reseller says the problem is quite the opposite: There are too few resellers selling iSeries (at least to support a “grow the iSeries” strategy by IBM), he says. “If it was easier to be a business partner, more resellers might be inclined to lead with the iSeries,” he says. “This would result in more footprints and more revenue opportunities. Therefore, having more resellers would translate into more iSeries revenue to IBM, and eventually to the reseller as well.”

Like other resellers Guild Companies has contacted for this story, the reseller quoted above had his value added enhancement removed by IBM. For some resellers, this has caused them to become more creative in their approach to selling hardware, such as by selling “winkware.” This reseller took a different approach, namely, acquiring another reseller that already had the VAE. However, following this transaction, IBM once again removed the VAE. “I get up some days and ask myself, ‘Why don’t we just partner with somebody else?’ ” he says. “We’ve had to bring in other business partners to sell upgrades to our own customers. These same partners have absolutely no presence in the account, but we have to do it to survive.”

The reseller says that, because he doesn’t have the VAE, profits that his company would reinvest in iSeries solutions are given to other business partners, who then reinvest the money into other money-losing ventures, and complain to IBM that they can’t make any money off the iSeries. For these reasons, partnering with larger resellers leaves a sour taste. “The ones in our area are poorly run, and IBM should allow them to fail, instead of trying to force companies like ours out,” he says. “As a former IBMer, I am totally disgusted with IBM’s recent channel moves. I think this is the beginning of the end for my beloved iSeries.”

Whatever method is used to strengthen the reseller channel and return it to health, the bottom line remains: It is the small, local resellers who forged and nurtured their relationships with IBM midrange shops–from the System/36 and the System/38 to the AS/400 and the iSeries–and they must be considered central to any solution. Fixing the problem isn’t as easy as pruning the dry limbs that are dying, because then there’s absolutely no chance for new growth in the spring.

After repeated attempts, Guild Companies could not get the appropriate IBM executive on the phone to talk about the iSeries channel. But we are still trying, and are hopeful that IBM will shed some light on the situation.

Other Articles in this Series

• “iSeries Resellers Struggling to Survive in Overcrowded Channel”

• “IBM to iSeries Resellers: Learn New Skills or Be Left Behind”