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

IBM says changes it made to the iSeries reseller channel program last year are working, and it doesn’t plan to make any significant changes for 2004. In 2003, IBM eliminated the coverage value added enhancements (VAEs) for 150 of its smallest business partners, which hampered their ability to sell iSeries upgrades as they had in the past. IBM executives say it was a necessary move in order to protect the profit margins of resellers who invested in new skills and software solutions, and to make the overall partner ecosystem healthier.

In previous issues of this newsletter, Guild Companies has reported on the difficult conditions that smaller iSeries resellers are facing today. Downward pressure on prices for iSeries hardware, combined with an abundance of resellers, has hurt profit margins at many reseller shops and is driving significant changes in the channel, they say. (See the first two articles in this series, “iSeries Resellers Struggling to Survive in Overcrowded Channel” and “IBM Faces Tough Choices to Bring iSeries Channel Back to Health,” for more information on this issue.)

Last week IBM responded to our numerous attempts at seeking comment. Paulo Carvao, vice president of iSeries sales, and John Guido, who left Carvao’s job in 2002 to become an executive in IBM’s Partnerworld organization, say the problem is not that there are too many resellers in the iSeries channel or that there are too few. It’s not a problem of quantity of business partners, but their quality. Current business partners do not have the right mix of technical skills and software offerings–the two main ingredients in selling “solutions”–to compete in today’s channel, IBM says.

“Our business partners account for close to 90 percent of iSeries business, so the health of this business partner channel is of paramount importance,” Carvao says. “The reality of the market we live in is that hardware margins are under pressure. Many resellers in the channel, when confronted with this, have incorporated non-hardware elements–software, services. Having said that, the fact is, over the last year, we’ve restored growth to the iSeries business. In the United States, the reseller business has grown 6 percent. This leads to hope that decompressing [the IT market] will restore growth to this business. And with growth comes enthusiasm, and it’s easier to command profit margins.”

This rising tide theory would work well if the iSeries business as a whole was growing strongly. And while 6 percent growth is nothing to sneeze at, the fact remains that while revenues are up, profit margins at many of IBM’s resellers–particularly the mom-and-pop shops selling “onesies” and “twosies”–are down significantly from prior years. IBM attributes this to a phenomenon called stacking, which occurs when too many resellers in a given geographic region are competing in the same accounts.

IBM addressed stacking by making changes to the iSeries channel program in 2003. “In the channel, we’ve tried to take a few key steps to minimize stacking and to have fewer partners to meet the demand,” Guido says. In 2000, IBM started the transition from the services value added enhancement–a type of credential IBM gives that allows a reseller to compete on certain types of contracts–to the coverage value added enhancement. In 2003, IBM went a step further and removed the services VAE from 150 “member” level business partners, which meant they could no longer make a living just by selling iSeries upgrades. IBM says it has grandfathered in the resellers, though, so they can continue to sell upgrades for the same iSeries serial numbers among their existing customers.

“When we went from services VAE to coverage VAE, it was just one action to improve channel health,” Guido says. “What we ended up with was having more skills, more successful partners, we minimized the stacking, and protected partners investments.”

While it trimmed the bottom of its reseller roster, IBM also grew the number of “advanced” and “premiere” business partners, and it made changes to the special bid process that protects resellers who have invested in software and skills, which tend to be higher-level business partners. When taken together, the moves were intended to force resellers to get new skills or to find a software solution to sell, if they wanted to continue in this iSeries business.

Guido says the changes were made for two reasons. First, it was intended to bring more value to customers, and second, it tried to minimize stacking. “The challenge is, you don’t make everybody happy,” Guido says. “Not everybody gets [coverage and support VAEs]. If they were relying only on coverage VAE and didn’t have solution VAEs, it’s potentially not a very profitable situation. It’s a very dangerous situation to be in.”

IBM offers hundreds of different VAEs. There are VAEs for WebSphere, for high availability, and for iSeries-based SAP implementations. For just about any type of conceivable workload, there’s a VAE addressing it. It is through the VAEs, and other institutions such as the bid process, that IBM controls which resellers can compete on a given contract and the amount of profit a reseller can make.

Some resellers are unhappy with changes IBM made to the special bid process in 2003. Guido defended the changes, saying they were necessary to protect resellers who have invested their resources in the software and skills IBM wanted them to invest in. “When multiple partners come in on a special bid, the bid goes to certification. We look at the certification around the opportunity–who developed the opportunity, who made investments,” he says. “There’s a process there not to declare a winner but to protect who made the investment.”

Resellers who lose the bids in these situations often complain, Guido says, but that’s the cost of making the channel healthy. “We’re looking to grow this business quite a bit more, but the other side of that is, how do we protect our partners when they do make an investment,” he says. “If we’re going to help the channel, and make it a healthy channel, we’re going to need to protect the margin. If I can have a healthy channel, and 80 percent are doing extremely well, and 20 percent don’t get on the bandwagon . . . it’s hard to please everybody.”

There’s nothing new about IBM’s control over the channel. The carrot and the stick enable IBM to lead the channel in the direction that it sees best, by rewarding resellers who spend money to grow the business and holding back resellers who don’t meet quotas or who haven’t invested in skills and software. What is new about the approach IBM is taking is the level of change and the rising chorus of dissatisfaction from being left behind.

Some resellers say there are simply too many resellers in the iSeries channel and that changes IBM has made to the channel rules are intended to cull the number of resellers. In effect, the changes ensure healthy margins for those who followed IBM’s lead. Carvao says the problem is not that simple. “I would say it’s difficult to say if we have too many or too few resellers,” Carvao says. “We don’t want to oversimplify the problem. I don’t believe this is about reducing the number of partners. We want to establish a balance in the partner ecosystem.”

IBM says the changes were necessary to ensure the overall health of the iSeries channel. “In general, the feedback we’ve been receiving has been we’ve taken steps in the right direction,” Carvao says. “At the end of the day, we’re generating healthier margins for those in the channel, and providing quality coverage in front of the customers.”

Other Articles in this Series

• “iSeries Resellers Struggling to Survive in Overcrowded Channel”

• “IBM Faces Tough Choices to Bring iSeries Channel Back to Health”