Understanding The World of Resellers
In the IT industry, whenever you want to purchase hardware, software, and sometimes services, there are two ways you can do it: direct or through a reseller. Oftentimes you’ll hear the word “integrator” or “value-added reseller" - or VAR - used when talking about a reseller. I’ve found that many people don’t know many of the basics of how and why these transactions take place through a reseller. In this post, I’ll attempt to explain some basics around the “hows” and “whys” of using resellers. Note: I’ll only refer to them as “resellers” but the reader should know, and will see, that term is really constraining.
Let’s start with some basics. A reseller is a company that sells you products that they don’t make. They can also sell you services that they don’t offer with their own staff. The products are made by a manufacturer and the services are offered by that same manufacturer or a different services firm.
When we talk about “Product,” we’re talking about things like routers, switches, load balancers, firewalls, and software licenses. With "Services," we are referring to the services the manufacturer may offer to implement or optimize their products. "Services" can also refer to standalone services to perform tasks unrelated to any specific product purchase. Now, there’s another class of reseller that offers its own services but let’s not get ahead of ourselves just yet.
The thing about the reseller community is that there are many different shapes and sizes of resellers. On one end, you have your Global System Integrators (GSIs) that offer product resale, professional services, managed services, and consulting services across the globe. On the other, you have smaller boutique resellers that specialize in a specific product / manufacturer or a specific geography. And in between, you have your pure resellers like CDW and SHI that offer low-margin resale.
Here’s an illustration that may help. 1
So now we have a firm from which we buy our phones, but they’re not the manufacturer of the phones. Why though? At its core, the reason really centers around what’s called a Master Sales Agreement or Master Services Agreement (or something similar). In simple terms, that document or agreements like it facilitates sales and payment - and all of the legal entanglements therein - of the products and services in question. Oftentimes you’ll hear the term “paper” as in, “Hey, do you have paper with client x? They need to purchase 10 widgets and I need to find a partner.”
But again, why? Imagine the number of products and services the modern IT environment consumes on a yearly basis. And I mean that not only in terms of the number of different manufacturers but also the number of transactions. Now imagine the difficulty in negotiating purchase terms with each of these manufacturers. Depending on an organization’s size, they could spend hundreds, if not thousands, of man-hours managing manufacturers' terms & conditions and transacting. To counter this inefficiency, organizations have terms (remember the term, “paper?”) with a reseller or resellers to expedite and consolidate purchases.
There’s another benefit: maintenance and renewal management. If one takes all of the products and services consumed by an IT environment during the year, more than likely, it’s substantial. Each year (or whenever the term of the subscription, maintenance, or support is due), IT shops have to set their reminders to pay that fee. …or they have to catch the automated notes that come from manufacturers letting them know, 60 days in advance, that their payment is due. This is time-consuming and requires effort. Depending on the size and complexity of the organization, it can take a LOT of time and a LOT of effort. In fact, in my experience, some organizations do it so poorly, that they actually get delinquency notices from their manufacturers or even get their products’ support or functionality shut off. Of course, this doesn’t happen to Fortune 100 firms as the manufacturers are wary of crossing them. By engaging with a reseller, this event is managed by the reseller. Resellers can even help organizations co-term their maintenance and support. This allows them to schedule one payment event at one time in the year. This is a huge help when you’re talking about tens or hundreds-of-million-dollar budgets.
There are a few other wrinkles that some resellers offer. I would also say if you’re in a position where you're managing an IT org, this is something that can make you look really good (or, by contrast, make you look like a bit of a neophyte).
Bulk Maintenance discounts. Many resellers will start to provide deeper discounts or even margin rebates when you hit a certain dollar threshold. As long as you have a reseller you can work with, I’m not sure if there’s any risk in consolidating maintenance
Discounts on payment after PO issuance. Many resellers offer rebates on payments received quickly after a purchase order (PO). I’ve seen 45 days numerous times in the industry
Margin reallocation, credits, pro-bono services, etc. When you get into the larger resellers and GSIs, a client has a number of ancillary products and services to choose from. Many resellers will give you something like a store credit after a certain dollar amount is spent. For example, if you spend $10mil with reseller X, you get $200k in professional services, lab time, or any other product or service offered by the reseller. Having done this in the past with lab services, the intent is simple. As a GSI / reseller, I want you, the client, to see me as integral to your IT ops and more than a “box dropper.” I also want to give you a taste of something that my organization does exceptionally well in the hopes you’ll use those services and pay for them next time
Training, office space, social events. Resellers are always happy and able to help clients or prospective clients. If they aren’t, you probably have the wrong reseller or you’re using one of the more transactional resellers (see the illustration above). Whether it be a happy hour, sponsoring a manufacturer training or EBC, or even using their office for one of your events, most times, all one has to do is ask. I once asked my Tier 1 integrator/reseller to let me use their office to run AppSec training classes for a week. They happily obliged and provided lunch and drinks. All I had to do was ask nicely. 2
A strong reseller will also facilitate shipping and logistics of gear and licenses - or anything else you ordered - and give you advanced capabilities to manage and track multiple items from multiple manufacturers. Good resellers have the infrastructure and ability to make this simple for the customer. Obviously, the GSIs are king when it comes to shipping switches, phones, and software to 187 countries at the same time. …but not everyone needs that particular service.
A savvy leader will use all the tools at his or her disposal and will get the most out of any relationship. My advice is to think about what you get from your reseller or integrator(s) and ask yourself, “Am I using everything they have that can benefit me.” And you may say to me, “Yeah dude, you’ve worked for GSIs and integrators for much of your career. Of course, you want me to do more with a reseller.” In fact, what I’m suggesting is that you push your reseller. Ask them to do more. Don’t focus on margins and pricing. If you’ve chosen your stable of resellers correctly and you’ve got deal registration events under control, margins, and pricing aren’t your issue. What IS your issue is getting more out of the relationship in the corners of the proverbial room that you haven’t explored yet. The bottom line is you can’t procure many tech products directly. You have to use a reseller. So get the most out of it!
From the manufacturer's perspective, resellers can be a good thing, a bad thing, or just another thing to manage. Some manufacturers have great, exclusive relationships with resellers. In other scenarios, the resellers scramble to line up at the trough. In a third scenario, the reseller is unaware of anything that’s happening in the business and is simply there to facilitate the transaction.
One of the challenges for manufacturers is that resellers sell and manage competing partners in a lot of cases. So where do their loyalties lie? Well, in many cases, they lie with the customer and their actions are dictated by the customer. But let’s be honest with ourselves here. Their real loyalties are to themselves and ensuring they hit their quota. That’s understandable. It’s incumbent on manufacturers to understand their place when it comes to the reseller. Sometimes that manufacturer will be the only game in town and the focus of the reseller. Other times, they’ll be competing for mindshare.
What’s frustrating for manufacturers of all sizes is that the resellers are the ones who can get meetings. This is really true for your GSIs and boutique resellers. I’ve got a few colleagues and friends who work for large manufacturers. One told me once that he couldn’t get a meeting with his own customer who spent about $15mil per year with him. To manufacturers, my advice is to track which resellers, in which geography, in which vertical, can help you with specific customers.
Resellers are incredibly distracted. As a manufacturer, you can expect an attention span of days to weeks. You read that right. In my experience, no matter how much money and effort you put into it, you can expect a reseller to stay dialed into your product for an incredibly short period of time. What you have to manage is the competing interests and motivations of your partner resellers. That’s another post for another time.
Resellers provide a manufacturer local market focus that a manufacturer doesn’t have. Many manufacturers don’t have a local presence. This is true sometimes even in large markets and the reasons are many. Nevertheless, the reseller presents the manufacturer with an opportunity to leverage a local sales force that is plugged into the local market. That reseller will have a running book of business and accounts into which they can walk that manufacturer into.
In conclusion, from the manufacturer’s perspective, the reseller is a force multiplier. And while it may seem odd, manufacturers wind up selling to two parties: resellers and customers. But for manufacturers, the channel is dark and full of terrors. Only the Lord of Light - or a Channel Account Manager (CAM) - can help.
Let’s now shift our gaze to the nasty business of margins, deal registration, and transacting this unholy triumvirate of commerce between a customer, reseller, and manufacturer. So how does all this work and who does what? Who pays who and when?
Resellers can uncover deals for manufacturers. In exchange for the work the reseller ostensibly put into the deal, the manufacturer will provide “deal registration.” Deal registration stipulates that a single reseller gets extra margin on a deal. Either way, in order to pass their product sale through a reseller, the manufacturer needs to give up margin on a sale. So while an enterprise may put out an RFP for a product or, at a minimum, solicit multiple quotes for the product, only one reseller has the extra margin to work with. But ALL resellers will get at least SOME margin for their “trouble.” Let’s do some “bidness math” here as an illustration.
Let’s say that Larry’s House of Systems Integration (LHSI) pitches and sells a client on the idea of the Anti-APT (AAPT) 9000 appliance. They would get deal registration from AAPT by filling out a form on their partner portal or even using email. Now, with this deal registration, LHSI now has 20 points of margin to work with. That means that, while other resellers are selling at either list or standard discounts - usually 15% - off of list price, LHSI is selling at up to 35% off of list. No reseller is going to pass all that margin on to the client. The reality is this deal registration allows LHSI to quote at 16% off of list and then use the additional 19% as margin for themselves.
Let’s talk about “The Jump Ball” now. If you’re not familiar with the origin of the term, it refers to a scenario in basketball where neither side is awarded possession of the ball and instead, the referee throws the ball in the air and two competing players have to tip the ball to their teammates for possession. Similarly, enterprises sometimes attempt to control a manufacturer's deal registration by instructing the manufacturer to deny registration to any one reseller. Thus, all sides have the same discounts and should quote using the same discounts off of list price; a jump ball scenario. In business terms, this is considered “uncool.” Many times an enterprise will do it during an RFP or while soliciting quotes for large product purchases. I get it.
When it comes to instructing manufacturers on their own deal registration, one really has to tread lightly. For me, I had two "Tier 1” partners and a backup. I did this so I could consolidate how and from whom I was getting quotes. In many situations, I - the client - was doing all the work in identifying the tech or the software. I would politely instruct the manufacturer to keep that in mind and not provide preferential margins. Why? Well, imagine a scenario where reseller X gets registration on a product, quotes it at a considerable discount, and my procurement team sees that. Now I’ve got another reseller involved in, what I consider, a fairly well-managed reseller and manufacturer ecosystem.
I explained this to an account rep at a reseller many years ago and he lost his mind. While he understood my situation and thought process, resellers REALLY, REALLY hate when clients do this. For me, I didn’t care then and, when I return to the reseller community again, I get it.
So there you have it: a very high-level explanation of how and why resellers exist, how you can use them as a customer, and how you can use them as a manufacturer. In summary, as a customer, one should find which resellers best serve which of your business functions and get the most out of those relationships. As a manufacturer, the same is true; resellers can be a force multiplier but setting the right expectations - both internally and with that reseller - based on that reseller's capabilities and interests is essential.
The chart refers to distribution partners. Distribution or "disty" as it's called (annoying me all the while) is yet another stop on the road to purchasing products. Perhaps that's another post
You have to be mindful that a reseller still requires you to actually buy something from them. At some point, if you don't buy something, they'll take you to no lunches and return none of your calls.