Double Agents

Solution providers are increasingly embracing agent programs as a way to boost their bottom lines as they expand the number of products and services they offer. But while growing in popularity, agent programs are not without risks and frequently require solution providers to adapt or change their business models.

The latest vendor to more aggressively promote an agent model in the channel is Hewlett-Packard, which is piloting a program whereby HP partners will resell complex services provided by HP's Services organization. HP is scheduled to formally introduce the program, which includes data center services and security and architectural assessments, in mid-June.

Despite the growing interest in these kinds of programs, solution providers say caution is the watchword in the agent business.

Expanets, an Englewood, Colo., IP telephony and networking solution provider, is cautiously embracing agent programs such as Cisco Systems' eAgent, said Expanets President Chris Younger.

"These are helpful programs because they reduce working capital requirements," he said. "The only caveat is that you have to watch account control. Anytime you involve a third party in a transaction, you have to watch it."

Other solution providers agree that agent programs live or die based on the trust established between them and their vendor partners.

"Obviously, you've turned your business over to another company and that company, at its whim, can change the commission structure that they pay you," said Don Richie, president of Sequel Data Systems, a solution provider in Austin, Texas. "The vendors, at their whim, can decide whether or not to continue their agent program and sell without any participation from you [into your agent accounts]. What you've done is made yourself extremely vulnerable to a manufacturer."

Earlier this year, agents for Qwest Communications International and MCI (formerly WorldCom) learned the hard way about the whims of a vendor. In January, MCI terminated the contracts of 900-plus agents as part of the company's bankruptcy proceedings. And in March, Qwest abruptly switched its agent compensation model from an up-front payment to residual fees.

Still, many solution providers say they are moving into agent programs, but with eyes wide open, willing to accept risks if vendors can show they are trustworthy.

"We are dipping our toes into the water [with the agent model] to see if an alligator snaps them off or if it's OK to move forward," said Rich Tear, CEO of CSCI, a San Diego solution provider. He said HP's agent program, for one, expands his reach, making it unnecessary to fund inventory and hold accounts receivable. "If I were just starting out in the business, I'd be all over this agent model," he said.

What follows is a look at the agent model as it is evolving in several industry segments. CRN staffers Larry Hooper, Paula Rooney, Christina Torode, Steven Burke and Edward F. Moltzen contributed to this story.

>NETWORKING
FOR EXPANETS PRESIDENT Chris Younger, the agent model is nothing new. The solution provider has been a telecom carrier agent since its inception, Younger said, and Expanets is now an agent for 17 telecom carriers. But Cisco's eAgent program is the first hardware agent program the company is testing, he said.

"I expect we'll be using the program more and more," Younger said. "It frees up our working capital and allows us to use that elsewhere in the business."

Market leader Cisco introduced its eAgent program last year as a sourcing option for its partners, said Surinder Brar, senior director of marketing for Cisco's worldwide channels organization. "Our partners have the option of using eAgent or reselling the hardware, and they negotiate the price of the hardware with the customer and their margin," Brar said. On the matter of account control, Brar said it's a nonissue with Cisco. "Many people worry about the vendor's visibility into an account with agent programs, but we already have that visibility with or without eAgent," he said. "Our partners submit POS reports on a regular basis. We know who is buying our hardware through our partners."

Younger said key to his acceptance of the Cisco program is that it allows Expanets to negotiate the price of the hardware with its customers and thus gives the solution provider the control over the hardware margin.

"That's critical to this business," he said.

>PCs
Apprehensive but hopeful.

That's the consensus of solution providers that participate in HP's PC agent Referral program. HP, inheriting a strong agent legacy from Compaq Computer, is the leading evangelist for the agent model in the PC arena, solution providers said.

Solution providers point out that for years Compaq ran its government, education and medical business through an agent model. And, prior to the merger with HP, Compaq was driving the agent model into commercial accounts as a way to trump Dell Computer's direct model.

"The way [the HP agent initiative] was positioned to us a year and a half ago was that this is coming whether you like it or not," said Glen Jones, president and CEO of TechPower Solutions, Redmond, Wash. "Then it became a matter of do we want to get on the bandwagon and secure [Referral] accounts, or do we want to try to fight and be in the indirect model and perhaps be on the outside looking in?"

Jones opted to embrace the agent program and said about 20 percent of his annual revenue of about $15 million now comes from his HP agent business. "The agent program with HP has leveled the playing field with Dell," he said. "It's similar to Dell's [direct model] but gives HP the huge advantage of having a large number of people to represent them on the street locally that Dell doesn't have."

Chuck Birmingham, president of ValCom, Itasca, Ill., said his firm now has 19 HP Referral accounts. "We have been dealing with Compaq for 18 years," he said. "We have gained a trust with local [Compaq] management, which is still intact [at HP]. Is it a total trust? Business is business. But we've never had a problem with HP taking the business direct."

Birmingham said, too, that the agent program extends his reach and increases profitability. "We're not as large as CDW or Insight so we need a competitive edge to offer our clients," he said. "And the Referral business is more profitable [than traditional hardware sales] because we don't have to deal with AR [accounts receivable], inventory or returns."

>SOFTWARE
Some solution providers in the software arena fear that vendors such as Microsoft and Novell, which both adopted agent models earlier this year, will try to take the accounts direct.

"The reality is that you're handing over your customer information without any sort of real guarantee that Microsoft,or the master agents like License Online,won't try to sell direct to [your customer] in the future, thereby cutting you out of any future revenue," said Jeffrey Sherman, president of Warever Computing, Los Angeles. "For the reseller,which in this case is really just an influencer,it can be a bad deal because commissions are paid over the life of the contract if the customer goes with the financed option. In other words, I do the work to get the customer to buy, figure out what they want, and then I get 3 1/3 percent this year, 3 1/3 percent next year, and then 3 1/3 percent the year after. Sell a small server for $2,000 in server software and I get a whopping $66 for my efforts," he said.

One solution provider said he is happy Novell is trying to reinvigorate the channel, but noted that the agent model does carry the potential of reducing solution providers' influence. "That is a danger," said Paul Anderson, CEO of Novacoast, a Novell Platinum partner in Santa Barbara, Calif. He also said it's a danger for customers if partners are more focused on quick fees than nurturing long-term customer relationships. "We can't let a rebate influence the deal for the customer."

>TELECOM
Carriers and hosting providers, including Interland, Verio and Affinity Internet, have used the agent model to great success. Under these programs, partners receive monthly residuals based on deals they've brought to the table.

"The agent model is nice because, unlike the VAR model, we don't get paid one-off on deals, but monthly. So, if we have a few bad sales months it won't impact us because we have the residual to fall back on," said Quy "Q" Nguyen, CEO of Allyance Communications Networks, a Newport Beach, Calif.-based telecommunications agent.

But some carriers are enforcing new sales requirements, forcing agents to bring in a certain amount of new business per month in order to remain a partner. Some carriers are also steadily chopping away at existing commission structures, said agents. And in some cases, commissions disappear altogether, as was the case with MCI recently. MCI is currently trying to re-engage master agents as it also woos VARs.

Emmet Tydings, president of master agent AB&T Telecom, Gaithersburg, Md., said he is rethinking his business model. "Many master agents are fed up with the way we're being treated by the carriers," said Tydings. "As a result, our business models are changing and we are looking to do more wholesale business. This way we control the commissions, the contract, everything."

In this model, agents buy services wholesale from the carrier and own the letter of authentication (LOA) with the customer.

"When the carrier owns the LOA, they control the customer and therefore can fire an agent if they choose to," Tydings said.

Meanwhile, master agent Venicom, Scottsdale, Ariz., is moving its entire business to wholesale. This move will essentially turn Venicom into a carrier with a set of subagents receiving commissions from Venicom. "Carriers continue to take liberties with us, and the commissions we receive today are a fraction of what they used to be," said Rob Goble, CEO of Venicom.

>GLOBAL SERVICES
Jim Carrick, president and CEO of SCS, a Syracuse, N.Y., solution provider that sells only IBM products, said he has prospered because of a tight relationship with IBM Global Services.

That relationship resulted in 13 percent of SCS' sales last year coming from reselling IGS offerings such as e-business hosting.

"What IBM allows us to do is provide almost all of the services our customers need without having to invest ourselves as a company in each of these individual specialties," said Carrick. "We can influence the delivery of services, and we feel comfortable that IBM can deliver them for us. If we had to invest in every technology, it would bankrupt us."

IBM is not the only vendor that is increasingly asking solution providers to resell its services offerings. HP and Sun Microsystems are also pushing hard into the channel to partner with solution providers.

Many solution providers say they are simply not willing to knock on their customers' doors as an agent for one of the major vendor's services organizations. Many view these organizations and IGS, in particular, as more foe than friend. "I wouldn't let IGS put their nose under any of my clients' covers because they are obviously going to try to take the account direct," said Steve Israel, executive vice president of AMC, a $90 million New York-based solution provider.

Israel, who has tried to establish a relationship with IGS, is down on any agent relationship with his vendor partners. He said solution providers using the agent model are ignoring the synergistic relationship between product and services sales. AMC has used the HP hardware agent program only to be undercut. "It backfired right in our face," he said.

>PERIPHERALS
While a number of peripheral companies maintain a traditional distribution sales model, some printer/copier companies have their own type of agent model,or a hybrid.

Specifically, Xerox, Rochester, N.Y., has about 550 agents in North America. Xerox defines agents as "independent business owners who exclusively sell Xerox equipment within defined geographic territories."

Xerox guarantees their agents geographic exclusivity. In exchange, the agents guarantee the company they will only sell Xerox products.

Michael Colleary, president and owner of Documenters, a Lexington Park, Md.-based Xerox sales agent, said the exclusivity has never been a burden.

"I've always preferred Xerox," said Colleary, adding he has found it to be a competitive advantage that, with the Xerox relationship, he can guarantee "genuine parts" from Xerox when selling products and service.

Xerox said it is now slightly tweaking its model. The company is opening the lower end of its product line,including multifunction copier/print devices,into general distribution.

Conversely, printer/copier vendor Kyocera Mita, Fairfield, N.J., has maintained a traditional distribution reseller channel but is hoping to build a tier of "exclusive" dealers that will commit entirely to its product line, a spokesman said.