VARs Behaving Badly

Would you hire a salesman from a competitor and urge him to bring over the accounts in his territory?

How about underbidding a competitor on a big deal, promising the customer a service level you know very well cannot be met?

If that doesn't bother you, would you undermine your own company by secretly working behind the scenes to move deals to a competitor?

Would you ever pass off used equipment as new?

These are not hypothetical questions from a Business Ethics 101 course. They are real-world examples of bad behavior in the solution provider business.

Unscrupulous actions have always been an issue in the rough-and-tumble technology solution sales trenches, where winning a sizable deal can mean the difference between a big sales commission and losing your job. But solution providers say they see a disturbing rise in VARs' willingness to cross that ethical line to win business and make fast cash--at the expense of those refusing to compromise their integrity.

It's a "Jersey Shore" kind of world.

Whether it's due to pressures from the economic meltdown or a more disturbing general decline in moral standards, solution providers say they see more and more of their peers engaging in behavior that would have been unimaginable in a bygone era.

Case in point: Technology Integration Group (TIG) and FusionStorm. In July, a jury awarded TIG $10.9 million after a six-week trial in which FusionStorm and some former TIG employees were found to be liable for misappropriation of trade secrets, breach of fiduciary duty and breach of loyalty. The two powerhouses, both on Everything Channel's 2010 VAR500 list, reached an out-of-court settlement on Aug. 17 under which FusionStorm agreed to pay TIG nearly $11 million to resolve the case.

The case shined a light on the unseemly practices that go on behind the scenes--in this case between two California-based companies battling for share in the Tampa, Fla., market.

"It is appalling the measures some people will go to to make money," said TIG CEO Bruce Geier, who said the case cost his company millions of dollars in business, $8 million in legal fees and countless man-hours in lost productivity. "Greed. It's all about greed," he said.

The list of alleged misdeeds, which dates back four years ago, is long and distressing. Among the more disturbing examples:

• A TIG regional sales director who had been with the company for two and a half years allegedly was a "mole" for nearly three months, steering multiple TIG employees to work for FusionStorm even while he was being paid by TIG.

• The same TIG regional sales director allegedly also sent confidential Tampa TIG profit-and-loss statements to FusionStorm and received a reply from a FusionStorm executive, stating: "Sounds great."

• TIG engineers allegedly were working in late 2006 for FusionStorm while remaining on the TIG payroll.

• A TIG employee allegedly spread rumors and convinced EMC to move a registered deal from TIG to FusionStorm by telling the vendor TIG was going bankrupt.

Geier said the misdeeds may have occurred four years ago, but he is convinced that unethical behavior is more prevalent today than at any other time in the relatively young history of the solution provider business.

"I think there is more unethical behavior going on right now because the economy is down and just isn't growing like it has been most of our lives," he said. "I think people sometimes leverage their ethics and logic to continue pushing sales numbers."

FusionStorm President Daniel Serpico, in an interview with CRN, said the company's management team has almost completely changed since the incidents that led to the TIG lawsuit. And the team has put "different and more stringent protocols" in place concerncing its hiring practices, Serpico said.

"Smaller companies tend to hire people more on the basis of their instincts," he said. "As we've gotten bigger and certainly wiser, we've recognized there needs to be balance and a more rigorous process."

With the TIG court case behind it, FusionStorm has revamped its hiring process to more closely scrutinize prospective employees' backgrounds, including whether they have any contracts or noncompete agreements with their current employer and whether they posssess any intelletual property that could prove problematic.

FusionStorm's legal counsel now plays a role in the hiring process, Serpico said, and the company creates documents about job candidates during the hiring process and holds them responsible for their representations.

FusionStorm Chairman and CEO John Varel dismissed the executives who were found by the jury in the case to be culpable for the actions that led to the lawsuit. Serpico said he believes the new management team "would approach such a situation very differently today" given the new protocols in place.

Poaching Salesmen And Accounts

By far the biggest moral quagmire facing VARs rests with hiring salespeople from the competition in a bid to bring in new business. Solution providers say they see more peers poaching their sales reps and accounts and, in one extreme case, the practice destroyed a business that had been built up over many years.

Scott Abbotts, now owner and CEO of Resolute IT, a Microsoft small-business specialist based in Cape Cod, Mass., had left the business years ago after a young technician he had hired, trained and introduced to his accounts was snatched away by a competitor looking to grab that business. At the time, Abbotts was out of state working on expanding into the managed services market.

Abbotts felt betrayed, as he had given the young employee a start in the business. "I was in Florida setting up a satellite office," he said. "My office manager called and said the sales rep had quit. I don't think it was his idea. It was unethical on the part of the company that hired him away. They saw potential in hiring him since he had my intellectual property they could extract from him. I was not able to salvage any of the accounts."

One of those accounts was a large law firm, an ironic twist that was not lost on Abbotts.

Abbotts went to an attorney who wanted a $15,000 check to take the case. "I really did have legal recourse," he said. "I just decided to let it go. I just couldn't be eaten up by it."

Some solution providers feel it is fair game to hire a salesperson away in an attempt to win new accounts. Sales, they say, is based on relationships and trust and it itsn't practical to stop a customer from moving business based on maintaining that trust.

"In sales you develop personal relationships that includes spending free time together, including golfing," said Bill Stevens, retail sales manager for Computer Solutions of Keene, N.H. "Sometimes business simply follows a salesperson. Don't get me wrong, there are unethical people, but a lot of times business is going to follow the salesperson. It's all about the relationship."

Mark Frisch, president of New England Digital Computers, a Middleton, Mass., system builder, insists that any sales rep joining his company does not attempt to bring over old accounts. "When you leave a company, everything there should stay there," he said. "You should leave the customer base just the way it was."

Just how far will a company go to win business from a rival? In the case of TIG-FusionStorm, FusionStorm's defense rested in part on the premise that the practice of hiring top talent from a competitor--including key sales and engineering talent--is a standard business practice.

Geier, who has been in the business for 29 years, said that premise sickened him. "To say that was typical is appalling," he said. "That is not typical in our industry. That's why people need to be sued: to stop this kind of behavior."

Rich Baldwin, founder and CEO of Nth Generation Computing, San Diego, is glad that Geier pursued the case."This is borderline criminal. It was done with malice and forethought. I'm not sure the fines were significant enough for this. I'm not sure what TIG lost over the couple of years it didn't have that branch office. I'm hoping the court costs get passed along," Baldwin said. "I'm glad Bruce [Geier] persevered. He was tied up for six weeks at court. How do you put a price on that time?"

Every business owner fears building a strong staff only to have it wiped away by someone else who didn't put in all the work, Baldwin said. "We talk to a lot of partners, and they interact with our staff. You can't keep your customers or your staff hidden. But all it takes is just one unethical person. They know our No. 1 person, our No. 2 person, our No. 3 person. You go steal those guys and you can put a company out of business. However, for the most part, people are ethical," Baldwin said. "People don't always learn ethics. But they will see other people getting fined."

Nth Generation's philosophy is to make it easy for employees to decide to stay. "If people want to leave, they will leave. I try to create an environment where people don't want to leave. [A couple of weeks ago] we celebrated 16 people who have been with us for 10 or more years."

John Murphy, executive vice president at Advanced Systems Group, a Denver-based VAR, said a good solution provider is always looking for good salespeople. "But it's about the future, not about the deals. It's about the long-term relationships they can develop, not about any short-term deals we can grab," Murphy said.

Tim Joyce, CEO of Joyce Consulting, Toronto, said poaching competitors' employees has been going on forever and won't stop any time soon. The alleged activity from FusionStorm is a different matter, however.

"You've got to be honorable about the way you change companies. You have to be honest, respectful. That's just regular ethics, not channel ethics," Joyce said. "Strong companies will not tolerate that behavior. If you bring an account [to a new company], that's wonderful. But if you're working a deal with your current company, I don't want anything to do with it. You're getting paid to work the deal for that company. Join my company and work on the next deal."

Spreading Rumors, Corporate Espionage

The principle that you win or lose business based on promoting your own skills and expertise rather than maligning your competitors is part of basic sales training.

But Arlin Sorensen, founder of HTG and CEO of solution provider Heartland Technology Solutions, Harlan, Iowa, said he has seen rivals spread false information on the financial health of competitors when trying to win business. In cases where customers have moved away from a particular provider, some VARs will suggest that financial concerns drove the change, he said.

Companies have also been known to send a key employee to interview for a position with a competitor to see why they're hiring, or call a competing company from a non-business-related phone number to obtain a price quote for comparison purposes, said Pete Busam, a former VAR executive who is now "chief balancer" at Equilibrium Consulting, his own firm based in Marlton, N.J.

VARs have differing interpretations of what's driving this behavior. In Sorensen's view, tough economic conditions are increasingly causing companies to resort to trickery. "When things are tight people cross the line to make quota or get the extra sales needed to try and keep their jobs. I see it more with vendor reps than between resellers," he said.

Daniel Duffy, CEO and CIO of Valley Network Solutions, an HP Gold partner in Fresno, Calif., sees other forces at work. "I don't think this is happening because of the economy. I think it's due to greed and the continuing erosion of 'old-fashioned, quaint' values in our country. We tolerate anything these days in the name of competition and capitalism," said Duffy.

Equilibrium Consulting provides integrity and procurement training to employees, according to Busam. "I believe that the culture of an organization starts at the top and is something you work on every day with everyone you talk to," said Busam. "It takes constant diligence."

Selling Used Equipment As New

There has always been intense price competition for computer products. Add the Internet to the mix and you have a recipe for instant price comparison.

Joyce, who formerly ran solution provider Roundstone Systems, said he has lost many deals to rivals selling used equipment as new. "I know we competed against guys who did that. It's disappointing," he said. "A company selling gray market doesn't go to a customer and say, 'Hey, by the way, our price is cheaper because we stole it or got it through means we shouldn't have.' It's always 'Everything is on the up-and-up. We're just more competitive.'

"But I sleep at night knowing that we did business honorably. … Sometimes you don't know until after the fact. You're at $100,000 for a deal and you find out another guy won it for $50,000. The other guy didn't make an [honest] mistake selling that cheap; he did something wrong," Joyce said.

In such cases, manufacturers need to be more judicious in investigating and penalizing companies that misrepresent the products they sell, Joyce said.

"The onus is on the reseller to be an honest competitor, but if it turns out not to be honest, make public examples of them if the manufacturer is serious," he said.

Stormy Clouds

Even a growing technology space like the cloud and SaaS isn't immune from bad behavior.

Jeremy DeSpain, COO and partner at Bellevue, Wash.-based cloud solution provider Explore Consulting, said he's encountered some questionable actions from his contemporaries in their push to become a top NetSuite solution provider.

"As we were first becoming a leading NetSuite [partner], we had other solution providers actively solicit highly trained employees away from Explore," he said. But it didn't end there.

DeSpain said he's also been underbid on deals that were lost, only to find the competitors misrepresented what they could do and the customer was left unsatisfied. Such examples leave a black mark on the whole burgeoning market for cloud services.

"I have a handful of these types of case studies where the customer went with the cheaper provider only to be dissatisfied halfway through, and came back to us to finish the job with quality product [and] service," said DeSpain.

"Referral business is the best kind of business; the only way to get this is by doing what you say you are going to do and acting ethically," he said. "It takes a lifetime to build a reputation and a day to ruin it. No matter what size VAR you are, there is always another deal right around the corner. You can't win them all, so you work hard at winning the ones you can, ethically and without malice."

Onshore, Offshore And Taxes

Of course, winning even your fair share is difficult in a marketplace where competitors may be increasingly misrepresenting themselves. That's a particularly thorny issue in a market where customers want to be sure their business is being handled by an easy-to-reach local business rather than an offshore supplier.

Daniel Holt, CEO of Heit Consulting, Fort Collins, Colo., said he's lost business to competitors who outsource a lot of work offshore but claim they are fully based in the U.S.

"Just because you have three people in the U.S. doesn't make you U.S.-based," Holt said of some competitors in the MSP space.

"They do this with banks, and it's a big deal for [the banks]. I know one bank had an audit exam and found a [solution provider] company that they were connected to through [India]. When they questioned them about it they said, 'Well, we also have offices in the U.S.' But [banks] have to go through additional due diligence [dealing with international companies]. It's not a regulation, but I think it's [breaching] a code of ethics not to tell the customer."

The MSP model came under scrutiny last year when some states, including Florida and Ohio, explored the idea of taxing managed services because--depending on whom you talk to--the states either didn't understand the business model or they found some MSPs were not collecting taxes on a services solution that included hardware (which should be taxed). Some MSPs suspectthat competitors have collected sales tax but then not passed the money on to the government.

"I don't agree with doing that. It falsifies your books. It's giving MSPs a bad name," Holt said. "If everyone keeps doing that, every state is going to come down on us. Do what's right. Don't try to create something that's not there. Be an open book. If you give hardware, you're selling it. The only way to do that is to separate out the services."

Holt blames some of the unethical behavior on the economy, which causes some companies to cut corners. "When things are great, people are not as bad or greedy," he said

An Industry Standard Code Of Ethics

So what can be done to stem the rising tide of bad behavior? Many VARs are in favor of an industry code of ethics in the manner of a Good Housekeeping Seal of Approval that would be championed by the likes of CRN parent Everything Channel or CompTIA, the nonprofit computing technology industry trade association. That code of ethics would detail specific principles that a solution provider organization and its employees would have to adhere to in order to display the Seal of Approval.

Francis Ferreira, president of Ferreira Group, a New Bedford, Mass., solution provider and MSP, said such a code could be instrumental in getting solution provider owners to stand behind their actions. "I always tell my clients that my company is my name," said Ferreira. "I stand behind what I do. That's how I built my business. You have to build your company with trust."

DeSpain says a code of ethics would be difficult to enforce. Still, he said two key codes of conduct are integrity--"the No. 1 quality of leadership"--and work ethic--"be responsible, dependable and give it your all to ensure your clients are getting good advice." Explore itself works hard to prevent any bad behavior from brewing within its walls, DeSpain said, discussing unethical practices other companies are using and then training and educating its workforce.

Geier says an industry code of ethics would get owners and employees to think twice.

"I would support it," Geier said. "It would set some decency standards in our business. Right now it is a free-for-all to some extent. They say everyone cheats on their taxes. If you have a code of standards that people buy into, they are not going to be as inclined to cheat."

Joseph F. Kovar, Scott Campbell, Andrew R. Hickey, Kevin Mcclaughlin, Rick Whiting & Steven Burke contributed to this story.

A VAR Code Of Ethics: Would You Agree To These Standards?

With what appears to be a rise in unscrupulous behavior in the channel, solution providers say the time has come for an industrywide code of ethics that would set clear guidelines for what is and isn't acceptable behavior.

With that in mind, CRN asked solution providers what specific principles should make up a code of ethics that company CEOs and their employees would sign and agree to abide by.

Hiring Principles

1. I agree that any salesperson I hire from a competitor will not approach any accounts regarding active projects or services that salesperson worked on or was affiliated with for one full year.

2. I agree that I will not hire a team of top executive, sales and technical employees from a competitor with the aim of stealing the intellectual capital related to that competitor and moving it to my firm.

Sales Principles

1. I agree that I will not spread rumor or innuendo related to my competitors' financial health, business practices or employee conduct.

2. I agree that I will compete on my own merits rather than demeaning the competition.

3. I agree to act in the best interests of my employer and not to share confidential information on my company's business strategy, financial health or status of accounts with competitors.

Customer Service

1. I agree not to promise my customers service levels or pricing that I know cannot be met without compromising the solution or services that I am providing to that customer.

2. I agree not to pass off any used or refurbished equipment as new.

3. I agree not to misrepresent what a product can do--including its performance and capabilities.

4. I agree not to substitute components in products without informing my customer of the additions and what impact they will have on the price and performance of the product.

5. I agree not to sell or service pirated software and to alert my customers of the implications and penalties for using pirated software.

6. I agree to pay all taxes on any sales of computer product or services in accordance with federal, state and local tax laws.

Representation Of Myself And My Company

1. I agree to not misrepresent myself either online or in the field in order to obtain proprietary information on my competitions' business strategy, pricing and solution provider methodology.

2. I agree to answer all questions on my business practices, financial health, account base, employee base, technical skills and expertise truthfully even when it may not put my company in the best light.

3. I agree to behave with the highest professional, legal and ethical standards when representing my company.

Distributors Keep An Eye Out, Too

It’s not just solution providers who have to watch out for unscrupulous behavior by their peers. Distributors also have to be wary of what some VARs will try to get away with, said Greg Spierkel, CEO of Ingram Micro. Some customers try to find loopholes or just blatantly look to avoid sales taxes for shipments directly to customers, he said.

’We won’t play games by trying to skirt or work around value-added taxes or state taxes by selling from one state to another. That is an absolute no-no for us,’ Spierkel said.

In addition, Ingram has to keep a sharp eye out for solution providers selling to areas they're not authorized for, he said.

"Countries like Russia, Iraq, Iran. There are players in America that are on that blacklist that the federal government watches. Every sale we make we crosscheck to make sure it's not on that list," he said. "We watch a list of end customers viewed from federal authorities that might sell technology products into countries that shouldn't have that technology. If a reseller tries to sell into that environment, we stop doing business with them. We don't want to take that risk."

--Scott Campbell