Getting tough on Grey

3Com has sharpened up its focus on grey market activity and is determined to wipe it out once and for all by making it both beneficial for the channel to turn its back on this “cancer,” and impossible for it to work with it.

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By  Colin Browne Published  November 29, 2000

3Com has sharpened up its focus on grey market activity and is determined to wipe it out once and for all by making it both beneficial for the channel to turn its back on this "cancer," and impossible for it to work with it.

3Com considers itself the most channel-friendly company around, and now it wants the channel to act the same way. A shift in emphasis during the course of 2000, following a significant corporate restructure, means that its channel relations have changed somewhat. A new reseller programme, called ‘Focus’ has been rolled out to enable 3Com partners to work better with this changed organisation as it sets about building high-growth business lines for itself. That focus gives 3Com the opportunity to ensure that the channel is able to grow along lines that are beneficial to both parties, but lays down far stricter guidelines about how the relationship will be run in the future.

In terms of those new guidelines, 3Com says it will only work with channel partners that buy through its authorised distributors, as it steps up its efforts to stamp out the grey market.

To be precise, the definition of grey market activity which is of interest to 3Com, centres on cross-border trading and the sale of product below defined channel cost prices. Typically this takes place when grey marketers take advantage of promotional or contractual terms by means of loopholes in the contracts, or through blatant dishonesty.

“Grey marketing is like a cancerous growth which we have to operate on,” says Colin Summers, general manager for 3Com Middle East and North Africa, describing the new resolve to tackle this issue within 3Com.

It is all about information. The issue of grey market importing has been with the channel since time out of mind, and by and large, nobody has devoted significant resources to stamping it out.

Generally, price has been considered the overriding factor in any sale, and many resellers—particularly those with a trading mentality—have been happy to buy product from wherever they could get it. The difficulty lay in identifying the source of those products, and efforts were often snuffed out in the process.

Not for 3Com. Not any more.

3Com’s Business Compliance Division has drafted new contracts for resellers and distributors, and set up mechanisms to better track the flow of 3Com product—by serial number—from the time it ships from its warehouses to the time it leaves the reseller. More than that, it makes random purchases in the market, collectively worth several million US dollars, to monitor grey activity and gain an understanding of which areas of the business are being exploited. That information has given 3Com new insights into who is playing fair and who isn’t.

Grey marketers in the 3Com definition are typically brokers—one or two person organisations with low overheads and with no pre- or post-sales support. These brokers buy products at prices intended for a specific sector—for OEM for example—but use them to supply another. And typically, they end up supplying customers for whom price is the most important purchasing factor.

The broker however has no means to assist the reseller or end-user in installation or in any after-sales activity, and isn’t interested in doing so either. In a typical case, that quest for support will lead the reseller or end-user to contact the 3Com authorised channel for help, with the result being an additional cost for the reseller/end-user in the form of technical assistance.

A serious consideration is that manufacturers often produce specialist material for specific sectors or geographies to which an end-user is often oblivious. When product is purchased grey, the end-user may end up with a product that does not work in his particular region.

Other problems include resellers purchasing grey product which proves to be outdated, refurbished or even fake. “We’ve had several occasions where product was purchased grey and the customer then contacts 3Com complaining that the product is an outdated version. This ends up being associated with the brand regardless of how or where the product was procured,” says Summers.

Shane Buckley, the vice president of channels and OEM for 3Com EMEA, says the new corporate strategy is characterised by “very severe penalties,” but stresses 3Com is aware there is a “very fine line between doing the right thing and going over the top.”

“But we need to be aggressively competitive, and so we have put in much tighter controls in the past year,” says Buckley.

The new contracts resellers and distributors have been required—or will be required in the future—to sign, are designed to do two things: on the first hand they give the channel solid ground rules for creating an environment where everything is on the level. On the second, they make it impossible for resellers with fewer business scruples to escape punishment for explicit breach of contract.

And what punishment. 3Com sued two Canadian VARs for US$14 million and $5 million respectively this year, on charges that they fraudulently achieved heavy discounts on 3Com goods. Specifically, the two VARs had bought from 3Com at the discounted price that it provides to VARs and distributors supplying special contracts such as government or large corporate deals. The reason for the deep discounts is that it gives VARs an extra edge when competing for a contract, and as a consequence, documentation is required that the contract has been won. These contracts were however, not legitimate in these cases.

At the time of the revelations in Canada, that 3Com was prosecuting the VARs, company executives issued a statement that “It is our contention that these activities lead to the selling [of] products in certain non-contracted geographies at below the market price. This practice ... threatens to undermine the integrity of legitimate sales channels, and is contrary to the agreements 3Com makes with its Canadian distributors and customers. Grey marketing activity is a clear violation of 3Com’s strict policies, which were established to protect our valued channel partners and to ensure customer confidence in 3Com and its products.”

And though that example is Canadian, 3Com is working on a single global policy today. Those examples may as well be here, and 3Com says they will if it finds similar examples in the local market.

For example, with OEM contracts, where 3Com provides discounted products to assembly partners, it is writing penalty clauses into those agreements. “So that if I can track a product back to a specific sales order number, we now have clauses in the contract where we would seek repayment back to the channel price for that sales order number—the whole quantity that shipped on it, rather than the one NIC that I trace, and any other sales orders that shipped in the previous 60 days to that one,” Trevor Camp, 3Com’s business compliance manager for Europe, the Middle East, and Africa told CRN.

Also, distributors in breach of the agreement surrounding 3Com promotions, for example, may find themselves unable to take part in those promotions for 90 days for a first instance, 180 days for a second, and so on.

“So it is quite a detailed penalty clause. And that will help them focus on talking to us when there is an inventory problem and when there is a problem with sell-outs, so that 3Com can also take on that responsibility and manage it with them,” Camp says. “There needs to be increased levels of responsibility by all parties involved.”

But to alleviate the stress on distributors right from the start, 3Com is putting more of the contractual obligation for only buying accurately priced products from authorised channels on the Focus resellers themselves.

3Com readily admits that it has to take a certain responsibility as a manufacturer for some of its actions, which, though designed to increase revenue, have themselves been a cause of the grey market. Tightening up the processes and a lot of the terms of the reseller agreement—by way of the new Focus contracts—is a way to attack those. “We also need to help those resellers increase their value proposition and heighten end user demand jointly. We have to first implement a mechanism for promotion through to the end user directly, off the Web for example,” says Camp.

In the mean time however, getting the channel into a position where it sticks strictly to the letter of the new contracts is key.

“And the distributor is going to help us with that rather than hinder it. That is the intention, that they work with us as a business partner. And 3Com will pick and choose the market and the business partners that we work with,” says Camp.

That future will include sophisticated serial number tracking mechanisms, where distributors and Focus resellers will be expected to make regular reports to 3Com on when product was shipped, where to, and at what cost, for example.

In the final analysis, the message 3Com is sending out is pretty simple. “Our intention is to continue to invest in this high-growth region and to develop it in the most effective way for both channel and end user. To do that we need to ensure that grey does not continue to eat into our revenues.”

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