Special Report On The Selling Of AS/400s: Navigating the Channel Stream

• 09/28/1998

Introduced to the market at a time when IBM was beginning to scale back its direct sales force in volume, the AS/400 has been swimming almost exclusively in the reseller channel since its inception more than 10 years ago.

In fact, as of 3Q 1998, between 60 percent and 70 percent of IBM’s AS/400 business in North America was done through business partners, according to IBM sources. As the technology continues to mature, the AS/400 still has much room for growth in the area of Value Added Reseller (VAR) hardware, software and services.

"The AS/400 was a resellers’ delight," says Mark Ryan, IBM’s general manager of marketing and distribution channels for North America. "It was an integrated system. All the reseller had to worry about was writing application code for it and providing some sort of integration services around it."

When the AS/400 was first introduced in 1988, many units were sold face-to-face, although there was a remarketer channel already in existence at that time selling System/36s and System/38s, according to Ryan. The channel was divided in half. One half consisted of complementary channels – old firms that were part of IBM’s Marketing Assistance Program (MAP). "They would go to an account hand-in-hand with an IBM sales representative and sell to customers," he says. The other half was comprised of "the value-added resellers, which would buy their products from IBM, then go independently to the end user and sell their solutions."

The IBM direct sales force was trimmed significantly in the early 1990s due to financial problems within the company. "We could no longer afford the massive face-to-face sales force that we had out in the marketplace," Ryan remembers. The channel was ready to step in; not only did the resellers already have their own customers, they were already making a substantial profit off the AS/400, he says.

One of the AS/400 sales and distribution channel’s charter members opened its doors on May 1, 1988; less than two months before IBM officially announced Silverlake. Throughout the past decade "we’ve enjoyed great success through our commitment to the IBM Business Partner Program," says Roger Ikeda, director of marketing for Real Applications Ltd. (Woodland Hills, Calif.). He estimates 70 percent to 75 percent of Real’s reseller business falls in the AS/400 market.

Real signed up with IBM at that time to act as a VAR for the System/36, System/38 and RISC Technology PC (RTPC). Ikeda points out that Real was already active in the mainframe used equipment market when the AS/400 took flight. However, Real didn’t see the same growth in the mainframe market that it saw in the midrange, he adds.

The remarketer channel dates back as far as 1979, when IBM began to move away from direct sales in certain foreign markets, according to Ikeda. But this embryonic channel initiative would take years before it delivered on its promise of offering an alternate sales channel for IBM hardware, software and services.

1988 was the beginning of many IBM channels programs, he explains. On July 1 of that year, IBM’s Complementary Marketing Program (CMP) became the Business Partner Program. This new program encompassed both the CMP and VAR initiatives, although the two segments often found themselves in competition with one another for end-user dollars.

The reseller and distribution channel as it exists today began during the summer of 1992, when IBM moved away from its combination of VAR and direct sales of the AS/400, recalls Jim Teter, VP of sales and marketing for Business Partner Solutions (San Antonio), a subsidiary of parent company Savoir Technology Group (Campbell, Calif.). Teter knows IBM well, having served as a branch manager with Big Blue for 15 years. Since 1992, there has been a shift in the high-tech market’s strategy as a whole, he says. "Everyone has gone to more of a channels distribution model."

The Business Partner Charter – announced in February 1996 – was IBM’s attempt to convince its reseller channel that the company was serious about its channel-centric strategy. According to Ikeda, such a strategy would not have been possible if IBM continued to support a high volume of direct sales to smaller markets, so IBM put many direct sales veterans into channel positions.

The top five second-tier resellers – based on revenue from AS/400-related sales – include: Direct Systems Support (San Diego), Integrated Corporate Solutions (Overland Park, Kan.), Chouinard-Myhre (Cotati, Calif.), Lighthouse Computer Services (North Smithfield, R.I.) and F.S.I. Financial (Norcross, Ga.). Each of these partners has earned between $8 and $14 million in revenue through June of this year, according to IBM sources.

There is no one factor that can be attributed to IBM’s increased dependence on the channel over the past decade, according to Sam Malandra, VP of sales and marketing for JBA International’s Computer Solutions Division (CSD), the distribution arm of JBA (Mt. Laurel, N.J.). Downsizing some of the direct sales force was one factor, but IBM also believed the channel could better reach the changing marketplace and could provide better support. In addition, IBM felt a need to get the people delivering the software solutions to deliver the hardware as well, he says.

Downsizing was going to happen in the early 1990s, regardless of IBM’s channel strategy, agrees Jim Oller, AS/400 program manager for JBA’s CSD, which does about 65 percent of its business in the AS/400 market.

Malandra sees three major changes in selling AS/400 over the past decade. The first is the product itself, the second is the fact that there wasn’t much of a channel 10 years ago and the third is the focus on solutions.

Four years ago there were probably 4,000 to 5,000 partners in the IBM program, however, IBM has trimmed this number over the past two years to about 2,500, Malandra notes. "The low-end companies that could not provide support or deliver solutions to the end users with appropriate skills have basically weeded themselves out," he says.

Years ago, channels were perceived as a threat to IBM direct sales, according to Oller. The transition toward channels was initially a difficult one for IBM direct sales, but eventually educational programs, compensation and a better understanding of the new structure led to a successful evolution of the sales strategy.

Over the past two years, the AS/400 channels market has seen its number of distributors dwindle from 25 to nine, explains IBM’s Ryan, who adds that he "wouldn’t be surprised" if the number shrank further to seven in the near future. Among the major AS/400 distributors consolidated during the past year are: Dickens, which was bought by Pioneer-Standard Electronics Inc. (Cleveland); Hall-Mark, bought by Avnet Inc. (Phoenix); and SupportNet, which is now a Gates-Arrow (Greenville, S.C.) company.

Several distributors have risen to the top of the competition in the AS/400 market, whether through acquisition or internal growth. They include: Business Partner Solutions, Dickens Data Systems (Roswell, Ga.), Hall-Mark Computer Products (Tempe, Ariz.), JBA International, Real Applications Ltd. and SupportNet Inc. (Indianapolis), according to IBM records.

"What you’re seeing is a consolidation of what I would call distributors that were primarily in the volume business, that have seen the financial benefits of being in more of a value-based market, where you’re not only able to sell the hardware but services, application software, etc.," Ryan says. "This solutions bundling protects the margins on the hardware that distributors sell."

These massive consolidation efforts have created a situation where two distributors – Business Partner Solutions (BPS) and SupportNet – do about 75 percent of the AS/400’s distribution to second-tier solution providers, adds BPS’s Teter.

Many of today’s distributors have been around as IBM partners, in one form or another, for a long time, Teter says. IBM distributors Western Micro Technology and Sirius Computer Solutions, for example, formed Business Partner Solutions in September of 1997, and it is now the largest AS/400 distributor in terms of volume, he says.

Teter estimates that 65 percent to 80 percent of Business Partner Solutions’ business is value-added distribution of the AS/400. In addition to selling hardware and peripherals to resellers, BPS is responsible for marketing efforts, as well as support and systems integration. "We help the reseller focus on their core business: developing industry-specific application software and performing strategic platform services, such as [Lotus] Notes and Web integration," he says.

Distributors like Dickens and SupportNet -- which "grew up" according to the volume model where they "were able to maintain margins on their hardware much larger than volume distributors" – became very attractive targets for publicly-held companies like Gates and Pioneer, according to Ryan. "It’s actually been a good marriage because as these distributors have grown over time, they have needed access to capital. Most of these distributors are private companies without access to that kind of capital, and therefore when they became large enough and became targets, being acquired by public companies has given them access to capital in order to invest in their companies," he says.

Distributors were initially allowed to sell only low-end servers, explains Malandra of JBA, one of the original six distributors in the AS/400 market. The distribution channel really picked up as IBM began to see it as a better way to reach small and medium businesses. "What was driving IBM’s hardware was solutions," he says. "That’s another reason they moved toward business partners. I think they also saw other manufacturers successfully implementing a distributor strategy – anywhere from PC companies up to HP and Sun."

Though JBA has considered acquisition as a form of growth, the company has chosen to grow its own business, according to Oller. The reseller portion of the company consists of the CSD and a Software Solutions Division (SSD), which acts more as the reseller arm for the company. SSD sells JBA developed and owned software solutions directly to large and medium-sized enterprise, while the CSD acts as the distribution arm.

"If you look at acquisitions, they need to make financial sense," Malandra says, pointing out that – in IBM’s business model – distributors are not rewarded strictly by volume.

Taking nothing away from the importance of business intelligence and other IBM enterprise initiatives, "e-business is certainly going to be an enormous opportunity for all business partners over time," Ryan states.

"We’re out of the product game," he says. "You have to sell a complete solution to the customer." This includes not only offering all the hardware, but also being able to provide integration, financing, services and maintenance.

"The biggest area of growth we see is e-business," Malandra agrees. "We have made huge investments in Lotus Notes, both internally and in a support staff to support our affiliates. We are putting a lot of our energy into the Internet, e-business and Lotus Notes solutions. We see this creating new marketplaces and new opportunities on the AS/400, RS/6000 and Netfinity platforms."

Selling IBM Intel-based platforms like the Netfinity into the enterprise will be a key growth area, according to Malandra. While the Intel-based marketplace is a relatively new space for IBM, an estimated 60 percent of all servers in the year 2000 are going to be Intel-based, he adds. There are "huge growth opportunities around that Intel base," particularly in the area of e-business solutions, as well as storage and systems management software.

There is still a lot of room for the AS/400 as a stand-alone server, but there is also much opportunity in the distribution of AS/400s throughout the enterprise, according to Teter. Lotus Notes has been incredibly successful, and the AS/400 is becoming a large part of its success. Though Lotus Notes comes from the PC world, the AS/400 has proven itself to be a reliable Notes platform, he adds.

"The future is bright for the AS/400," Teter boasts. Even though the AS/400 brand name has been out there for a while, IBM has done much over the past several years to refresh the technology.

The distribution and reseller channels have grown a lot more of late, thanks largely to IBM’s restructuring efforts, Teter explains. "Currently, solution providers within the reseller program make up the dominant part of the overall channel," he says.

"From a distribution perspective, our goal is to help the reseller channel," Teter says. This means knowing more than just hardware and operating systems. It also includes having skilled personnel on the distribution level who know the newest skill sets – such as Java, business intelligence, e-business, etc. "As margins continue to shrink, you have to capture market share," he says, adding, "Products are costing less and doing more now."

JBA’s background in software development adds to the company’s value proposition, according to Malandra. "That’s an important factor in attracting business partners," he says. "A lot of our competitors are distributor-oriented. The solutions culture is inbred here." Malandra says he also wants to extend JBA’s CSD out to a worldwide presence.

Looking to the future, Real – like many of its competitors – is counting heavily upon e-business and the Internet. "E-mail [for example] became easy overnight," Ikeda says. "The Internet has this same potential. Resellers need to have an Internet e-business strategy."