Carmakers Provide Performance WarningBy Lawrence Walsh | Print
General Motors' and Chrysler’s decision to shutter thousands of dealerships is an apt parallel of how vendors view their underperforming partners, and how those solution providers could meet similar fates if they’re not careful.
No surprise to anyone, the auto industry is in bad shape. That reality hit a new peak in recent days as General Motors and Chrysler notified hundreds of dealers that their franchise contracts would not be renewed because of poor performance and the manufacturers’ inability to support their existing retail network.
The contraction of the GM and Chrysler channels will have far-flung consequences. Chrysler is shuttering nearly 800 dealers. General Motors will shut down 1,100 dealers through non-renewals and about 500 more through the closure of its Saturn, Saab and Hummer brands. More than 100,000 management, sales and support people will lose their jobs as the two carmakers push to find financial viability.
While the closure of hundreds of local car dealerships will have a ripple effect in the IT channel as solution providers see some of their best and more enduring customers evaporate, there’s a much larger, more prescient lesson in Detroit’s woes for IT resellers and solution providers: Perform or perish.
A growing number of IT vendors are viewing their channels as being bloated with too many underperforming partners. Call them "lifestyle VARs" or "transactional partners," the underlying characteristics remain the same. From a vendor perspective, a great number of solution providers simply do not deliver the financial returns that warrant keeping them in a vendor network. In fact, many vendors report that 80 percent (in many cases 90 percent) of their channel sales are delivered through partners in the top 10 percentile.
This is precisely what the auto industry is encountering—over-distribution. General Motors says it will reduce its dealership network by 40 percent over the next year and a half. That means it will close as many as 2,400 of its current 6,000 dealerships—most of which are independently owned. GM dealers sell, on average, 470 vehicles per year. By comparison, Toyota—archrival to the U.S. auto industry—has less than 2,000 retail outlets, and each of its stores push more than 1,800 cars out the door each year. GM and Chrysler believe that pulling down the number of dealerships will make it easier for surviving dealerships to push more cars, making both the dealer and manufacturer healthier.
Vendor channel chiefs have this same problem and would make the same choice to end relationships with underperforming partners if it weren’t for one thing: revenue. Assume for a moment that the 90/10 ratio is accurate. That means than 10 percent of channel revenue flows through 90 percent of solution providers. However, that 10 percent represents a significant amount of money in the aggregate, and vendors are reticent to give up that money even if it comes at a significant cost.
Such is the case of the car dealers. For the past few years, GM and Chrysler pushed the dealers to buy cars and build inventory to help their bottom lines. The dealers assume huge liability and risk for allowing the manufacturers to—in our industry’s words—stuff the channel. And even though the dealers ultimately had a lower—and increasingly eroding—sales performance, the dollars they drove to Detroit were worth the high cost of sales and doing business.
Today, the cost of doing business is too great for carmakers to support underperforming dealers. The same is rapidly becoming true for IT vendors in their relations with "authorized" and "registered." Many vendors continue to say they support partners through "automated" resources, such as marketing materials archived on partner portals or quoting tools hosted on Websites. Automated resources are a cheap alternative to field resources for low-tier and -volume partners, but they certainly do not replace human beings for support. No wonder more than one-half of solution providers say they regret joining a vendor channel program and that many say their dissatisfaction is because vendors fail to live up to their promises (see the Channel Insider/Motorola Partnership Study).
Vendors avoid partner decommissioning by constantly recruiting new partners to their ranks. The steady flow of new partners doesn’t alleviate the underperformance problem, but simply masks it. New partners mean new sales and revenue, which will provide cash flow. But the expansion only makes it harder and more expensive for vendors to provide adequate support to all segments of its channel, which leads to dissatisfaction on both sides of the equation. Many vendors would gladly give up the lower one-third of the partner community if they could figure out a way of easily replacing the transactional revenue that they generate.
The auto industry and the IT channel are vastly different in many respects, and the variety of technology providers does insulate solution providers from sudden shifts in vendors’ attitude and policy toward their channels. That said, solution providers should be mindful of the experiences and lessons from Detroit’s rapid contraction and the collateral impact on local dealerships. GM’s and Chrysler’s decision is based purely on performance, and many IT vendors are using those same performance metrics to shape their future channel policies.
Lawrence M. Walsh is vice president and group publisher of Channel Insider. Read more of his research reports at [CI] Perspectives.