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A BP BATTLE SHEDS SOME LIGHT ON IBM MAINFRAME MARKETING

Glasshouse Systems, which resells IBM mainframes, says Big Blue has done it wrong.  One June 18, Glasshouse filed a federal suit against IBM in Philadelphia asserting IBM broke its own rules to help a reseller rival, Mainline Information Systems, grab account control at SEI Investments, Inc., based in Oaks, Pennsylvania.  In its suit, Glasshouse explains IBM practices that authorized dealers live with every day, but which are generally hidden from end users.  It's not hard to see why IBM might prefer to keep these practices out of the limelight, and why customers might want to know more about them.

There are several companies that are authorized to sell IBM mainframes and products used on mainframes.  Only some of the companies on IBM's list are actually allowed to sell mainframes to end users, and in practice IBM's restrictions are even tighter than they seem on the surface.

Usually, only one of its resellers is supported as the IBM's preferred hardware supplier at any single account.  In other words, if you are an end user who buys mainframes from a business partner, you will find that is it impractical to see if there is another business partner who might get you a mainframe, an upgrade, some software, or support services.  Glasshouse explained why this is the case in its legal complaint, thus exposing IBM's practices to scrutiny by mainframe users.

It is not clear how well IBM's competitors in the server business, such as Hewlett-Packard, understand IBM's practices.  If they do understand IBM's methods, it could well be through the study of IBM materials they are not supposed to see.  At least that is the impression a reporter gets when asking people who are familiar with IBM's rules for resellers about the arrangements between Big Blue and its Business Partners; they say they can't be of much help because the details are considered confidential by IBM, and IBM does not want its dealers nattering about the rules of the game.

It is, however, impossible for IBM and its resellers to keep all their business practices under wraps.  In order to sell mainframes, IBM's dealers have to tell users what their systems will cost.  Sometimes that requires dealers to explain that prices can come down if a user chooses a mix of hardware, software, and services IBM is pushing.  In fact, the very concept of a discount can be the first indication a customer gets that somewhere there is a price list for mainframes, a reference from which discounts are then computed.  IBM and its resellers do in fact have documents that include IBM's suggested prices and discount plans.  This is the case even though IBM wants mainframe customers to believe every transaction is a special bid.  What looks like a special bid could well as a price computing from a formula that starts with an IBM list price (known to IBM and its resellers but not to customers) and applies the prevailing discounts based on a schedule of IBM sales incentives in force at the time the deal is struck.

When it comes to a really big transaction involving multiple large systems and other apparatus, IBM does try to work up a special price.  But smaller customers in the mainframe world, which are by no means mom and pop businesses, are treated with some uniformity, according to people familiar with IBM's mainframe sales practices.  These shops are more numerous than the giants, but even in aggregate constitute only a fraction of IBM's total mainframe revenue, because the superpowers of industry and government have such vast appetites for big iron.

Even so, different end users getting identical systems at the same time may be offered machines at substantially different prices.  That is because IBM's uniformity may be more evident in the prices it charges its resellers than the prices the resellers offer to their end users.  IBM dealers want to buy low and sell high.  And it seems that IBM probably lets them do this, with few exceptions.  The events that led to litigation by Glasshouse might be one of the exceptions.

Glasshouse Systems, Inc., began life as a company in the Toronto area, and in Canada it is (or was, until it went to court) one of IBM's leading resellers of mainframes and other kinds of IBM systems, arguably the largest in Canada.  Last year it was a finalist for an IBM Beacon Award in the mainframe group.  Outstanding IBM resellers are recognized at IBM PartnerWorld conferences and the top companies get Beacon Awards.  The winner in 2007 for mainframes was Cornerstone Systems, which is based in the US but sells systems in Canada.  There may be no connection between winning a Beacon award and corporate prosperity.

Currently, Cornerstone is trying to sell itself to Mainline Information Systems, another IBM reseller and one that figures prominently in the Glasshouse affair.  (Despite its name, Mainline is not headquartered in Philadelphia, the scene of this dispute, but in Tallahassee.)

Just as some American IBM dealers chase business in Canada, Glasshouse Systems went after some business in the USA, but it did not do this by opening an office south of the border.  Instead, David Antebi, who is the boss of Glasshouse, set up a corporation in Vermont, and that company is also called Glasshouse Systems, Inc.  The Vermont Glasshouse has its main office in Lisle, Illinois, outside Chicago, not Burlington, Vermont, where it legally lives, and it also has an office in Villanova, Pennsylvania.  The Villanova office is the part of Glasshouse that chased deals at SEI, which had been a mainframe shop for a long time, but one with a bit of independence.  SEI bought Amdahl processors and other non-IBM but compatible equipment when Glasshouse first pursued it.

Getting a company that uses non-IBM servers to switch to an IBM mainframe can involve a time-consuming and costly sales effort.  IBM knows this and provides big incentives to resellers that get a shop to go Blue.  There are also substantial incentives for resellers that get a mainframe customer to bring new workloads to the mainframe (whether in an IFL running Linux, on a standard engine, or within another kind of specialty processor).  The way IBM puts it, at least according to the Glasshouse suit, the incentives are part of a plan to encourage resellers to "undertake significant sustained sales and marketing activities" in return for exclusive pricing that is supposed to prevent rival business partner from swooping in when a deal is ripe and undercutting the reseller that has been grooming the prospect for some time.

In the case of SEI, in 2002 Glasshouse hired Peter Flick a sales rep that had experience with the user.  It took Flick until March 2006 to dislodge some Amdahl processors at SEI and get IBM iron in place.  Along the way Glasshouse did sell some peripheral and interconnection equipment to SEI, but did not close any deals on big ticket hardware, such a central processors.  Six months later, in October 1966, Flick was busy trying to persuade SEI that it needed even more big iron, this time in the form of processor upgrades.  IBM sent a couple suits into help move the upgrade deal forward and it approved a request from Glasshouse for favorable pricing.  Glasshouse says IBM assured it that the pricing was exclusive, meaning no other Business Partner could come into SEI and pick off the customer on the basis of comparable (or lower) pricing.

The deal didn't close right away and Glasshouse apparently kept working on SEI to get it to sign for a processor upgrade.  But in the end what happened was that another IBM reseller, Mainline Information Systems, got into the account and obtained similar or possibly deeper discounts from IBM.  In 2007, Mainline, which Glasshouse says didn't do any of the hard work it had done to persuade SEI to go for the upgrade, walked away with the deal.  In its suit, Glasshouse claims IBM owes it $3 million for the time and effort it wasted on the SEI account.

Glasshouse apparently complained to IBM, which seemed to have broken its promises to protect an incumbent reseller, but of course there could be more to the story.  If Glasshouse displeased SEI that could be the basis of IBM's decision to let Mainline pick up the business.

Still, Glasshouse maintains that it had received quite a bit of reassurance from IBM that it had the inside track and its posture suggests that any difficulties it might have had in its relationship with SEI could have been ironed out with a little more effort on everyone's part, with everyone meaning Glasshouse, SEI and IBM, not Mainline.

In law, parties involved in a business relationship have enforceable obligations to each other if there is a high level of reliance among them.  In the case of IBM and its reseller, the relationship goes farther, because IBM pokes its nose into mainframe resellers' operations, controlling the wholesale price of systems, reviewing the retail price the resellers charge users (and possibly making comments or suggestions as it does), and basically managing many other aspects of the transactions that occur between its authorized resellers and their end user customers.  Glasshouse asserts that IBM pretty much controls how much money its resellers make.  Even if that is a bit of litigation hyperbole, IBM does appear to play a sufficiently strong role to have what is called a fiduciary responsibility.

The roots of this legal concept lie in the structure known as a trust, a way for one party to put valuable possessions in the hands of another on a temporary basis and obtain some assurance the holder of the assets will behave honestly and decently.  Trusts are an invention dating from the middle ages, when feudal knights who went off on a Crusade would have to temporarily entrust their estates to others.  If a crusader came back alive, he would hold his trustees accountable for the assets they parked for the duration of the adventure.

In a modern context, this kind of relationship has been used to characterize business arrangements in which one party is largely or wholly dependent on another for its livelihood.  An IBM reseller does in fact depend on IBM's decency and, well, trustworthiness, and it is only as a result of that trust that the reseller can conduct its business with courage and integrity.  Customers can count on IBM resellers because the resellers can count on IBM.

Glasshouse is saying in its suit that it fully trusted IBM to control its livelihood with integrety and IBM accepted this and thus had a fiduciary responsibility that it violated when it allowed another reseller, Mainline, to walk away with a deal Glasshouse assumed was safely in its hands.

There is a lot more to this something in the corporate imagination of Glasshouse Systems.  There is a trail of documents that provide a history of the relationship of Glasshouse, SEI, and IBM.  There are also lots of IBM documents, some of them undoubtedly bearing an IBM Confidential designation, setting out the rules of engagement.  (A confidential designation sometimes can have legal value, but sometimes it's just a bluff.  When it's a bluff, it is still the kind of bluff an IBM reseller takes seriously.)  If it comes to finding IBMers who, under oath, might say things Big Blue would rather not have in a court record, there is John Pyne, an IBM sales rep, who was involved in the deal, plus Al Payne, an executive in IBM's Business Partner program, who also was in the thick of things.

One aspect of the attempt by Glasshouse to hold IBM to a high level of responsibility and trust is the list of acts a reseller has to perform (and document) if it wants IBM to acknowledge that it has undertaken the "sustained marketing activity" that is required to get IBM's deepest discount on a mainframe system.  People familiar with the reseller practices of IBM believe the amount of the discount relative to the secret list price of a mainframe is in the range of 35 to 40 percent.  A reseller that puts a lot of effort into selling a mainframe may feel it ought to keep the whole amount but in practice a reseller ends up splitting the price break with the end user.  It is not necessarily an even split, but it would not be unreasonable for an end user to figure on getting 15 to 20 percent off secret list price.  That can be an amount large enough to enable a reseller to persuade a customer to buy more mainframe processing headroom or more specialty engines at the outset because it is unlikely the reseller and thus the user could get a similarly large discount a year after a deal is made if the customer just wants to add some MIPS or activate an IFL.

Mainframe dealers are pretty good at self-protection but they don't all think every word on every memo they get from IBM is top secret.  What they generally disclose is that they qualify for IBM's (presumably) deepest discounts by proving they have put in a lot or time, usually at least a year, on a sales effort, that on three or more occasions they met face to face with the user's tech execs and buyers, that they presented multiple possible options in terms of configuration to cover a range of possible end user computing strategies, that they ran benchmarks if appropriate, and that they put what IBM calls a VAE (for value added enhancement) into the deal if possible.

A VAE is a software package, migration support or some other non-hardware item the reseller offers that makes the reseller more than just an outlet for things IBM makes.  In practice, a VAE can be a software package the reseller resells and which customer never actually uses.  It's just there to enable the reseller to advance the plot that gets a deeper discount from IBM.  In other words, sometimes a VAE is a Macguffin.  IBM is well aware of this but tolerates the practice when it can make the difference between a deal and a lost opportunity.  At least that is what some resellers say.

The complex rules under which mainframe resellers operate give IBM a lot of control over its Business Partners, but the Glasshouse incident shows that the system doesn't work perfectly all the time.  It is apparently possible, under circumstances that may emerge if the suit progresses, for a mainframe customer to change resellers and possibly get a better price along the way.  But mainframe shops should not misinterpret the exceptional events surrounding this matter as a sign that there might be any real competition arising among resellers in the mainframe business.  On the contrary: Mainframe users who feel they are not getting treated well enough would be wise to move carefully unless they are indifferent to the fate of their incumbent reseller, as SEI apparently is in relation to Glasshouse.

— Hesh Wiener September 2008


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