Alliances, Referrals, Kickbacks, Reselling: Where's the independent advice in this?

Alliances, Referrals, Kickbacks, Reselling: Where's the independent advice in this?

Summary: Can you be a consultant and still accept referral fees from a hardware or software manufacturer? Can you do it if you disclose these monies? The answer depends if you are a consultant or a reseller. It also depends if you are truly independent and objective.

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TOPICS: Software, CXO, Hardware
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InfoWorld reported the latest on a federal case involving alleged kickbacks between some of the world’s largest systems integrators and hardware manufacturers. Several firms have settled with the government while others are maintaining their innocence.

There are a couple of pieces to this story that really got my attention. For one, a former Accenture executive allegedly took approximately 700,000 pages of material with him when he left the company “many of which involve HP”. That is an impressive quantity of material and a quantity that would suggest the whistleblower involved might have been planning this for some time. Think about how much paper that is. If a ream of paper is 500 pages and 10 reams come to a case, that's 140 cases of paper alone.

The other item of interest is that some of the parties don’t seem to understand the conflict that referral fees introduce into the procurement equation. Yes, it’s ethically correct that parties inform the buyer that these fees exist. However, how can a consultant or systems integrator even pretend to be providing impartial advice and counsel to clients that are selecting new software or hardware if their employer benefits from steering the business to one provider over another.

This issue is at the heart of the difference between a reseller and a consultant. A consultant is supposed to be a professional that puts their clients’ needs/wants/business ahead of their own. I believe the following acts are not the acts of a professional consultant but rather speak to the acts of a self-interested integrator:

- An integrator recommends their client license a software product over another because the integrator has more people on the bench available to implement the recommended product. This is made more egregious when the recommended product is a better fit for the client.

- An integrator recommends their client choose a product without disclosing the cross-marketing fees/referral fees that will go to the integrator when the deal closes

- An integrator staffs a software or hardware selection with project team members who only have experience with one product and that is the product the integrator wants the client to choose.

These commissions or referral fees are problematic as they introduce BIAS. From a professional standards basis, consultants should avoid even the appearance of impropriety. When an integrator pursues these referral fees they should distance themselves from doing evaluations for clients. And, that is a dilemma as these referral fees are paid precisely because the vendor is steering business to another firm. In other words, an unbiased consultant should never take referral monies if they want to remain independent, transparent and acting in a fiduciary manner. Resellers or integrators who are paid commissions or referral fees need to be honest with themselves and admit that they are merely an extension of the hardware or software vendor’s sales force. To accept payment for referrals is to be paid for selling product. That’s a conflict of interest if one is also presenting themselves as a neutral evaluation partner.

The cases InfoWorld is reporting also suggest that the customers involved in these deals knew about these economic relationships. That adds another dimension to the case as customers can’t claim they were hoodwinked if they had knowledge of the referral relationships. Since these are governmental transactions, I’m perturbed that governmental bodies may have hired integrators to do selection or evaluation work when these firms had a clear conflict of interest. If that is the case, then both sides may be culpable.

I know some integrators claim that their referral fee programs don’t impact their impartiality as the people involved on the evaluation projects do not directly benefit from the fees. That’s a stretch in my opinion as the project team will likely get a lot of ‘advice’ from other executives in the company suggesting a number of reasons why the deal should go to one vendor over another. Even if the referral fees are never disclosed to the evaluation team, the evaluation team would need to question every iota of ‘advice’ it’s getting internally.

Some integrators will claim that they pass these savings back to the clients. Sounds good but I’d suggest that the money should never cross the consultant’s threshold in the first place. If discounts are driven by ever greater deal flow, the discounts encourage the integrator to do ever more deals with one supplier over another. That’s bias.

While I have no idea how these cases will be resolved, I’d recommend that software and hardware buyers do the following:

- Disallow consultants, et.al., who have these reseller or referral arrangements if the firm is being considered for an evaluation project

- Require all integrators, consultants, et.al., to fully disclose any and all economic relationships they have with potential hardware or software vendors

- Require any personnel staffed on an evaluation project be balanced from a product knowledge basis. In other words, make sure different people have deep expertise in different products. Avoid project teams with a pre-existing bias for a given solution.

- Create an ethical code of conduct that binds the consultants. Make sure they put the clients interests ahead of their own. The acid test for the integrator is simple: Would they recommend a solution that they lack skills or experience in? If no, they’re biased.

- If you need an independent and unbiased opinion, are you looking at the wrong kind of firm to help you? Seriously, if you hire a mechanic who only works on Porsche automobiles to help you buy a car, do you think you’re going to learn a lot about Subaru cars? Hire an integrator for implementations, hire a consultant to consult. When you mix up the two, you can get problems.

Topics: Software, CXO, Hardware

About

Brian is currently CEO of TechVentive, a strategy consultancy serving technology providers and other firms. He is also a research analyst with Vital Analysis.

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5 comments
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  • Extends to the recent B2B Mergers and the coming VAN Wars.

    We see the same dynamic occurring in EDI integration with the recent mega mergers - these market distortions extend not only to systems integration, but to the communications services, the distortions of routing practices, and the abrogation of decades of cooperative network ops between VAN competitors who did what was technically best for the industry's comms requirements, and left ruthless competitive practices to the sales armies in the field and the marketing departments. That's over now. The story is just being written, the VAN wars have begun.
    abmadw
  • Kickbacks: of course they can

    Why anyone would employ them though?

    Ah, more ripoffs in the public sector. Yet the people keep giving them more money. Sure change is just around the corner;-)

    It used to be tragic, now it's funny. I need to get me some.
    Richard Flude
    • RE: Alliances, Referrals, Kickbacks, Reselling Wheres the independent advi

      @Richard Flude

      I don't know if you are aware that Cisco, Accenture and Sun are all in the private sector.
      msalzberg
      • Seriously?

        You believe these companies are paying these kickbacks?

        I worry about our future.

        To help :
        "Since these are governmental transactions, I?m perturbed that governmental bodies may have hired integrators to do selection or evaluation work when these firms had a clear conflict of interest"

        waste and government goes hand in hand. Today it simply takes on a more organized angle. Taxpayers like msalzberg apologise for them.
        Richard Flude
  • Typo?

    You wrote:

    "This is made more egregious when the recommended product is a better fit for the client." Was that the meaning you were intending to convey?
    JustinfromHexawise