Gap in CSU bid raises trust, profitability issues for resellers

Bid for a university project in the US tells a story of two vendors

A storm in the US over a massive $US100 million discrepancy between the winning low bid of Alcatel-Lucent and the losing high bid by Cisco to upgrade California State University’s (CSU) network has flowed through to the Australian channel.

Jim Duffy of IDG US publication, Network World, broke the original story in October and then confirmed it in this article on October 25.

The winner of the contract, Alcatel-Lucent, bid $US22 million. Runner-up HP bid $US41 million. Cisco bid just under $US123 million, Duffy reported.

Despite company denials, the difference was $US100 million.

When asked about the price discrepancy, Alcatel Lucent Australia head of channels, Mac Lewis, said this is not the first time he has seen it happen, although he also admits it does not happen that often with large customers like CSU.

Lewis said the local reaction to the situation has been positive, at least from an Alcatel-Lucent perspective.

“It really comes down to the way we architect our solution, as it’s not a box for box price reduction,” he said.

“There are cost savings over a period of time that come into this.”

When it comes to deployment, Lewis said warranties, the efficient reuse of the equipment, and other factors need to be consider, though that adds to the cost.

“The local market didn’t comprehend this until this news [about the CSU bid] came out,” he said.

“A lot of end customers don’t either.”

Looking at the up front sale, Lewis admits the price difference is not nearly as large, but customers are now looking at the total cost of ownership.

“They understand how to make that comparison now, so this highlighted the enormous potential difference over a period of time,” he said.

Cisco A/NZ was contacted to address the above allegations, though PR manager, Linda Horiuchi, said the vendor does not publicly discuss confidential customer account information, which extends to specific contract or request for proposal information.

Rising up

The CSU bid uproar comes five months after Cisco raised the price on all of its product and services in Australia this year by 9.2 per cent.

At the same time, Lewis said Alcatel-Lucent has not increased its prices.

“When we saw the price increase from Cisco, we offered a promotion to get some interest from the partners,” he said.

“We offered to drop some of our prices to make that gap more compelling.”

Asked about the price raise in Australia, Cisco’s Horiuchi said the vendor periodically reviews price levels on our Australian price list as part of its "regular business review process".

“While earlier this year there was an increase, in the past this process has also led to reduced prices when certain conditions are met,” she said.

While Cisco may have been put into the position to explain its higher amount for the CSU deal, Lewis said the situation has translated into a positive impact for Alcatel-Lucent’s partners and customers.

“Now they have a good reason to actually go out and seek out a second potential network provider in these large networks,” he said.

“They now realise the cost difference could actually be in their favour, and rather than being scared about it costing a lot to retrain service people, redeploy them, and extra equipment.”

This, according to Lewis, has prompted customers to look at their strategy and be as open as they can.

“The dynamics at the enterprise have now changed, therefore we have to change,” he said.

“We can no longer be with one vendor, so we need that capability to provide a lot more flexibility to the end users.”

Partner sustainability

In addition to having trust for a vendor, the other key aspect of a good partnership is having good margins for resellers.

Lewis said one of the strengths Alcatel-Lucent has had over most of its other competitors is that it allows “sustainable, good margins” for partners.

“Not only on the equipment purchase, but since we are 100 per cent channel, we don’t go and sell our own maintenance, professional services,” he said.

Lewis emphasis that everything is done through a partner, enabling them to “maximise their business return” with the vendor.

“We have a good, loyal base of our large partners, and what I get told a lot is that they can sustain their margin with us,” he said.

“You have to do a big turnover with other vendors just to make a similar or close margin,” he claimed.

What Alcatel-Lucent tried to do is provide everything partners need in addition to a good margin on the sale, he said.

Providing good annuity revenue, which sustains business and it to grow, is also important.

“You need to have a good sustainable business, and our partners have to be sustainable moving forward,” Lewis said.

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