People in marketing really do come from another universe, and in that alternate world it makes good business sense to frequently pull the rug out from under people in an attempt to motivate them. This is exactly what IBM Credit Corp, the US-based financing arm of IBM, has done to its mainframe resellers with a new sales commission plan that has the intent of stimulating mainframe sales and the leases laid on top of those sales, but could very well backfire on IBM and cause its S/390 channel partners to say the heck with it and start trying to sell other equipment instead. According to a report in Infoperspectives (www.tech-news.com), IBM Credit is changing its sales commissions on leases from the current system where business partners get commissions based on the total dollar volume of equipment put under lease to one where they get fees based on the incremental increase in dollar volume they bring into IBM Credit each year. In effect, to get the same commissions they got last year, IBM business partners in the S/390 area now have to do twice the revenue volume; to show growth, they have to do even better than that. This is particularly difficult as equipment prices drop by 30, 40 or 50 percent per year, which means that partners have to really push three times as much equipment to see any money. As far as anyone knows, this change in IBM Credit sales commissions is only in effect for S/390 business partners, who sell mainframes under 200 MIPS in power, as well as storage, peripherals and software for the boxes. Some S/390 business partners only get to sell IBM’s S/390 Integrated Server, a baby mainframe in a PC server box. Why the big change? IBM Credit is obviously under the gun to show better numbers than it has in 1998. For the year, net earnings were up 9% at $309m, which contributed significantly to IBM’s bottom line. And new lease originations provided by IBM Credit directly to commercial and government institutions was up 3% at $7.2bn. During 1997, new financing to commercial and government customers was up 21% compared to 1996. Figures for 1996 were up 28% compared to 1995. Clearly, IBM Credit Corp is hitting a wall when it comes to trying to increase lease originations. The most probable cause of the shrinking increases in new leases to commercial and government institutions are the rapidly falling prices for servers, workstations and PCs. There is nothing IBM Credit can do about this. Moreover, 1997 and 1998 were probably up higher than they otherwise would have been if companies had not been buying and leasing processing power to cover Year 2000 projects, although no one at IBM will ever admit that.
A thin year ahead
The point is, 1999 is very likely going to be a thin year for IBM Credit’s captive accounts. And that, more than any other reason, is why IBM Credit appears to be taking it out on its business partners, who have been given the task of moving IBM’s legacy servers (System/3X midrange and 9370, 4380, 9221, 9121 mainframes) to more modern equipment and who, quite honestly, haven’t done a particularly good job of it, thanks mostly to IBM’s high upgrade costs from basically free legacy gear to new stuff. IBM Credit wants these business partners to move equipment, has so for years, and it is willing to use scare tactics because quite frankly, it has nothing to lose, especially when none of this old equipment is Year 2000 compliant anyway. Last year, lease originations passed on to IBM Credit from business partners who push mainframes, AS/400s, RS/6000s, Netfinities as well as other hardware, software and services fell 5% to $14.2bn. During 1997, lease originations from the business partner channel were up 12%, and during 1996 they were up 30% compared to 1995. This is a much more rapid decline than for direct leasing to customers, and it indicates that like IBM and its credit arm, business partners have been concentrating on making the minimum numbers necessary to keep in business, not aggressively trying to convert the huge installed base of legacy equipment. Under the new sales commission plan, which could very well be extended to its AS/400 and RS/6000 lines because they are part of the problem, too, IBM Credit is sending a very strong message to customers that if they want to move equipment the easy way – by cutting prices – they are not going to make any money. The new sales commission plan will very likely cause many S/390 partners, who can’t make a living just selling equipment and who rely on sales commissions on leases passed on to IBM Credit, to go out of business because they can’t make the sales volume requirements IBM is imposing. Alternatively, intrepid S/390 partners who want to boost their bottom lines with commissions on leases will look elsewhere for cheap funding, perhaps Comdisco, perhaps Newcourt, perhaps some other financial institution that has nothing to do with computer leasing because it didn’t think it could compete against a captive lessor like IBM Credit. Until now, that is.
