the one about SI Compensation

A colleague of mine, who recently joined Microsoft from Sun, was explaining to me yesterday something known as “S.I. Compensation”. This is where a Systems Integrator (S.I.) is compensated financially by a technology vendor whose products they sell. It’s otherwise known as a “kick-back” or “finder’s fee”.

For example, a large consulting firm might be engaged by a client to recommend a middleware solution. The partner at the firm will go to his technologists, advise them of the customer’s requirements and desired outcome, discuss their existing technology infrastructure and skills and then ask for a technology recommendation.

The technologists’ recommendation will be predicated on a number of factors:

  • what skills the client and the consulting firm have;
  • what architecture the client has;
  • which middleware technologies are the most mature (e.g. which are in Gartner’s Magic Quadrant)
  • the client’s budget, timeline, etc.

One of the deciding factors, however, will often be: which of the vendors (assuming their products are all pretty much equal in terms of features) will pay the consulting firm the most money for bringing them the business. Much of this money goes straight to the partner’s pocket, and it’s big, easy money. Think about the kick-backs that must be involved in multi-million dollar ERP deals. Or multi-million middleware deals for that matter.

The Microsoft model is (currently) quite different. We don’t offer compensation (as far as I know anyway) to the SI. If the SI also happens to be the Large Account Reseller (LAR) for that account, they will get a margin on the software, but these margins are quite small. The LAR, however, gets the margin regardless of who sells the software, as they typically have a contract in place to supply Microsoft software into the account. Even if Microsoft did introduce SI Compensation (and I believe we are probably one of the only large IT vendors who haven’t adopted this model), quite frankly, there wouldn’t be a lot of money in it for the SI. If you compare the sticker price on a lot of our products, and compare them to the competition, we are a heck of a lot cheaper. For example, look at the starting prices for Webmethods, TIBCO, SeeBeyond, Websphere and BizTalk. Based on the feedback I get from customers who evaluate these products, there is usually a factor difference between our offering and that of the competition (although I’ve seen these guys be prepared to discount to almost zero recently in order to win business). In fact, one CIO I know likes to say he could buy BizTalk “out of the stationery budget”.

I’m not saying the SI Compensation model is necessarily wrong or corrupt. However, a good question to ask the consulting firm the next time they recommend a particularly expensive solution to you might be: “Can you please show me what kick-backs your firm will be getting from the vendors you are recommending?”

Comments (7)

  1. Darrell says:

    The SI kickback is equivalent to a loaded mutual fund. The load has nothing to do with the mutual fund firm, it goes directly to the seller. At least that is explicit, which is what happens when the US federal govt gets involved.

    But I have to wonder, if a seller is getting a kickback, how objective is he going to be? Either he is going for the money, or he is extremely ethical, and there aren’t too many of the latter!

  2. Agent Smith says:

    In a previous life (before I was a CIO), I used to work in the vendor market doing pre-sales and implementation of ERP solutions …. Cameron, you are right; it was amazing how often the sales guys would recommend hardware platforms on the basis of who paid the largest finders fee. Of course what we then needed was to find a convenient benchmark which proved that the recommended Fred Nerk brand server had the goods …. of course every single hardware vendor had a suitable benchmark putting them at the top.

    On one occasion we did an actual performance test for a prospect on 2 different vendor platforms using their data and volumes …. interesting result for the sales guy 😮

    Remember MIPS as a measure of performance? We implementation guys used to refer to it as Misleading Information for Promoting Sales

  3. CD says:

    Another observed practice is the one of "recommending" the product from vendor A against B when the SI has 10+ consultants "on the bench" trained on vendor’s A product…examples in Australia include…large insurance company, etc