Ethical Dilemma No. 2: Customer Kickbacks

The channel community has been discussing the topic of business ethics in its blogs, conferences, forums and backrooms. At the suggestion of master agent Josh Anderson, CEO of Telephony Partners LLC, PHONE+ is tackling the topic in a new and, hopefully, constructive way by presenting “ethical dilemmas” that have happened in the indirect sales channel, and seeking comment from suppliers and partners.

Our debut effort was published in December 2009 as Ethical Dilemma No. 1. This month we present Ethical Dilemma No. 2 with comments from agents Jeffery Ponts, executive vice president for Datatel Solutions Inc., and Jim Carter, president, Cartercomm, and service providers Matt Ziebro, vice president of enterprise sales for PowerNet Global Communications, and Craig Schlagbaum, vice president of indirect channels for Level 3 Communications Inc..

We encourage you to add your own comments. If you have an idea for our next “ethical dilemma,” please contact PHONE+ Editor in Chief Khali Henderson at [email protected].

Ethical Dilemma No. 2: Should Agents Share Commissions With Customers?

The agent had been helping the client to replace its frame relay network with an MPLS network with higher bandwidth with class of service to support a new centralized IP PBX. The agent was representing two carriers and competing against direct reps from two other carriers. After several weeks of sales activity, the agent was informed by the client decision maker that one of his two proposed carriers was the preferred solution, but that one of the carriers he did not represent was within a few hundred dollars of the total price and offered some differentiating services that the client claimed made the decision a wash. The client suggested that the agent might be able to secure the business by allowing the client to participate in the commissions to be earned from the deal. The total commission to the agent on the deal was going to be approximately $5,400 per month. The client was requesting $750 per month. Ultimately, the agent decided to agree to the arrangement and the client signed with him.

In actuality, the ethical question posed in this scenario is an amalgamation of several similar circumstances dealing with customers requesting compensation in return for awarding their business to a particular agent or carrier. In some cases the customer was more aggressive, and in others the agent volunteered the compensation in order to expedite the close of the deal.

Do you find this arrangement ethical? Why or why not?

Ziebro: No, I don’t find the arrangement to be unethical. The customer is essentially asking for a discount of $750 per month. It is not unethical if the agent is willing to take a slightly lower commission to win the business. Similar arrangements are frequently made in the real estate industry and no one considers those arrangements to be unethical. As long as all parties are aware of the arrangement and agree with the terms, then I think it’s completely ethical.

Ponts: The request is not necessarily unethical, but it is a bad business decision. The delta between the agent’s carrier price and the customer’s request is approximately $400. The agent should be able to support the additional services either internally or by a third party to meet the customer requirements. A commission of $5,400 represents a customer billing of approximately $35,000 MRC; most likely a multilocation transaction with complicated, ongoing management needs. The agent needs to do a good job positioning its service and understand the cost of managing this customer and the margins needed to properly give service. If the agent gives in to the customer to win the deal knowing the margins are too small to deliver a professional service, then ethics have been violated.

I am not a lawyer, but paying out a commission to the customer may violate bribery and kickback laws in some states and business types.

The potential ethics violation may be between the agent and the carrier. The agent has a legal and loyalty responsibility to the carrier. The carrier may have a clause in their agency agreement forbidding the agent from kickbacks to stave off channel conflicts internally. If the same agent was competing at the same price with a direct rep from the same carrier, he/she would be putting the direct rep at a disadvantage to the agent creating an uneven playing field.

Schlagbaum: In general we would not support this kind of arrangement in using commission payments made by the agent to the customer in order to win the business versus other carrier direct reps, our direct reps or other agents. We don’t knowingly allow or encourage any payments of commissions from partners to end-user clients. Our agent contract language is quite clear on this matter in that the partner’s dealings with prospective and current Level 3 customers must use the highest standards of honesty, integrity and not do anything which would reflect adversely upon the reputation of Level 3. We believe arrangements like the one outlined in this example would fall into that category and, therefore, we would not support them and we would view them as a violation of our agent agreement.

Carter: Client payments, rebates, kickbacks, under-the-table or over-the-table deals, whatever you want to call them, have been around for years in our industry. Personally, I have lost a couple of deals whereby an opposing agent in one case and a direct rep utilizing their carrier’s referral program in the other directly compensated a decision maker to win a deal. I have seen plenty of very large, established agents (which will remain nameless) build very successful businesses making a practice of these types of deals.

If you have to buy somebody’s business, did you really earn it? In this example, I did not see one point of value that the agent was bringing to the table other than literally buying the business. Out of what was probably a $35,000 deal (assuming 15 percent commission), could he not find $750 in differentiating value for this prospect? It looks to me that all three sales representatives were offering quotes and not solutions. At the end of the day, the buyer saw no value, so he made his own — “Pay me.”

How would your opinion of the scenario change if the client had requested payment be made to him personally? Or to a charity with which the client was actively involved? Or if the customer itself is a non-profit?

Ziebro: The ethical nature of the scenario is drastically changed if an individual who is acting on behalf of a client organization is asking to be paid personally. It’s unethical for a decision maker within an organization to suggest that his or her decision to purchase services from a specific agent or carrier can merely be bought and that no part of the decision involves the best pricing or product. In this scenario, the individual is not acting in the best interest of his or her organization regardless of the offer from the agent or carrier. It’s in no one’s best interest to entertain such an arrangement.

As for the charitable contribution, if it appears to still be a quid pro quo arrangement at the direction of the individual, then such contribution would not be ethical. However, if the client organization is a nonprofit, then such a transaction could be viewed as a discount on the services.

Ponts: We judge ourselves by motivations, but we judge others by their actions. This scenario would be bribery and/or extortion to win the deal and, therefore, unethical.

Schlagbaum: Any payment to the company directly or even more so to an individual of the company would not be supported by Level 3. We run an open competition channel model with our direct sales team and we don’t want to have our indirect or direct sales channels financially advantaged on pricing, terms or other areas in order to win business over the other channel. Pricing parity is essential in a model like ours. If the issue is price, we would seek to have the contracted price meet the customer’s concerns in order to win the business. If an agent wants to donate money to a charity or join a chamber of commerce, etc., as part of their business dealings with a particular customer, which would assist them in their dealings with the customer, that is at their discretion.

Carter: After working weeks on a deal, who wouldn’t make a tax deductable donation to a customer’s favorite charity if asked? In fact, making that donation to their favorite charity, which you discovered in due course, after signatures, will keep that customer for a long time. However, payouts to a prospect in order to secure a deal are questionable. Let’s focus on the ethics of agents initiating that conversation. I suppose a lot of agents look at putting a customer/end-user on their payroll the same as they would a subagent. It’s just another entry on the accounts payable ledger, right? In the example given it’s 13 percent commission, which is pretty typical I would say. However, in my experience, I have seen as many of these deals go bad as I have seen them work out positively. People are liquid. They get promoted, they get fired, they want more, and yes, they even die. (Going to keep that widow or widower on the payroll?) Money is changing hands, so I am sure there is liability. In my opinion, it just gets very messy; not withstanding the ethical concerns.

I started my sales career selling copiers and dictation equipment right out of college and was never confronted with nor heard of this issue. What about commercial real estate or office furniture sales? Do you hear about “rebates” directly to clients in these industries? Microsoft? HP? Cisco? Can you imagine? Why telecommunications? We are not talking about just wining and dining here. More and more it seems to be our culture to do business this way. After all, look at the money changing hands in Congress over health care. Should we be surprised?

These types of transactions are one of many reasons that give a number of carrier execs heartburn every time someone mentions the channel to them and why some carriers opt out of channels. It does not reflect well on us overall and, in my opinion, makes us (the channel) our own worst enemy.

What if the client instead requested that the agent pay for the cost of the new equipment that would be required for the migration?

Ziebro: In this scenario, the arrangement could be viewed as further negotiation by the client for a lower price on the services and, therefore, I don’t think it would be an unethical arrangement. It would be similar to a discount on services and, in fact, I would suggest a discount on services as an alternative to paying for a client’s new equipment. That way, the client could use the savings to pay for the equipment and the agent still wins the business.

Ponts: If it is done with the carrier’s approval, it is ethical.

Schlagbaum: If an agent wants to pay directly for anything else as part of an arrangement on their own for equipment or otherwise, that is also at their discretion. VARs often work on scenarios like this that involve equipment even without carrier commissions being involved in the opportunity and they often offer invoice credits and rebates from the manufacturer for professional services or otherwise. But again, a direct cash payment of an agent’s commissions to the customer or an individual at the customer would violate our agent agreement terms.

Carter: Certainly partnering with an interconnect or equipment vendor is preferable with the quote “packaged” as a total solution that includes electronics would be acceptable. Short of that, this is not a route that I would personally entertain. Again, where is the value? If asked for this request, I would work the deal to show soft-dollar savings in increased productivity and provide a competitive edge in order to justify the hardware.

Does the arrangement differ appreciably from carriers offering customers rebates or credits for signing by a certain date?

Ziebro: Not at all. As carriers, we offer rebates and credits to agents to help them win business. I think it’s at each agent’s discretion to determine what’s best in each business deal. As long as everyone is aware of and agrees to the arrangement then offering rebates or credits for signing by a certain date is not unethical.

Ponts: This practice is ethical because it follows the carrier’s public product pricing rules of engagement. The customer and carrier are entering in to this agreement with their eyes wide open.

Schlagbaum: This is significantly different as it is done “above board” and via the carrier’s contract with the end-user. This is a published promo that is available to all customers. We had published promotions in Q4 2009 like this in place offering several months of free services for multiyear contract commitments, and we fully support this as a model to use when incenting customers to do business with us, as it is an industry standard accepted model of using promotions to win more business.

Carter: It differs a lot. The carriers do this because someone in finance has determined they can afford to do it, and it is already baked into the margins. It’s a tool and is nothing more than a marketing ploy. This is a long way, in my opinion, from putting a decision maker on my payroll. No ethical dilemmas here.