Ethical Dilemma No. 3: Subagent End Run

The channel community has been discussing the topic of business ethics in its blogs, conferences, forums and backrooms. At the suggestion of 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 on channel pricing conflict was published in December 2009 as Ethical Dilemma No. 1. In February, Ethical Dilemma No. 2 discussed the ethics of customer kickbacks. This month we present Ethical Dilemma No. 3: Should subagents (or carriers) bypass the master agent? Comments are from master agent Anderson and independent agent Laura Bernstein, president and co-founder of CRA Telecom, and service providers Frank Ahearn, CEO, McGraw Communications Inc., and Tim Basa, vice president of sales and marketing, Nitel Inc.

To add your own comments, click on the comments link at the end of this article. If you have an idea for our next ethical dilemma, please contact PHONE+ Editor in Chief Khali Henderson at [email protected].

Ethical Dilemma No. 3

A master agent brought on a new carrier providing regional IP services. In the course of integrating this carrier, introductory Webinars and conference calls were held with key subagents during which time carrier representatives were introduced to subagents. As those relationships progressed, a carrier representative alerted the master agent to a subagents attempts to circumvent the master agent and sign directly with the carrier. The carrier representative reported that he had told the subagent that it would not be ethical and that his commissions would be equal to or less than what he was being paid by the master agent. After a few conversations with the subagent, the carrier representative reported to the master agent that the situation was resolved. At no point did the subagent broach the subject with the master agent. Later, the master agent learned that the subagent had not only signed directly, but was also provided the same commission structure as the master agent. The subagent had persisted in his inquiries, escalating to the carriers ownership and striking a deal to provide some installation services for the carrier. As part of this deal, the subagent was allowed to become a direct agent with the highest available commission structure. The master agent confronted the carrier representative, who apologized but was otherwise unable to offer a resolution.

Is this scenario unethical? If so, who acted unethically the carrier or the subagent?

Bernstein: Yes, it is unethical. Even though the [carrier] employee behaved in an ethical manor by approaching the master, in the end the [carrier] owner was certainly unethical. Not only did the carrier show no loyalty to the master, but they also completely disempowered their own channel manager. The subagent never approached the master at all, again demonstrating no loyalty and no ethics. Both the carrier and the subagent acted unethically.

Basa: This is a communication issue. The subagent should have gone directly to the master agent and had a candid business discussion about signing direct. The carrier representative did the right thing by stating policy, telling the subagent that he would be wrong and alerting the master agent. At that point, the master agent could have approached the subagent at any time. In this situation, all the parties were trying to do the right thing for their business. The real issue is candid business communications. Everyone was tiptoeing around versus talking. You need to get on the phone and collaborate. While there is no guarantee that hard feelings will be spared, at least all parties are on the same page going forward.

Anderson: This scenario is absolutely unethical, but more importantly it is damaging to the indirect channel in that its precisely the type of behavior that erodes trust. Both the carrier and the subagent acted unethically here, but I would place more blame on the carrier. The carrier was the party with the ability to keep things above board, regardless of the subagents maneuvering.

Carriers leverage the master agents ability to recruit and to develop subagents, and they impose production expectations. In return, besides compensation the master agent expects support and security in the relationship. If a carrier behaves as this one did, it is clear that they dont understand the value of a multitiered channel.

Furthermore, the primary asset a master agent has is its relationships, and those relationships are not acquired or maintained easily. There is real cost in time and money to recruit, to train and to work with a subagent. Likewise, substantial effort is often put into ramping up and maintaining carrier relationships. I cant imagine that this carrier would be able to sustain the commitment of master agents if this type of behavior were commonplace.

Ahearn: Both. The subagent has a moral obligation to work through the master that brought the sub to the carrier. There may be some reasons why the sub would be better served directly but in that case both the carrier and the sub should be honest and upfront with the master. Financially, the master should get an override on all of the subs deals that are brought directly to the carrier.

The carriers agent agreement in this scenario did not include any non-circumvention language, proscribing the formation of direct relationships with the masters subagents. Would this scenario present an ethical issue?

Bernstein: Yes. With no non-circumvention language in place, the subagent in this case who wanted to dissolve the relationship, although not legally bound, would still have an ethical dilemma around how to correctly seek out the carrier.

Basa: Because ethics are defined by actions within groups and cultures (medical ethics, Christian ethics, without contractual language the door is open for an ethical debate. If in the end, there was no language prohibiting circumvention, there are going to be hard feelings. But, it is tough to hold the carrier or its representative liable. Having been on both sides of this debate, as a master agent and carrier, I know even with clear contract language, these scenarios will play out with some perception of wrongdoing. It is important to keep a couple realities in mind: 1.) If youre a master and a subagent believes you dont bring value to the table, they will look to get more from a new relationship. 2.) At the end of the day, all parties involved are going to work to protect the best interest of their entities. Understanding the relationship and working towards helping each other succeed is critically important in the channel.

Anderson: Not having contractual protection may expose the master agent from a technical perspective, but the ethics of the matter remain the same. While such language may give the master agent some legal recourse, the cost of enforcing that may not be worth the outcome, especially if the subagent agreement is not exclusive. Even without non-circumvention language, the success of a multitiered distribution model is predicated on the assumption that all parties respect each others relationships. This highlights the most frustrating element of scenarios like this one when such circumvention occurs, there is rarely any going back regardless of the legal means a master agent takes. The best a master agent could hope for is restitution.

Ahearn: Yes, right is right and wrong is wrong! Being honest and upfront in business would resolve 90 percent of all business conflict.

Assuming the subagent in question is producing enough that they would otherwise merit a direct relationship under the carriers programs, does that change your answer? Should the master-subagent relationship require that the master approve of such a migration to direct in order for it to be allowed by the carrier?

Bernstein: (A) No. The amount of revenue the subagent has or the commission percentage they deserve is not relevant when discussing the ethics of the scenario. It only speaks to the justification for wanting to evolve from a subagent to a master. (B) Approve? No. Worked through by both parties? Yes.

Basa: No, the language in the contract matters more than the production of the subagent. If contract is clear on circumvention, the debate is over. Its wrong to do, and allow. In this scenario, without defining language it becomes a judgment call based on the facts of the business case.

Anderson: The production level of the subagent may merit a direct relationship, but that decision is one that must be made cooperatively, with the involvement of the master agent. Simply because a carrier would allow a direct relationship based on a certain level of production does not entitle them to unilaterally decide to remove that subagent from a master agents base.

In addition, there are other considerations besides simply production. The value of a master agent that continues to manage the relationship and to provide support cannot be overlooked. It is difficult not to consider almost any scenario such as this one as simply a case of a carrier, motivated by greed, believing that a direct relationship with a subagent provides them more power to induce that subagent to sell their products. It may make financial sense, but it does not make ethical sense.

Ahearn: (A) No, my answer remains the same. (B)Yes, all three parties should have to approve. As previously stated, the master should be compensated in some way, shape or form for all business brought to the carrier directly by the subagent. We have experienced this on more than one occasion at McGraw. We work through it by coming up with overrides that everyone feels comfortable with.

Some agent agreements include ethics clauses that allow the master to terminate for cause and cease commission payments if the subagent engages in unethical behavior. Would this scenario constitute behavior that would merit such a termination if the subagent did not cure the breach by terminating the direct relationship? If so, from a business perspective would it be wise for a master agent to create ill will with a subagent through such a termination?

Bernstein: Once the relationship took hold between the subagent and the carrier, the ill will already existed. Every business relationship should have an exit strategy in place before it begins. Both the master and the sub need to solidify not just the money, but the over all value the master will bring to the sub. For example, sales training, telecom training, paperwork support, etc. Once the value is established, both parties can determine how to quantify the master’s support should the subagent want to pursue a direct relationship with a carrier, stop selling and or change to a different master.

It is unrealistic to assume that a successful sub will not desire at some point to venture out on their own. In the scenario above, where no such agreement existed, the ethical step would have been for the subagent to approach the master and work through an appropriate exit strategy where the master is compensated for its investment in the sub.

Unfortunately, neither the sub nor the carrier demonstrated enough loyalty to the master. One would hope that the carrier, when approached by this subagent, would think twice about the character of the subagent and weigh his/her ethics when considering a new master-level relationship. It is clear the almighty dollar took precedence over ethics for both the sub and the carrier.

Basa: It depends on the language specific to circumvention. If the subagent was contractually obligated to notify the master agent of any direct communications with the carrier, or if the specific non-circumvention language was contractually defined and breached, the master would be within its rights to withhold commissions. In general, the impact of withholding commissions or terminating the agreement with the subagent would not be wise. The subagent has many choices in the master agent community and typically controls the relationships with the end-user of the service. The master would be better served negotiating a new contract with the subagent than showing them the door.

Anderson: While this scenario is clearly unethical, it is not so repugnant to merit the master agent stopping commission payments unless there is specific verbiage in the agreement warning of that consequence should the subagent attempt to circumvent the master agent. Any master agent that uses an ethics clause in this way runs the risk of losing credibility in questions of ethics, you can rarely fight fire with fire.

Whats more, the ill will generated by that type of reaction would do immense damage to the master agents reputation. Given that the crux of this scenario is the value of relationships, taking the high road, while often not profitable in the short-term, is the only viable long-term strategy. A more meaningful reaction would be to terminate the agreement, pay out the agents commissions, and seriously reconsider the relationship with the carrier.

Ahearn: (A) Every scenario could be different. It depends how long you have been doing business together and the willingness to work through this particular problem. Typically, no one wins when a contract is terminated (besides the attorneys). (B) From a business perspective, it all depends upon the masters/subs previous relationship. No master in their right minds wants to cut an honest, good business-producing relationship. If the sub isnt producing and the master feels that they will never be able to trust the sub, it may be in their best interest to terminate the contract.