|Khali Henderson Blog|
Khali Henderson, editor in chief of Channel Partners, draws on more than two decades of experience covering telecom and IT for her observations about the technology and business trends impacting the channel.
Khali Henderson Blog: Terminated Without Cause?
More than 30 agents of the former Switch and Data were terminated without cause by the company’s new owner, Equinix. The action has reignited the debate about “termination for convenience" clauses in partner contracts.
On the one hand, agents charge carriers with using such terms to “conveniently" justify discontinuing payment on residual-based business. On the other, suppliers view it as a way to easily shed non-producing agents.
In recent conversations agents have told me that they will no longer consider signing a supplier agreement that includes a “termination without cause" clause. “It sends the signal that they are not interested in a long-term partnership," one agent argued. That likely means the company is for sale or just wants to milk the channel for new business revenue and then walk away.
The agent said, “If they are only going to dip their toes in [to the channel], they are not going to get any traction."
Maybe, but then why do so many existing agreements contain these clauses? There are plenty of possible reasons. Here are a few:
- One, some agents will sign anything;
- Two, some of the agreements were signed by new agents or many years ago;
- Three, some contracts were acquired during mergers and new contracts with the offending clause were substituted and the agents were made to sign them under duress lest they lose their existing revenue stream.
- Four, some must-have suppliers have significant market power and it’s impossible to negotiate these clauses out of their agreements;
- One, agents must stop being impetuous – at least about signing contracts. Legal review is critical and worth the money. Seriously, at Channel Partners Network on Linked in, the common advice for new agents is to get your contracts reviewed by a professional.
- Two, new agents should learn from mistakes and hopefully some of these agreements can be renegotiated or the business can be moved off the carriers’ networks.
- Three, I’m not sure there is a solution for having a new agreement forced on you without going to court to keep the original terms. Ask a lawyer.
- Four, there is legal precedent now that may help to put pressure on large suppliers to take these clauses out of their agreements. In a 2008 lawsuit with one of its VARs, Cisco was admonished by the judge for terminating partners without cause; he claimed Cisco had unfair bargaining power.
I can’t think of a reason to suggest that agents not do the things suggested above, but I am challenged by the question of whether there is any justification for having a termination for convenience clause from the supplier point of view.
Cisco called the provision a “quality control" measure, presumably to jettison partners that are not up to snuff. I’ve heard this same sentiment from other vendors. In the carrier world, the idea is not necessarily around agents that are not performing for clients, but not performing for them, e.g. not continuing to place new business with the provider. Some suppliers know that this clause is a stickler and have enabled agents to earn exemption by meeting revenue commitments. I suspect this was one of the concessions in Qwest’s new Premiere Elite partner level, but I am only guessing. It was, however, part of the Switch and Data contract. The hitch with that contract, in particular, is it required agents to hit those revenue levels over and over to maintain the protection. There was no ability to earn “evergreen" status permanently … so if the program is dissolved, how will these agents maintain their revenue levels? Good question. I don’t know the answer.
If both partners are performing admirably, I can see the argument for this kind of a plan. But it totally falls apart if the vendor underperforms and the agent is forced to pull back on sales of its services. The agent cannot “quit" the carrier without doing significant damage to himself. That doesn’t seem fair.
Additionally, agents make a good case that they have earned the commissions on the account they sold and should be paid on it independent of any other sales activity. Not to be paid for work performed is tantamount to stealing, they say. I know at least one master agent who doesn’t cut agents under the theory – a sale is a sale. What seems logical and right is not always what is in the contract terms, however.
I suppose that carriers using these contract “outs" could be trying to hedge against the cost of overhead to manage a channel. Agents who only “shop" a carrier and never buy potentially could be a resource drain. But, I have a hard time understanding how that justifies cutting a contract AND taking earned commissions. Maybe someone can explain it to me??
One byproduct of this situation as it stands is that many agents have begun looking for vendors that pay upfront in whole or in part to avoid “losing" the revenue stream to a capricious decision by a new or cash-starved CFO. It’s a reasonable risk-management tactic given the present environment, but I suspect in some, if not all, cases it leaves the agent short of what he would have earned on a residual plan paid for the life of the customer.
I’m open to anyone willing to prove me wrong, but at this point I can only conclude that the “termination for convenience" clause is just like it sounds – an easy way out.