OEM agreements: Key questions to consider

Original equipment manufacturer (OEM) agreements can help you conquer new markets and expand your business. But be sure you're asking the right questions before building this important relationship.

Are you considering entering into an OEM (original equipment manufacturer) agreement in the future? Certainly, such relationships seem lucrative—you may be able to make money in an area where your competitor dominates. The arrangement could greatly improve how your business works, since you’ll sell and manufacture more of your product.

However, despite the obvious attractiveness of an OEM relationship, there are several factors you need to consider carefully before taking the plunge. You must develop a concrete plan for managing the relationship smoothly once you have signed the contract.

A changing definition
The term OEM has grown to embody a relationship rather than just a channel. A definition from describes an OEM this way:

“An OEM (original equipment manufacturer) is a company that uses product components from one or more other companies to build a product that it sells under its own company name and brand. The term is sometimes mistakenly used to refer to the company that supplies the components. IBM is an example of a supplier to the OEM market (and IBM is also an OEM itself since it uses other companies’ parts in some of its products).

Many computer hardware manufacturers that have their own brand-name products derive considerable revenue by reselling the product or key parts of it to OEM companies that seem to be competing in the same market.”

Many OEM relationships fail to meet the definition of the term because the dynamics of the OEM are changing. “At one point, OEMs were direct customers of manufacturers, and buyer-seller dynamics prevailed. However, in recent days, both manufacturers and OEMs have realized that it is the end user, or the customer of the OEM, that causes profits to come in to the OEM, and thus in turn to the manufacturer,“ said Subhajit Bhatacherjee, senior consultant at Edison, NJ-based Intelligroup Inc. “So we are seeing an advent of partnerships between OEMs and manufacturers geared towards leveraging the ultimate customer base: the end users.”

Branding and control
The issues of branding and control need to be clearly examined and defined at the very outset. “Brand identity can be a tricky issue in such relationships. You have to consider the implications,” said Anne Harper, Baltimore-based industry analyst. She recommended you ask these questions:
  • Will the OEM product receive publicity?
  • Will the buyer advertise the product as coming from another source?
  • Can the seller publicize the fact that its technology is being outsourced to a well-established brand?

“You need to iron these issues out before you sign on the dotted line,” said Harper.

Managing the agreement
Once you have entered into an agreement, you must take steps to ensure that it is a well-managed, sustainable relationship. Jim McKenna, principal of Pleasanton, CA-based Technology Channels Group, Inc. offers a five-step formula for OEM success:
  1. Complement each other.
  2. Create a joint “whole product.”
  3. Leverage the whole rather than each individual’s part.
  4. Focus on the end-user requirements in the selection process.
  5. Outsource if you cannot achieve synergy.

In his “Beyond OEM Report,” McKenna describes several benchmarks of successful OEM relationships. According to the report, manufacturers who are successful with OEM resellers typically:
  • Maintain a large number of OEM reseller relationships.
  • Spend over 50 percent of their dollars on managing/nurturing end-user relationships.
  • Have dedicated OEM resources in each functional area of their company.
  • Monitor OEM relationships closely and take immediate action when needed (they review their OEM contracts quarterly).
  • Use OEM resellers who also sell competitive products.
  • Use the OEM channel for “market share” gain not necessarily for revenue.

Finally, be prepared to settle in for the long haul. If you want to experiment with a revenue-generating idea, don’t try an OEM. Experts agree that an OEM arrangement makes sense only for companies committed to a long-term relationship.
Tell us about your experiences with this type of business arrangement. Have you sold your product or received products via an OEM relationship? Will more OEM agreements develop as the hype about B2B increases? Post a comment or send us a message.

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