Repairing the HP channel

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This article appeared in the Issue 186, 28 November 2005 issue of CRN magazine.

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Repairing the HP channel

It’s not been a great year for Hewlett Packard and the company’s attempts to restructure its channel arrangements have, it admits, not all been properly conceived and communicated, upsetting many of its partners.

Events like the embarrassing rigermarole over resellers being dropped from the NSW government’s ITS2000 contracts only served to fuel ill feeling towards HP amongst its partners, some of whom still think it inevitable that the company will one day go fully direct.

Since becoming president and CEO of HP in March of this year, Mark Hurd has announced a dramatic restructuring program for the company, including slashing 14,500, or roughly 10 percent of its workforce, as part of its attempts to reverse a slump in earnings, even though sales have been up substantially.

But after several years chasing what it and many others saw as a necessary proportion of direct business to compete with the likes of Dell, HP now says that it has reaffirmed its commitment to the channel as integral to its future growth.

Aided by various partner advisory boards and other groups, its charter for the channel now appears to be clearer and more targeted than it has been for years. The question remains whether it can retain this renewed commitment amid increasing threats to its market position from direct rivals and the Internet.

According to HP channel manager Martin Dare, the company does around $1 billion through the Australian channel and is clearly not about to turn its back on its 3,500-plus Australian partners. ‘Our channel remains one of the key ways that we go to meet our market.’

He outlined the increasing value of HP’s Partner Principle Forum which is designed to allow close consultation between the company and its partners to ensure the best model going forward. Around 40 partners participate in these HP says.

Still, the recent kafuffle surrounding HP’s restructure of its preferred supplier arrangements for NSW Government contracts remains a major embarrassment that is yet to be fully resolved. ‘We’ve learnt from this process – there was a break down in the process of ITS2000 communication and we recognise that,’ HP’s commercial sales manager Neil Campbell told CRN recently.

HP’s preferred supplier list for lucrative ITS2000 contracts was re-issued late December last year minus 11 Sydney resellers, none of whom were notified of the decision or received any subsequent explanation until more than six months later. Some of the resellers had been supplying HP to NSW government departments for more than 10 years.

This made a lot of people in the channel angry, and angrier when all 11 companies were asked to provide sales documentation to support their cases for reinstatement, despite several of the companies being long term, multimillion dollar suppliers.

Campbell said that the breakdown in communications occurred because none of the resellers had their own account managers within HP and were simply overlooked. Most were eventually referred to account managers in Malaysia. Some resellers says that these representatives lacked detailed information on the local cases, further frustrating their efforts for reinstatement.

John Grant, CEO of Brisbane-based reseller Data#3 sits on HP’s Asia Pacific channel advisory board and says that he can’t understand what went wrong in this case given that HP has endeavoured for years to improve its processes for dealing with the channel and preventing exactly what did occur.

‘If it’s true that companies were not advised, then that flies in the face of the documented rules of engagement and HP needs to fix that.’

And it wasn’t that long ago HP said that it had.

But John Foxe, director of IT National, one of the Sydney resellers dumped from ITS2000 is far from appeased: In fact his is ropable.

His company received an informal apology from HP some months back and was given assurances that it would be placed back onto the contract. IT National had been supplying HP to the NSW State government for over 15 years and only learned that it had been dropped from HP’s preferred supplier list when its existing customer State Rail said it could no longer buy from the company.

Now, after initially being told all was well, IT National, like the other 10 resellers dumped, has been told that it must still submit extensive documentation supporting its case for reinstatement.

‘They still want us to pull together a case as to why we should be put back onto to ITS2000 despite us receiving assurances that we were going to be put back on,’ Foxe says.

‘This is after being on the contract for 15 years and they won’t give us a reason for why they’ve taken us off’. It’s disgusting behavior.’

Still steaming, Foxe believes that HP’s lofty rhetoric about the importance of the channel is contradicted by its actions. ‘Somewhere within the organisation there is a core lack of understanding about what is required to generate loyalty amongst the resellers: The actions they have taken in regard to ITS2000 are just appalling,’ he says.

‘It sticks in my craw where I am required to justify my existence and we weren’t even given the dignity of being asked previously before we were cut off.’

Yet highlighting HP’s current lopsidedness, Foxe emphasises that he still enjoys ‘excellent working relationships’ with SME account managers and other staff.

‘Some parts of the organisation are working well while others like the government group are failing miserably.’

Following on from Campbell’s explanation for the ITS2000 fracas, criticism has been leveled more broadly at HP for not having enough account managers on the ground, leaving many dealers feeling that they’re being neglected.

But HP’s Dare dismissed any suggestion that HP’s planned redundancies globally had, or would have any impact on the Australian channel operations.

‘There are no plans for redundancies within the channel group,’ he says, adding that in his view HP’s ‘communications mechanism with our channel has remained in tact.’

But Leading Solutions director Frank Colli feels that there needs to be more HP people on the ground working with partners. ‘The account managers have enormous workloads to get across all the dealers they have responsibility for,’ he says.

‘It’s really hard to get a lot of their time.’

Part of the reason for this oversight Colli continues, is the cultural residue from HP’s merger with Compaq; the latter of which in his view was not especially channel oriented.

‘When HP merged with Compaq the focus for the first 24 months was very internally focused. Now they’ve started to focus outwardly.’

A fitting location for the renewal of their vows, Colli and several other HP partner representatives attended the companies’ recent channel shin-dig in Las Vegas, where he says he was surprised at how committed HP seemed to be to its partners. ‘HP was extremely committed to the channel’.

This is despite so much publicity that the company would one day go fully direct, talk of which has not been helpful for companies like Leading which do around 70 percent of their business with HP.

Nevertheless, Colli remains philosophical and acknowledges that HP had little choice but to develop some proportion of business outside of the channel to properly compete in the current market. ‘Over the last two or three years this direct model had a lot of focus from senior executives because they needed to have some direct business.’

Now Colli thinks the focus is shifting back. ‘My general feeling is that HP is recommitting itself to make sure that the channel is successful from what I can see from a global position’.

Data#3 recently won a multi-mullion dollar IT contract, comprising mainly HP equipment, for Brisbane City Council, which is expected to have a dramatic impact on its bottom line, and according to Grant, HP’s perception of the value of its channel going forward.

‘It is an example of HP partnering with resellers to gain success and beating people like Dell, Acer and Sony head-to-head,’ he says.

‘I think that HP has an opportunity to provide a difference to its competitors via its channel partners.’

Data#3 saw its shares surge recently after forecasting a better-than –expected 40 percent jump in Q1 net profit to almost $4 million, a achievement the company says it owes to the quality of its vendor partnerships.

However, Grant agrees with many in the channel that HP has not done the best of job of communicating this year considering the situation with ITS2000. Further, some in the channel remain unclear about the current structure of HP’s global accounts.

‘There’s been a miscommunication between HP and its partners which is HP’s responsibility to correct.’

Although these often very lucrative global accounts are mostly managed by HP directly, Grant feels that there are ample opportunities for resellers to participate, provided that they can bring something substantial to the table.

‘It has been well documented for some time now that it is HP’s preferred position to deal with its global customers directly. That does not of necessity preclude its business partners from being involved, but they must add considerable value; different and more extensive than what is being offered today in order to extend that involvement.’

But according to Neville Ray, IT account director with market analysts GFK, the overall market is only getting tougher with total sales through the channel down sharply over the last few years due to a slump in corporate business.

Looking at the 12 months to August/September this year, the total value of sales declined 14 percent after falling 8 percent for the previous corresponding period.

‘If you look at base unit needs, retail is up and corporate is down which is taking the whole market down,’ Ray says, adding that increased direct sales to corporates are contributing to the decline.

‘We know direct sales are increasing for corporate use,’ while increased investment in network and shared storage solutions in the business market is extending the life cycle of PCs and notebooks.

This year especially has seen unprecedented commoditisation in the retail IT space with mass market chains like Big W and Kmart reporting big sales of products like low-end notebooks for the first time.

Acer’s introduction of its $999 laptop and the success of low-end brands like Mercury, which carry neither an Intel or AMD chip has caught many by surprise and indicate, Ray, believes that consumers are no longer as driven by specs and bytes.

‘We are seeing a move away from techno speak to: ‘What can it do for me?’.’

For instance, GFK reports that 60 percent of all notebook sales are now through retail, compared with around 30 percent a few years ago.

‘Which is an amazing transition,’ Ray says. In fact, he ads, the next few years will see a big shift in the whole landscape as process continue to fall, in turn demanding of vendors and the channel new strategies for retaining margins.

‘Margins are going to go down for PCs and notebooks, and there is a need for greater vertical specialisation,’ he says.
‘Vendors need to be more aware of the changes that are taking place throughout the channel, while those operating within it  must develop more competitive offerings.’

For major vendors like HP, it needs to renew its vows with the channel to reflect the new conditions, with both parties having to agree to new terms moving forward.

As Data#3’s Grant points out, it doesn’t have to follow that tougher market conditions result in the channel being shouldered out of the picture, so long as it can add value.

In the case of HP, which was mandated by the market as much as anything else to develop some direct business, he believes the fact that it has now fully renewed its commitment demonstrates that it still sees the bottom line value of having good partners.

‘In terms of HP’s direct strategy, the partner community would certainly like HP to de-commit to this and I have a sense that within HP similar views are developing,’ he says.

But the onus remains on the partners to do more with HP products in their accounts. ‘That’s the quit pro quo.’

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