Indirectly Yours

• 08/30/1998

HP's Indirect Sales Channel Partners Come to Terms

As competition squeezes profit margins from sales of computing hardware, HP is pushingout more high-end business to distributors -- and eventually to resellers and systemintegrators -- as a means of generating more business and reaching broader markets whileholding the line on expenses.

Increasingly, as HP fine-tunes its channel strategies, the company is beginning to gobeyond a standard accounting of revenues as a measure of success and is looking criticallyat the return on investment statements of their partners, says Randall J. Katchis,president, DIS Research Inc.( New York, N.Y.) a technology consulting firm thatspecializes in application development, integrated document management, electroniccommerce, enterprise management and systems integration and is a HP Best in Classpartner.

Over the past two years, HP has been requiring that partners spend the resourcesnecessary to deliver optimal service and product knowledge to vital corporate buyers."The demands it puts on the value-added- reseller are significant," saysKatchis, whose company also resells HP 9000s and HP-UX. "It's going to effectivelydetermine who the players are moving forward." But those demands, which typicallyfocus on adding greater value, can also pay off for the reseller.

Mark Melillo, president of Melillo Consulting Inc. (Somerset, N.J.), a reseller andsystems integrator, believes HP is looking to reward its top selling Best in Classpartners by giving them an additional designation. "One of the things they're tryingto do is separate the masses from those resellers that are really providing the value-addthat HP wants," he says. "In doing that, partners who do a lot of consulting andwho really bring a solution [to the table] are going to play a part in that model."

Katchis thinks, "It's very clear that HP is quickly getting to a model wherethey're going to require their partners to be larger in scope, both from a servicesstandpoint, a support standpoint and a geographical standpoint, thereby limiting thenumber of players they have to interface with." "They want to drive theirleverage model higher and reduce their costs, as well as requiring the specific VAR tohave a return on investment."

ONE TO TWO PUNCH

Eric Johnson, vice president, professional services at Bloomfield Computer SystemsCorp. (Bloomfield Hills, Mich.), a HP reseller since 1992 and one of their largest,explains that HP's two-tier channel strategy no longer allows them to buy direct."But, we're getting involved with HP and HP sales teams on much largeraccounts." That opens up other kinds of opportunities. "They're moving many ofthe larger accounts to indirect as opposed to direct relationships. The types of companieswe are selling to are certainly larger than the mid-market firms that we previously hadvery strong relationships with."

As you might expect, change has not been uniformly smooth. "We used to get [a]phenomenal [amount of] attention" from HP direct, says Tim Powers, marketing managerfor ROI Systems Inc. (Minneapolis, Minn.), a HP reseller. In 1997, ROI Systems, which didabout $2 million in HP business annually, lost its direct connection and was forced to buythrough a distributor, according to Powers. Powers says the change in the relationshipwith HP was apparent as they re-targeted the amount of annual revenue resellers had togenerate in order to deal direct, a bottom line today that starts upward of $5 million.While the company's revenues didn't suffer, quality of service and level of service didduring the switch over.

"We always bought from HP and that's what we expect." Nonetheless, ROISystems understands the need for change. "As the markets continues to get tighter andtighter, and that problem escalates on a downward spiral for hardware vendors, they justcan't afford to put the direct resources into them," Powers says. "We had adedicated sales person being paid a lot of money to generate a couple of million dollarsin retail revenues. They needed to move that business out to distributors to avoid thoseinternal costs. I understand from a business standpoint why that needed to be done."But he adds, "the catch is" that distributors also are trying to cut costsbecause of shrinking margins, "so they want to put the least amount of resources in asale as they can."

Expanding Distribution

Patrick Hopkins, managing director of Omicron Systems Inc. (Philadelphia, Penna.) whichresells HP hardware as a Best in Class Channel Partner, says partners must adjustby understanding that what HP is trying to achieve is a customer-centric salesinfrastructure. "The customer expectations of Channel Partners are different than thecustomer expectations of HP direct sales," says Hopkins, who worked 14 years in salesat HP for large and mid-market accounts before founding Omicron Systems. "What we dois have an optimal blending of the two, and we complement that with our product knowledgeand our ability to deliver the full set of services if required by the customer."

Hopkins says as he saw the HP indirect channel model taking shape, he configured hishardware sales organization from the base of offering total services. "HP has a goodplan of not just looking independently at the customer, the integrator or thereseller," he says. "HP looks at all of that as a whole. They essentially havegood relationships with their Best in Class Channel Partners." HP distributors, withmore responsibility to move product through the channel, are being asked to recruit andexpand vendor channel programs, while the manufacturer focuses on programs to generatedemand.

The result is consolidation among distributors, says Charlie McPherson, vice presidentfor marketing for Scientific and Business Minicomputers, Inc. (SBM; Atlanta, Ga.). Asevidence, SBM was acquired in May 1998 by Gates/Arrow Distributing, (Greenville, S.C.), asubsidiary of Arrow Electronics, Inc., (Melville, N.Y.). "Gates/Arrow Distributingwill fold all of its HP business into SBM," says McPherson, who expects the logisticsof the merger to be completed by year end.

Gates/Arrow sought the acquisition as a means of enhancing their position in thehigh-end enterprise computing marketplace to handle HP 9000 business, says Mike Long,Gates/Arrow president. Harper Thorpe, HP's U.S. distribution and reseller manager, notesthat the joining of SBM and Gates/Arrow creates "an exciting value proposition for usand our resellers."

McPherson, soon to be vice president of new business development at SBM, says the dealalso is evidence of HP's preference to rely on fewer distributors for their HP 9000business. He says when SBM became a HP 9000 distributor in 1993, eight or ninedistributors were moving the product, but now that number has been cut in half."You're seeing a lot of consolidation in the distributor ranks," McPherson says."All of the big companies continue to be on an acquiring frenzy. That's brought aboutby a number of reasons. One is the terrific opportunity there. The whole marketplace forresellers and distributors has grown dramatically."

NT Changes The Dynamics

The demand among end-users for low-end Windows NT systems and workstations is alsocreating new dynamics in the relationship between distributors and resellers. For example,SBM recently added an NT line.

Industry research firm International Data Corp. (IDC) figures that while by the year2001, revenues from direct UNIX sales will be seven times greater than NT sales, NT growthworldwide will achieve compound annual growth of 38 percent from 1996 to 2001. Indirectchannels will account for 88 percent of all NT shipments by 2001.

"More and more customers are purchasing HP systems, both UNIX systems and NTsystems, through the channel," says Omicron's Hopkins. "As far as theintegrators and distributors are concerned, their linkage as a team effectively will be animportant factor in customer satisfaction." On the other hand, Nilesh Desai, seniortechnical architect for Claremont Technology Group Inc. (Basking Ridge, N.J.), saysintegrator companies like his are awaiting signals from HP as to how vigorously they willpursue NT business. While HP's 9000 systems have price points in the hundreds of thousandsof dollars, enterprise customers are increasingly favoring NT for its cost in the tens ofthousand of dollars.

Melillo, of Melillo Consulting, thinks that what still needs to be worked out at HPbetween UNIX and NT is the value versus the volume model. He believes HP won't ignore thevolume side of the equation. "Clearly there will be a volume model in thefuture," Melillo says. With the volume model, "value does not have a lot ofimpact in the sale." The questions are, "Can you get the stuff?, how quickly?and at what price?" Claremont Technology Group, in order to ramp up their options inthe NT space, bought a pure Windows NT company, Desai says.

Setting Up Camps

Claremont Technology Group builds software applications for billing systems, and withNT those are now attractive to small companies with $50 million to $100 million inrevenues. There are two camps within HP over UNIX and NT, according to Desai. "So howare they going to differentiate and how we are going to take advantage of what theyoffer?" Going forward, HP's partners want the vendor to continue to involve them inbusiness opportunities -- the earlier, the better. Partners are also asking for cleardirection and communications.

"I have seen HP make continued commitments to the channel," says SBM'sMcPherson. "In the early days, I think distributors and resellers heard a lot ofwords, but didn't see a lot of action. HP has done a very good job of ingraining theimportance of the two-tier channel throughout their organization." Katchis of DISResearch says HP put out a very strong message several years ago -- both from acompensation standpoint and from a management standpoint -- that they are going to buildand increase the amount of business the channel does.

"To have a good channel [program], the partners have to be viewed as being anintegral part of the team," Katchis says. "We have to become an active part ofthe overall P&L of HP. And HP, [now] really has to rely and almost assess quota to thechannel. HP also has to very tightly integrate our technical and selling organizationsinto their technical and selling organizations, so that we are all singing from the samehymnal. That's very important when you're interfacing with corporate buyers."

-- Marvin V. Greene is a writer with the Washington News Bureau.