DIRECT SELLING BY VENDORS

Vendors say that a large majority of customers expect partner involvement to

service the requirements, and the vendor only benefits from honoring customers’

choice. But, partners allege that vendors offer very little over-riding

commission for doing direct business.

Vendors snatch customers in the name of

hand-holding...

    In the last two years, most MNCs have failed to live up to

their reputation when it comes to working with partners in executing large

business propositions generated by channel partners. If it was not for our were

brands, we would have been nowhere. Vendors work with us in the name of

hand-holding and build a good element of trust in the customers. But things turn

ugly, when vendors slowly snatch away our customers by going direct to them.

It takes a lot of brand building and personal touch to develop and establish

a new account. All these efforts go waste when we introduce our customers to

these vendors. Once the vendor knows all the key people and details of the

account, they offer to deal directly with the customer.

The modus oparandi is simple...



Earlier, vendors lured customers by offering lesser cost by saving taxes.

After the implementation of the new Central Sales Tax rule, they offer lower

prices to customer if they deal directly and higher prices if they chose to deal

indirectly, that is, through the channel. Similarly, vendors used to offer

adequate ORC (over-riding commission) for doing direct business. But, if their

business increased with any particular customer, the ORC grew smaller. And now

the ORC has reached to such an extent that we are impelled to opt out of that

account. After which, the account is completely handled by the vendor directly.

We could get wiped out from the market...



We have been maintaining few major accounts for the last 12 years. In 2000,

we earned almost 50 percent of our revenue by selling MNC products. But in 2002,

the revenues have dropped to less than 15 percent in this segment. We have

survived only because of our own brand of products. Depending completely on MNCs

has become very dangerous for our survival.

Vendors’ indirect selling figures are misleading...



Vendors always claim that indirect selling is 80-85 percent, which is highly

misleading as they account for ORC business in indirect category. ORC offered by

vendors is generally 1-2 percent to partners. For some large orders this has

dropped to less than Rs100 per desktop (which is hardly around 0.2 percent).

If this trend of disguised direct selling continues, SI players like us will

have to rely absolutely on our own brand of PCs. Since last two years, even the

industry trend indicated in favor of local assembled PCs. Marketshare of

assembled PCs has grown to more than 60 percent of the total PC market compared

to less than 50 percent two years back.

Essentially vendors want the channel to do all the groundwork and then they

reap all the benefits. According to me this is a wrong approach and every vendor

should have a clear-cut policy whether they want to do direct dealing or

indirect dealing. There are no in-betweens.

HP has three distinct direct sales motions...

HP’s imaging and printing business has hardly any direct component. But in

the commercial desktop, commercial notebook and Intel server businesses, HP has

three distinct direct sales motions. The first, Pure Direct – where there is

no partner involvement at all. Second, Agent Direct–where HP sells to the

customer while the partner earns an agency fee or commission for delivering

pre-defined services, for example: pre-sales support, installation, bundling,

software loading, logistics management, extended post-sales support and

collection. And lastly, Partner Direct–where HP sells to the reseller who in

turn sells to the customer.

Many partners find Agent Direct role attractive...



Our partners have thus been playing an active role in two of these sales

motions (Agent Direct & Partner Direct). In line with changing customer

requirements and increasing competitive pressures, these two sales motions have

gathered momentum over the last seven months. Many of our partners find Agent

Direct particularly attractive because they do not need to invest their own

working capital to participate in it.

On the other hand, the share of Pure Direct has been stable over second half

of 2002 and is expected to remain so during first half of 2003. Apart from these

three direct sales motions, HP has, of course, the conventional two-tier channel

route. As a matter of fact, during the period Jul-Oct 02, the percentage share

of the two-tier route in our overall Intel server business in India actually

reached an all-time high.

We compensate partners to the extent they add value...



As a general rule, our Wintel business is transacted through partners.

End-to-end partner involvement is a win-win situation for HP and our channels in

most circumstances. There are, however, specific customer segments and specific

cases like large government tenders, corporate accounts having direct global

contracts with HP and duty-exempt customers, where vendors necessarily need to

transact directly. This may be due to the need for large earnest money

deposits/bank guarantees to be furnished, certified technical expertise to be

deployed for complex systems integration projects and multi-location support

requirements to be met.

Even in these situations, through the Agent Direct model, HP involves and

compensates partners to the extent they can add value by rendering

cost-effective services.

Majority partners expect vendors involvement...



Our Wintel business is transacted through partners (conventional two-tier +

Partner Direct + Agent Direct + SI) as a general rule. A large majority of our

customers typically expect partner involvement to service their requirements,

and HP only benefits from honoring the customer’s choice. In the commercial

reseller space, partners having the capability to service large, complex and

multi-location projects are not very common; yet, if the customer expects and

prefers partner involvement, HP only benefits from honoring the same.