HP’S DIRECT PROPOSAL: WOOING CUSTOMERS OR HURTING PARTNERS?

Globally, HP wants to take 50% of its commercial PSG (Personal systems

group) business direct. While the same may not hold true for India, partners are

already casting a wary eye towards the company. But HP India assures that both

volume and service partners would continue to remain integral to its business

interests. The company´s distribution system is currently straddling a line

between reseller and direct-sales model and it would surely not want to woo

customers at the cost of hurting its channels.

Change is the law of nature. But nowhere does it say that the change has to

be smooth or even all-pleasing.

That´s

what essentially happened when two IT majors, HP and Compaq decided to merge.

The changes that followed this merger were neither smooth nor did they please

every one of those associated with the business of either of the organizations.

But it was the loyal channels (of HP and Compaq), which had to face most

turbulent of weathers post-merger. Few of them set out to seek newer horizons;

few sailed ahead positively with determination while many managed just to stay

afloat.

1+1 IS LESS THAN 2



As the newly-formed entity (new HP) soon found out, one plus one didn´t

necessarily make two. HP scrapped its entire PC line, and the sale of Compaq PCs

so far has not been able to compensate for the loss in erstwhile HP´s PC sales.

Essentially, HP´s PSG (Personal systems group) division, which looks after

desktops, notebooks and handhelds, had to rethink its go-to-market strategy. It

was in this regard, that at the analysts´ conference held last year, HP Chief

Carly Fiorina announced that by 2004, her company would take 50% of its

commercial PSG business direct, up from the then 16%.

While Carly was at pains to emphasize that channels would remain integral to

HP´s overall business, the ´worry-factor´ started to set in globally. Leading

distributors, Tech Data and Ingram Micro, both reported a decline in revenue

from the sales of HP´s PSG products, citing HP´s ´direct´ move as the major

reason.

While the Indian channel community by and large is not aware of HP´s target

percentages for direct sales globally, the subtle effects of the same are not

going unnoticed either.

There are those set of partners who claim they are or have been affected by

HP´s direct proposition. Then there are those, who are confident that they

would continue to remain valuable to HP. And there´s a third school of thought,

which feels that HP can´t afford to simply switch to a ´direct-mode´, at

least not in a geography like India.

WHAT MAKES BUSINESS SENSE FOR HP?



Every organization has to function according to what makes business sense to

it. HP, one should realize, is no different. In these difficult and fiercely

competitive times, consumers (especially volume purchasers) are no less

forgiving when it comes to pricing.

Customers in the enterprise and government sector love to pinch every

penny they can. So what option is HP left with?



Either it continues routing the large-account sales through channels,

distributing margins across four to five tiers or opts to go to the customer

direct and keep him happy by passing on the cost-benefits. Obviously, it´s the

second option, which makes ´business sense´ for HP.

HP India, however maintains that this is not how exactly things are.

"Either the customer approaches us requesting for direct fulfillment or the

deal is brought to us by our partner, who wants us to take it direct, giving

them their ORCs (Over-riding commissions) and assurance of post-sales service

opportunities," clarifies PV Viswanath, Country Manager-Channel Sales, HP

India. Viswanath emphasizes that HP takes that route which creates a win-win

situation for channels, customers and the company itself.

Sounds so utopian, doesn´t it? Well, not quite. To begin with, the

discretion over which ´deal´ can be taken directly largely remains with HP.

Second, given the cost-advantage that HP can offer over its channels, why

would a customer want to go to the latter for fulfillment of large orders? And

third, but most significantly, with HP also having a very strong and active

service group in place, what proportion of service opportunities would be passed

on, remains a moot question for many of company´s service and SI partners.

HOW FAR CAN HP GO?



Whether HP will go direct or not, is no more an important question. What´s

top on the mind of worried partners is that to what extent would HP take its

business direct, especially, that of the PSG and ESG (Enterprise systems group)

division.

Viswanath attempts to make it very clear that a decision to go direct would

be made on a case-to-case and need basis. "We would involve channels in

every little way that would help add value to the pre- and post-sales

process," affirms he.

Viswanath insists that direct vs indirect should be treated as a non-issue as

HP´s global strategies has channels at its core.

"Channels has been the most-critical business enablers for HP and would

continue to remain so," puts he succinctly.

Nitin Shah, MD, Allied Digital Services, a key HP partner, agrees with

Viswanath, albeit not completely. "There has been a perceptible shift in

the ratio of HP´s direct to indirect sales. While HP has to work in sync with

channels to grow its business, to what extent would it do so and with what kind

of partner base, is a question that only time can answer."

Nitin, however, is not at all a worried man because he is more than sure that

his company´s capabilities has to be used if HP wants to reach the complete set

of desired deliverables to its customers. "HP can´t afford to have 52

branch locations like we do. For last-mile delivery and implementation, HP has

to rely on partners like us," says he confidently.

OTHER SIDE OF THE STORY



But there´s also a group of partners who feel hurt over

´channel-alienating´ approach adopted by HP. Nikesh Sakaria, Director of CDP

India is one such man. "We are clearly witnessing a decline in HP´s

desktop sales. On two occasions in the past (pre-merger days), we lost out on

two accounts because Compaq decided to take the deal direct," says Nikesh

ruefully.

He informs that from a time when his company used to sell as many as 40 HP

(Compaq) machines a month, these have now reduced to as low as 5-10 machines a

month.

"HP has also taken away our DPSP (Dealer-partner service provider)

status. Is this what they call as channel-friendly strategy," questions

Nikesh. However, he is also quick to point out that whatever HP has been trying

to do, it has given IBM a good advantage. "Our IBM sales witnessed a good

surge post-merger. And with IBM getting more channel-centric, I believe HP will

have a closer fight than ever before," he remarks cautiously.

Though Nikesh continues to do HP´s business as diligently as before, there

are many others like him who are increasingly feeling insecure because of HP´s

´direct maneuvers´. According to these set of partners, if HP opts to go

direct aggressively, without involving them, they may be forced to shift

loyalties.

"When IBM entered the country the second time, its business was largely

direct. But in due course of time, it increased the contribution of channel

sales. Even Indian PC vendors like HCL and Zenith have constantly increased

their reliance on channels for their business. So what probably could be the

logic behind such a move from HP," questions a partner.

STRATEGIC ENGAGEMENTS



Viswanath seeks to clarify on this issue. "Present business

environments require us to have ´strategic engagement´ with some of the

clients. In these accounts, we are required to have an in-depth understanding of

client´s business, his requirements and accordingly take care of his IT needs

in a way that it translates into effective business processes and long-term

returns," elaborates he.

Viswanath further adds that in case of many global contracts, the company has

to remain uniform in its delivery model. "These are accounts managed

directly by HP across the world and we can´t make an exception for this

country," clarifies he. And what about the Government accounts? "Most

of the Government deals are brought to us by partners. If nothing else they are

at least involved in service delivery," answers he.

Viswanath further explains that with the consolidation of product lines after

the merger, the channel would also naturally get consolidated. HP cannot afford

to spread itself very thin across the channels, which is also a fact that he

admits. "And so we are constantly looking at increasing the service volume

to a partner," says he adding, "Service opportunities in the form of

installation, AMCs, repairs and so on, are vast. Partners with service and

value-add capabilities would remain integral to our business interests."

Allied´s Nitin too attests to this view. "What we foresee is that the

pre-sales channel chain would get shorter while the post-sales chain will

increase in the times to come," opines he. Nitin feels that the scenario

currently is not alarming for partners in the country. "HP will align its

support partners and offer more service opportunities to channels," states

he optimistically.

A PARADOX



But these statements carry a paradox! HP has a separate, profit-making

business group which deals exclusively in services. Not just globally, but in

India also, this group is growing both in terms of manpower as well as revenue.

So if that is the case, how can the company promise to offer more of service

opportunities to partners? Further, what is the assurance that the company would

not shy away from making the direct-delivery model prominent for services also?

Additionally, if the product delivery has happened directly via HP, would a

customer want to go to a partner for fulfillment of his service needs?

Obviously, no.

A closer look at these facts and one can deduce a possible theory. And the

theory is that apparently HP is trying to implement two different business

strategies, each one of which has brought immense success to the businesses of

its closest competitors, Dell and IBM.

Dell´s USP has been its direct-delivery model and it has grown rapidly by

passing on the cost-advantage to end-users. HP too wants to keep its customers

happy this way. Its second closest competitor, IBM has made a fortune through

IBM Global Services (IGS), a pure service and consultancy-offering arm of IBM.

HP also realizes that if it has to strengthen its bottomlines and increase

the per-share value, it has to make its service offerings strong.

And does it come as a surprise then, for the first time in several years, HP

reported profitability in its PC business in the quarter ending Jan 31st? CEO

Carly was reported as saying, "Personal systems group profitability is

really driven by our own cost structure and supply-chain efficiency." Well,

words like ´cost structure and ´supply-chain efficiency´ can have other

implications as well!

But Viswanath wishes to make things clear. "We are not going all alone

with our service offerings. Both HP´s and partners´ service capabilities have

their own place and we would ensure that at no given time one party compromises

because of other," he points out. ´Synergy´ would be the key word for

successful existence of both principal and partner.

FUTURE OF BOX-MOVERS



Finally, let´s take a look at what the future might hold for those

resellers who are purely box-movers. This community of partners doesn´t dabble

in services and their money lies in volume business. So under the given

circumstances, do we assume that the end of the road is nearing for these

partners?

Also, on the macro level, do national distributors like Tech Pac, Ingram,

Redington and Iris need to put efforts towards beefing up their sales for other

vendors?

Answers Atul Rawal, VP-Business Development, Ingram Micro India Ltd,

"Distribution just can´t be written off, whether by HP, IBM or any other

vendor. Logistics are a distributor´s USP and in a vast geography like India,

it could be a nightmarish experience for a vendor if he tries to handle the

entire supply-chain management on its own."

While Atul denies that Ingram´s business of HP´s PSG products in India has

seen any decline, he is quick to add that HP would make a mistake if it tries to

replicate a model followed elsewhere in world in this country.

"Dell is far from being a success in India and a direct-delivery model

would never work in long-term for any principal," says he. Atul further

reasons out that another big advantage that distys enjoy is that they can afford

to offer credits. "Both logistics and credit facility are something HP

can´t manage by itself," says an assuring Atul.

But at the same time, he is of the opinion that changing market dynamics may

force many small-time distributors and sub-distributors to re-look at the

viability of their businesses. Though another premier partner for HP, Megahertz

feels that there is no reason to feel worried about. "We have been doing HP

business for over one-and-a-half years now and it has only grown with every

passing month," says Vipul Sangani, Partner, Megahertz.

While he admits that the first two quarters post-merger were difficult for HP

and IBM took a lead, he points out that once again HP´s business has become

very stable and that volumes are increasing on a month-on-month basis. "We

have struck a perfect partnership with HP and have strengthened our business by

adding value from our end whenever we see a scope for it.

According to Vipul, it is this synergy and a need-based cross-functionality

that has helped Megahertz grow not just its HP business but also as an

organization, despite being largely into volume business. "We are taking

our partnership with HP further by opening up an exclusive retail outlet for

them," informs he.

Viswanath too makes a point here. "For HP to be successful, whether in

its PSG, ESG or IPG (Imaging and printing group) business, it would continue to

deploy a judicious mix of volume as well as service partners. Both of them have

their own significance, which can´t be undermined in any given

circumstance," asserts he.

THOUGHTS FOR HP



As is apparent by now, HP seems to be positioning its distribution system

that would straddle the line between a reseller and a direct sales model. An

increasing tilt towards the direct sales model in the country however can result

distributors and solution providers to increase their dependence on other

competitive vendors. With HP also aggressively advertising its online ordering

facility, more partners are casting a wary eye towards it than ever before.

HP should also not overlook the fact that channel came into existence because

direct selling was not sufficient to meet overall demand. Many a times, vendors

overestimate their direct-sales capabilities, and only after they have ticked

off their partners do they discover that their direct strategies leave something

to be desired. HP needs to realize that once lost, regaining the channel´s

support can be a costly proposition, particularly in an environment where

vendor-loyal partners enjoy an upper hand.

Channels have consistently delivered superior results and proven skeptics

wrong. Unfortunately, in tough times like these, endeavors to ensure excellence

in meeting end-user needs can take a secondary status. What is required from HP

is that its focus should be on optimizing what it can achieve together with the

channel and not without it.

And last few words for partners: In order to remain valuable to HP, develop

new ways to differentiate yourselves through value-added services of one kind or

another!

GOLDIE