Making The Call

In a Saturday afternoon interview in her office at a deserted HP headquarters, Fiorina was confident and jovial as she outlined the channel strategy that would arise from the proposed merger of HP and Compaq Computer. Just two days earlier, on Jan. 31, the European Union had approved the merger deal, which would create an $87 billion IT behemoth. And in less than 48 hours, Fiorina would tell Wall Street that HP forecasts its first-quarter earnings to be well above consensus estimates of 16 cents per share.

Now the time of decision is in sight. HP last week scheduled the shareholder vote on the merger for March 19, and to push the deal through the company must win the support of about two-thirds of its institutional shareholders.

Yet Fiorina is buoyed by what she calls a changing tide. "The momentum is coming our way," she said. "We will get this done." When asked if she has been actively lobbying for institutional shareholder votes, Fiorina laughed. "That's why we're meeting here on Saturday," she said.

But instead of dwelling on the proxy fight being waged by HP board member Walter Hewlett, who opposes the deal, Fiorina focused on her vision for the new HP and its partners. She said she sees a technology- and market-leading company that would leverage the solution provider communities of HP and Compaq to make the equation work.

"This is a company that cannot complete a customer solution without partners," Fiorina said.

Fiorina, however, also foresees a hybrid channel for the merged company. She said HP's Hard Deck guidelines would be the playbook for customer engagements, and Compaq's direct distribution strategy would weigh heavily in hardware sales.

"We've fixed our channel problems, and we don't want to go backward," Fiorina said. "We are going to keep Hard Deck. That program works. We will be clear to the channel about how we play, how they play and how we will add value together so we are not competing with each other."

Hard Deck is the rules of engagement that HP introduced last year to delineate boundaries between its direct-sales force and solution provider partners. As part of Hard Deck, HP named about 900 customer accounts that it will target directly. Compaq also has released rules of engagement,its Partner Engagement Principles (PEP),that mirror Hard Deck in strategic intent.

Though both plans name enterprise accounts that each vendor will take direct, HP has vowed that the remaining customers will be the exclusive domain of the channel, whereas Compaq hasn't made such promises with PEP, solution providers say.

Nevertheless, Fiorina said that if the merger is approved, HP plans to keep fueling the direct distribution engine built by Compaq.

"The reality is there are some customers who prefer to order through a direct distribution capability a la Dell, and we have to satisfy those customers," she said. "In any channel partner relationship, our common enemy is inventory in the channel, and we have to make sure that our joint fulfillment is adding real value to customers who are willing to pay for it and to turn inventory as effectively as we can. Those realities won't go away."

Direct distribution holds particularly strong appeal for enterprise customers in product categories such as PCs, according to Fiorina. And for the vendor, a direct distribution model can help trim costs, she said.

"Yes, you save real money. But I don't want to convey that it works perfectly all the time," Fiorina said. "If you look at the measure of performance, Dell does about 70 inventory turns today. Compaq is doing about 62 inventory turns through their distribution facility. A year ago, they were doing 23. There's been real progress."

Some distribution and solution provider executives, however, question the economic assumptions behind HP and Compaq's direct distribution strategy.

" 'Dell envy' forced the industry into this mind-set," said an executive at one of HP and Compaq's largest solution provider partners, who wished to remain anonymous. "For a vendor to do realtime BTO [build-to-order, image loads and asset management as efficiently as we do when their SG&A is four times greater is a real challenge."

Cutting out two-tier distributors would be a mistake for HP, said Glen Jodoin, vice president of GreenPages, a Kittery, Maine-based solution provider.

"When manufacturers try to take customers direct, they fail because they can't manage customers on a sales level. That is what the channel does well," Jodoin said. "It is not less expensive for the customer to use Dell compared to the channel in a total value proposition. We have to stop saying we need to be more like Dell. People have to stand up and say, 'We don't need to be more like anybody. We do a great job.' "

The merger with Compaq would double the size of HP's direct-sales force and professional services staff. But Fiorina noted that with Hard Deck as the guiding light, solution providers will see more opportunities coming their way, not fewer.

"One of the things we'll get out of this merger is that we'll become the single largest player in the SMB market," she said. "It's a segment that today represents 60-plus percent of our volume. It's a segment we can't address without channel partners."

And that view extends to specific product and solution areas, Fiorina said, adding that the merger would make HP the leading server, storage and network management software provider in the enterprise space.

"We need the channel and solution providers [in those areas," she said. "In professional services, our consulting capabilities are very targeted. We need consulting partners to help us complete our value proposition. In outsourcing, we have channel partners coming to us and saying, 'Let us be your arms and legs. You go to the customer and provide assurance for quality of the capability and delivery, and let us provide you the resources to implement that capability.' That's a great deal for us and a great deal for the partner."

Despite having some qualms with HP's direct-sales rationale, solution providers say HP and Compaq are a good match on a technology level.

"You have strong, complementary engineering organizations with HP's ability to build components and Compaq's ability to move data around through the boxes," said Don McDowell, vice president of server solutions at Forsythe Solutions, Skokie, Ill. "If you have the guys who can move the data very well together with the guys who build the components and process the data, then you have some real strong technology options. But execution is the key. One plus one has to equal two and a half. It can't equal one and a half."

McDowell added that he's pleased HP's Hard Deck would reign over the combined channel organization. "We traditionally play in a lot of accounts that HP refers to as above the Hard Deck [named accounts," he said. "Once the [HP sales force understood that HP wasn't there to cannibalize channel business in those accounts and that they were there to support it above Hard Deck where it existed, we flourished under that."

And last week, HP revealed the next phase of its channel strategy to solution providers. Dubbed partnerOne, the plan will integrate all of HP's disparate channel contracts and partner designations into a single program, said Kevin Gilroy, vice president and general manager for North America commercial channels at HP.

Currently, HP has about 30 different solution provider contracts and 35 to 40 channel programs divided by product and market segments, according to Gilroy. "These programs are extremely complex," he said.

By aggregating all programs and designations into a single contract under partnerOne, HP and its solution providers will be able,on a quarterly basis,to develop joint business plans that recognize a partner's full capabilities and entire contribution to HP, including products and services, Gilroy said.

Such a program would enable HP to drill down and get a better picture of a partner's expertise and how it's contributing to HP's business, said Tim McGrath, executive vice president of sales and marketing at Comark, a Bloomingdale, Ill.-based solution provider.

"PartnerOne allows HP to say, 'I like what Comark is doing in the area of infrastructure investment. I like what they are doing in building a Unix sales force or a server sales force. And I can now make investments in them because they are making investments in us,' " McGrath said.

Initially, plans call for 50 partners to transition to partnerOne in late spring, with all other HP solution providers making the move by late summer, said Susan Reynolds, channel program manager for North America at HP. That time frame likely would coincide with the timetable for integrating the HP and Compaq channel organizations, if the merger gets the OK from shareholders.

And Fiorina knows all too well that winning shareholder approval for the deal is only the first battle. Integrating the two huge organizations and executing a consistent channel strategy will be key to the merger's ultimate success, she said.

"Come back in September and see how we are doing," Fiorina said.