Saints And Sinners

More often than not they fear that those forces are holding sway in the company's battle to gain market share against rivals IBM and Dell following its merger with Compaq, the largest marriage in IT history. By her own account, she is winning that market-share fight. Fiorina said last week at the Forrester Executive Strategy Forum in Boston that, since the merger, HP's market share is up in virtually every market segment. But some solution providers wonder at what cost. They charge that so great is the pressure within certain divisions of HP to win market share that HP salespeople are willing to hit their numbers regardless of the impact on business partners and sometimes even HP's own bottom line. This, they say, sometimes translates into aberrant behavior in which some HP PC and server salespeople offer pricing far below a solution provider that is already selling HP products into an account. And while HP is not the only company struggling with channel conflict these days, the current state of affairs results in a maddening scenario for the channel: lost margin for everybody and no net market-share gains for HP.

At the Forrester conference, Fiorina would not respond to questions about conflict between the HP sales reps and the vendor's solution providers.

But this festering issue remains an unsettling legacy to HP's vaunted post-merger channel strategy, symbolized by the introduction of PartnerOne one year ago on Nov. 1. PartnerOne is the umbrella program for solution providers that defines how they partner with HP and how they will be rewarded for their efforts. While many solution providers say HP's channel strategy is sound, they fault the implementation and execution on a division-by-division basis. Specifically, they charge that HP's channel initiatives are sabotaged by the culture of HP's field-sales force, spotty performance from HP's direct distribution organization, and pricing strategies that cut into their margins and artificially tip sales to HP direct.

Solution providers also are concerned about a new list pricing strategy that they are afraid HP may unleash on high-end enterprise products. Beginning Feb. 1, HP, Palo Alto, Calif., is planning to introduce a lower-list, lower-discount pricing strategy for enterprise storage, a move solution providers say could seriously impact their margins if the strategy is expanded to include high-end servers. An HP spokesman said the price changes, which were originally scheduled to go into effect on Nov. 1, will be confined to storage and will not include high-end servers.

Under the plan, HP in essence lowers the list price of storage to more closely match the street price of the product.

"I'm used to having about 30 points to play with," said one HP enterprise solution provider who asked not to be identified. "If I only have 12 points of discount, that's going to be tough. Our customers are used to getting big discounts off list, and I think it will be lost margins for us."

Mike Cox, CEO of Bloomfield Hills, Mich.-based Logicalis (formerly Logical), one of HP's largest enterprise solution providers, worries about the planned pricing strategy moving beyond storage.

"Our concern is that, with a lower list, depending on how far they take it up into the product line, that will affect the higher-value solution providers," Cox said. "At one point, HP talked about low discounts all the way up through 16-way Intel servers, but if they go all the way to 32-way servers and throw in Itanium Superdome, that's a mistake."

So deep is the frustration with some divisions of HP now that many solution providers are convinced there is a war within the company over the role and ultimate value of the channel, a charge that HP vehemently denies.

Some see it as a war between the aggressive volume pricing mentality of premerger Compaq vs. the value pricing strategy of premerger HP. "I think there is a mandate to hit [sales] numbers because things are tight," said the CEO of one of HP's largest commercial solution providers who asked not to be identified. "[HP] people are concerned about keeping their jobs, and there is no referee making sure that the rules are hard and defined in how to go about business."

Solution providers direct most of their ire at HP's Personal Systems Group, headed by Executive Vice President Duane Zitzner. The group is under pressure from Fiorina to turn a profit in the post-merger world. The Personal Systems Group lost $56 million on sales of $5 billion for its fiscal 2003 third quarter ended Aug. 1.

But Executive Vice President Peter Blackmore's Enterprise Systems Group also draws some of the channel's wrath. What solution providers fear most is that the low-price, high-volume mentality of the PC business may invade the enterprise space, seriously eroding solution provider margins. The Enterprise Systems Group lost $70 million in HP's third quarter on sales of $3.7 billion.

Channel peacekeeping duties at HP fall to Dan Vertrees, vice president and general manager of enterprise channels, Americas, and Kevin Gilroy, vice president and general manager of commercial channels, Americas.

Gilroy said there is no war within HP over the value of the channel and how the vendor will leverage solution providers going forward. "[HP] is a big, broad organization," he said. "It's not a fight; it's about educating people [within HP] about the value of the channel."

To facilitate this, HP just launched what it is calling internally the "Channel MBA." Initially, everyone in both the commercial and enterprise channel organizations will go through an assessment to determine their skills in working with the channel, and then a curriculum will be developed to improve those skills. Eventually, the program will be expanded to include everyone in HP business units who interacts with the channel. "People make bad assumptions if they don't understand channel economics," said Gilroy.

Solution providers say those bad assumptions confound HP's channel efforts. One bone of contention is the fact that pricing for solution providers from HP direct distribution is often cheaper than through HP commercial distributors Tech Data, Ingram Micro and Synnex Information Technologies.

"We want to buy through distribution, but right now the pricing isn't close to equal," said Ted Warner, president of Connecting Point of Greeley, Colo. "If HP was a great distribution partner, that would be too bad for distributors. But HP doesn't have the logistical capabilities to be successful and, therefore, they are hurting themselves."

Warner said the pricing discrepancies come in the form of special bundles offered by HP direct. One recent promotion offered a free printer and flat-screen monitor with the purchase of an HP laptop. The same promotional pricing was available to solution providers, but only if they sourced the product directly from HP and not through distributors. "We like what distributors bring to the table, but when it gets to the price, we can't get the same deal and we are caught in a trap," said Warner.

When Warner does order from HP, he said HP frequently misses its agreed-upon delivery date despite vows to meet drop-dead deadlines. "We had one recent deal where HP promised to meet a delivery date, but when the day showed up, they called to say they couldn't make it," he said. "The customer was furious, and we were forced to turn around and overnight the stuff from distribution, and it cost us a little over $1,000 extra to do it."

Rick Chernick, president of Camera Corner Connecting Point, Green Bay, Wis., agreed that the pricing discrepancy between what's available through distributors vs. direct from HP is an ongoing problem. "I don't want to look stupid to my customer," he said. "If there is a free monitor or memory with a laptop, I want to bring it to the attention of my customer. If I don't, and they find out about it, I'm going to lose the customer."

Gilroy said some distributors are able to bundle products but others don't have the IT capabilities to do so. "It's always somewhat problematic to get effective bundling done through distribution," he said. "We have zero plans of not offering something to the channel. We have no reason to retard the growth in the channel."

But Chernick said, "That's one thing they have to fix; what's good for one [HP direct] has to be good for the other [distributors]. If you look at the big picture, [HP's] heart is in the right place. They are stuck with us, and we are stuck with them,in a good way."

Other HP solution problems say pricing discrepancies between direct and indirect negate customer choice and cost both HP and the channel margins. As part of its channel strategy, HP targeted slightly less than 800 enterprise accounts for direct sales, ceding accounts outside of the named ones to the channel.

But solution providers say the strategy behind taking those accounts direct often defies logic. One solution provider who asked not to be identified said he lost his two biggest accounts, with annual HP sales of more than $20 million, to the vendor's direct campaign. "If HP sells cheaper than what we can buy products for, how do you expect us to ever compete?" the solution provider said.

What's frustrating and puzzling to many solution providers is that HP is in effect slashing margins on business that is already its to have. What's more troubling is when that aggressive pricing on the part of HP direct spills outside the named accounts.

"I'm not the president and CEO of my company anymore," said another solution provider who also requested anonymity. "I'm the chief channel conflict person, and HP is the prime offender. I've had one account for 20 years and HP call-center people gave them a price on seven tape libraries that were $2,000 below channel pricing. They are giving away margins. The end user uses the word 'Dell' to get better pricing, and the [HP salespeople] are not talking to the resellers who are engaged in the account."

But some solution providers say HP is doing a better job at listening to and working with the channel. Laurie Benson, president of Inacom Information Systems, based in Madison, Wis., said that she has not had a problem with HP direct making an incursion into her accounts during the past six months.

And she said that since September, HP has extended special bid pricing capability, once reserved for large competitive bids, to SMB accounts. She said that aggressive pricing on small bids keeps Dell out and lets her stay active in the account by not forcing her to turn over the deal to HP direct for an agent fee. "They have shown an awareness of, and the importance of, the channel," she said. "Now we'll see if they can build momentum and get it to the point where it's sustainable."

STEVEN BURKE contributed to this story.