HP Dumps Fee Model

Under the Enhanced HIP (HP Integrated Partners) plan, HP will abandon its fee-for-services relationship with its three enterprise distributors,Arrow Electronics, Pioneer-Standard Electronics and Avnet Hall-Mark,on Nov. 1 and instead allow them to take title to products and set pricing for VARs.

But solution providers attending HP World last week in Atlanta said they were caught off guard by the changes and that HP has yet to negotiate pricing with the distributors.

"I'm a little disappointed that we had to read about this and were not told of the changes by HP," said Don McDowell, vice president of server solutions at Forsythe Solutions Group, a solution provider in Skokie, Ill. "If this has a Nov. 1 trigger, we need more than 10 weeks to plan strategy. This could disrupt end-of-year business. My concern is that the new pricing model will change the economics, and I anticipate my costs will go up."

HP said the changes will drive growth in its enterprise business. "We have preserved the biggest breakthrough of HIP, which was the supply chain aspect, and we have said to [HIP distributors] that you have more flexibility and incentive to drive volume and improve your cost structure," said Jim Milton, managing director for the Americas and senior vice president of HP's Enterprise Systems Group. "By empowering the channel, they win more on the top line and the bottom line as they pump more volume through this model."

Under the new plan, as in the past, solution providers must choose just one HIP distributor. "We have to figure out who we're going to buy from and at what price," said Mike Cox, president and CEO of Logical, HP's largest North American enterprise solution provider. "We would like to continue to buy from Arrow, but they are frustrated because pricing isn't set."

Cox said Logical, Bloomfield Hills, Mich., has been approached by all of the HIP distributors but can't choose one until pricing is set. "The real value-add [from distributors] is price. It's at least equal to everything else put together."

Under the existing HIP model, HP set prices, direct-shipped products to the VAR or its customer, and paid distributors a fee for handling sales and support logistics.

After Nov. 1, HP will sell products at a discount to the distributors, which, in turn, will mark them up and sell them to solution providers. As a result, HP's enterprise distributors will book product sales as top-line revenue.

Under the Enhanced HIP structure, HP also will add enterprise storage products to the program, which currently includes HP 9000 Unix systems and enterprise software.

Ingram Micro will also be added as a distributor for enterprise storage only.

Distributors, for their part, said the changes to the HIP model should be transparent to VARs. They pointed out the only difference under the new model is that distributors will be more involved with pricing than before.

"We were an agent to HP [under the old model]," said Charles McPherson, vice president of sales and marketing for Arrow's SBM division, Englewood, Colo. "What they want now is more involvement from us at the reseller level by determining price."

But as HIP distributors scramble to sign up VARs by Nov. 1, Patrick O'Connor, vice president of marketing for HP worldwide at Cleveland-based Pioneer-Standard, said, "I hope that pricing is not the primary consideration."