Dell Vs. HP

Kokoska, president of The Computer Specialists (TCS), an HP Gold partner in Whitesboro, N.Y., now looks at Dell as "the lesser of two evils." And even though he doesn't want to, Kokoska says shipment delays, warranty reimbursement issues and other hassles are forcing him to consider dropping HP.

The myriad of issues facing Kokoska and other solution providers no doubt played a part in HP CEO Carly Fiorina giving the company's two top enterprise servers and storage executives, Peter Blackmore and Jim Milton, their walking papers last week. The shakeup came after HP said it would miss third and fourth fiscal-quarter estimates because of problems in its enterprise servers and storage division. The division reported an operating loss of $208 million for the third quarter ended July 31. The news sent HP shares tumbling 15.7 percent to $16.95 on Thursday.

HP this week is expected to address some of the enterprise servers and storage issues at HP World in Chicago. The company's two new top enterprise servers and storage executives, Mike Winkler, who replaces Blackmore, and Jack Novia, who replaces Milton, however, are not expected to attend the technical conference.

HP said the disappointing quarterly results and some of the shipment delays faced by partners were due in part to a migration to a new SAP order-processing and supply-chain system. The company also said it is moving quickly to address any and all issues associated with partner disenchantment. On the enterprise side, the company is mounting a major effort to improve the logistics of its eHiP enterprise distribution program. HP is also in the process of implementing a PartnerOne logistics improvement blitz aimed at helping partners simplify and reduce their cost of doing business with HP.

Fiorina said she expects the management changes and margin-improvement plans to return the enterprise servers and storage unit to profitability in the fourth fiscal quarter.

Kokoska is not sure the management shakeup will solve HP's problems. "There seems to be a major gap between the direction from upper management and the implementation at middle management," he said. "The problem pervades the entire organization. There has to be a fundamental change to move back toward the Compaq spirit of 'Can-do' vs. the HP spirit of 'We'll think about it.' "

The biggest issue is that his cost of doing business with HP is up significantly in the past year, he said. An analysis TCS completed for the six months ended June 30 comparing all the costs associated with selling and supporting HP vs. Dell showed a 30 percent higher net margin on the Dell business. That's because of the higher costs TCS is now incurring with HP on warranty services reimbursement, the expense of tracking shipment delays on commodity products from HP direct, higher administrative costs associated with some pieces of HP's PartnerOne program, and the hassle of fighting with HP for commissions, he said.

Kokoska, who did $558,000 in HP business the last week of July, expects that business to drop by more than half to only $5 million this year. At the same time, he expects his Dell business"which was virtually zero two years ago and has already surpassed $2 million this year"to grow significantly.

Kokoska says HP channel field reps have diligently worked with him to solve issues in the field, but the resolution dies in what he calls a middle-management blackhole at HP. "The question I have is, how much business do I have to lose before I decide enough is enough?" he said.

Making matters worse for HP, last week Dell reported a rock-solid second fiscal quarter, with revenue hitting $11.7 billion, an increase of 20 percent over the same quarter last year. Business was strong across all product lines, with desktop sales up 15 percent over last year and notebooks up 28 percent. However, Dell really shined in the area of servers, where it was up 31 percent, and in storage, where revenue from its EMC relationship was up 36 percent on a 70 percent increase in capacity growth. Also, laser printer sales rose 43 percent.

While Dell is showing strength across all product lines and is on target to reach $60 billion in revenue this year, it has not been at the expense of margins, said CEO Kevin Rollins. "This is unprecedented organic growth for the industry," he said during Dell's earnings call. "And we did it while driving our margins higher."

Worse still for HP, when it comes to commodity products such as desktop computers and low-end servers, some HP partners are saying they no longer see any difference between partnering with HP, a channel booster that has spent countless millions cultivating partners and moves 65 percent (more than $50 billion) of its business through the channel, and Dell, a longtime channel antagonist that has been quietly working with partners in recent years, albeit with a reseller contract that says Dell can take an account direct at any time.

The most stunning and significant change is that a number of solution providers say they are seeing no difference in terms of net profit between partnering with Dell and HP. Also, some solution providers say gross profit margins on what they call HP and Dell commodity products"particularly desktop systems and low-end servers"are more often than not comparable. This, as a number of them maintain that the cost of being an HP partner is on the rise.

Behind the net profit figures is the cold hard fact that some partners have lost the fear of partnering with Dell, something that once seemed almost unthinkable. In interviews with 15 solution providers for this article, 10 said they see no difference between partnering with HP or Dell. And among the five that came down on the HP side, there were still complaints about HP's execution in the field.

In the second quarter of 2004, 28 percent of solution providers polled in the CRN Monthly Solution Provider Survey said Dell is now their best-selling desktop PC, compared with 20 percent for HP. In June, Dell scored a 52 percent channel satisfaction rating, compared with 50 percent for HP.

HP, which admits it is dealing with 15 percent to 20 percent fewer partners than it did two years ago, maintains the company is not losing U.S. channel share to Dell. In fact, HP said its own survey in April showed that HP Gold and Platinum partner satisfaction was up, while the SMB Network partner rating remained flat.

Kevin Gilroy, HP's senior vice president of worldwide SMB operations, said he is shocked by the claims that some partners do not see a difference between partnering with HP vs. Dell. "This is disconcerting for HP and partners," he said. "It is not a wise or prudent strategy [to partner with Dell]. I am very concerned for partners looking to make a fast buck. This is not a long-term viable business model. I wouldn't want to bet more than a couple of percentage points of my business on a company with the clear, stated 100 percent goal of being direct. Anyone that is doing double digits [sales percentages with Dell] has a model that is at risk, under pressure and, in my opinion, not long-term viable. They can roll the dice and follow the demand and not create demand. That is very risky."

Dell would not comment for this article.

One of the biggest flashpoints in the HP cost equation are the changes HP has made in warranty service reimbursement. The most recent change came in the form of a wide range of cuts in service reimbursements effective in August, with most rates being lowered by 10 percent under a pay-by-performance metric.

Mike Cornell, the services manager for Nexus Information Systems, a Plymouth, Minn.-based HP Premier services partner that does about $4 million in HP services business annually, believes HP has foisted millions of dollars in costs on HP service providers. "HP has become so focused on competing with Dell that they are taking all the overhead of the resellers and taking it out of their business equation," he said. "They should be talking about a better quality of box and sticking with that. A Cadillac can't compete with a Ford. We are losing our image of top-quality, top-shelf service and lowering ourselves to have corporate customers be 'cash-and-carry' on systems."

Cornell said he has seen a fall-off in HP's quality, support and parts availability as his costs have climbed an estimated 20 percent over the past year. He compared HP's channel rhetoric to empty political promises. "We resellers definitely feel we are going it alone without a partner," he said. "How much more does HP think they can squeeze out of the reseller to make their goals?"

HP, for its part, said it is looking at the warranty reimbursement issues. In fact, HP said ownership of the services warranty reimbursement business is in the process of being shifted to HP's Solution Partners Organization (SPO) from the Technology Solutions Group (TSG).

Another issue in the HP vs. Dell battle is that customer expectations are a lot higher on HP products than Dell products with regard to services, product quality and reliability. Solution providers said their clients are willing to pay for any of their time spent on Dell equipment, but that is not always the case with HP product. "Dell is more profitable because anytime I am involved with them, it is a billable event," said Scott Klemm, vice president of operations for Distributed Computing, a Baltimore-based HP partner that picked up the Dell line about a year ago. He said the gross profit margins are about the same on both HP and Dell desktops and servers, adding, "I don't see any difference between the Dell VAR program and the HP VAR program at the level I am at."

Some partners said delays in product deliveries from HP direct have forced them to switch some customers to Dell on recent deals. The average HP server order has taken four to five weeks from HP direct, the partners said. In contrast, they said, the average Dell server or desktop order takes seven to 10 days. HP executives acknowledged the recent shipment delays on servers, but stressed that the problem has been fixed. They said solution providers should see the difference immediately.

A number of HP's top-tier Gold and Platinum partners have also had a change in attitude when it comes to partnering with Dell. One HP Platinum partner, who asked not to be identified, acknowledged that Dell "is far and away our most profitable line." He said he works with Dell servicing government contracts and in corporate accounts when the customer requires solution provider involvement. "Dell is most profitable for us because they protect us in those accounts; they don't let other resellers come in."

By contrast, on an HP deal, he said he competes against mail-order companies, large public HP resellers and even small solution providers working out of their houses. "It's a nightmare," he said. "We can create a whole project and then the client can put it out to bid and we end up making nothing on the deal."

He called his relationship with Dell "working with the devil" because he said Dell, for whatever reason, could decide that it doesn't need the solution provider anymore and take away the business. But he added that he faces the same reality with HP. "I don't trust HP any more than I trust Dell. What HP says for public consumption and what their actions are are not one and the same," he said.

Darren McBride, president of Sierra Computers and Training, a Reno, Nev.-based solution provider that became a Dell partner one month ago, agreed. Two years ago, he said, HP accounted for about 20 percent of his product business, but now only accounts for several hundred thousand dollars in business. "If I open my eyes and look, the differences between Dell and HP are less and less," he said. "Dell may be direct, but at least they are telling me they are direct. They are not trying to deceive anybody as to what their distribution model is. I feel that HP has walked a fine line for many years saying they value the channel, but what they say doesn't line up with what they do."

Jim Gildea, the president of Aegis Associates, a $10 million Watertown, Mass., solution provider, said his HP business is flat while his Dell business is up considerably. "Dell is a little more aware that the channel drives the sale, that there are some customers who will buy what their trusted adviser tells them to buy," he said.

Solution providers that are prospering with HP say one of the keys is knowing how to take advantage of the profitable HP PartnerOne program. Geoffrey Lilien, the CEO of Lilien Systems, an HP Platinum partner in Mill Valley, Calif., said his HP business was up 70 percent in 2003. Lilien has profited by availing himself of the wide range of HP channel programs. "If you know how to play the game, it works," he said of HP's PartnerOne program. "We learned how to work in the new model where a lot of money is in the back end."

Bicky Singh, the CEO of Future Computing Solutions, Yorba Linda, Calif., which is investing in becoming an HP Platinum partner, said he refuses to even consider Dell as a partner. He said his HP business will double this year. "A lot of the VAR community just does not understand how to engage with the manufacturer," he said. "HP is asking us to put skin in the game and [is] not giving money away as an entitlement like Social Security."

TCS's Kokoska, however, said he is not looking for any kind of a free ride. In fact, his company has made major investments in HP over the years and has been recognized many times with various sales and service awards (the most recent being an MVP Award last week for outstanding service in the Northeast). Kokoska also acknowledged that many aspects of the PartnerOne program are quite good and produce thousands of dollars each month in back-end money. However, he claims that the benefits fall far short of the increase in expenses his company incurs in doing business with HP overall. In some cases, Kokoska said, he is losing cash repairing HP equipment.

Kokoska, who is still hopeful he can resolve his issues with HP, also is not looking for the high margins of years ago, but he would like to see better teamwork and the respect that was the hallmark of the old HP partner relationship. "I feel like I have had an irrevocable fight with my best friend," he said. "I would love to resolve this and return to the point where we can work together and trust one another again."

JOSEPH F. KOVAR contributed to this story.