VARs: Vendor Loyalty Must Be Earned, Not Bought

What price loyalty?

Many of Hewlett-Packard's fastest-growing solution providers are pondering that question as rebate checks for the vendor's much-vaunted Attach Plus program fall far short of what they had anticipated. In fact, some say that the program—designed to reward partners for adding more HP products and services to a deal—is actually costing them money because it is contingent on hitting quarterly revenue growth goals.

So vehement are the protests that solution providers attending the HP Group of Arrow Enterprise Computing Solutions' Alliance Summit in Half Moon Bay, Calif., last week said HP is considering killing Attach Plus and replacing it with another program, a report that HP, Palo Alto, Calif., denied.

Still, using rebate programs designed to bind solution providers more exclusively to a single vendor is not the best route to take, solution providers say. IBM, Microsoft and Cisco Systems partners, for example, say consistent channel programs, open communication and resisting direct sales into the SMB market are the ways to win partner loyalty.

And HP partners agree after their Attach Plus experience. Some say that overall rebates from the vendor are far below what they received prior to the launch last May.

"When you say 'Attach Plus,' as an HP-exclusive partner everything I sell is HP so it's 100 percent attach. If it's 100 percent attach, how do I make less money?" said Tim Joyce, president and CEO of Roundstone Systems, Alameda, Calif. "I'm all in favor of programs that help drive more Hewlett-Packard business. That's to my advantage. But this one doesn't do it. It doesn't reward you; it penalizes you. The better I did last year, the harder it's going to be for me to do anything this year."

HP Chairman, President and CEO Mark Hurd played the loyalty card earlier this year when he promised to "double down" on HP's most loyal partners by rewarding those who bundled more HP products and services into a deal. To back up his pledge, HP introduced its Attach Plus rebate plan, which promised to pay HP solution providers significantly more money for attaching more HP content to a deal.

But solution providers say Attach Plus went wrong when it tied a revenue growth component to the plan. In order for solution providers to collect on Attach Plus rebates, they first must hit revenue growth goals based on how much HP business they did in the year-earlier quarter, solution providers say.

And they are discovering, much to their chagrin, that if they had an exceptional quarter a year earlier and can't top it for the next year's quarter, they could get zero rebate money. Solution providers caught in that situation say the rebate shortfall, in some cases, amounts to hundreds of thousands of dollars.

"At the time, I was told that Attach Plus would be independent of growth," said Don Richie, president of Sequel Data Systems, an HP-only solution provider in Austin, Texas, who initially predicted that his HP rebate money would more than double because of Attach Plus.

But when the plan was rolled out, Richie said solution providers had to hit growth revenue bars for each quarter based on the comparable year-earlier quarter to get Attach Plus rebates. "By tying growth to Attach Plus, it makes the program virtually meaningless," he said.

NEXT: Give-and-take on Attach Plus and loyalty programs

Mark Melillo, president of Melillo Consulting, an HP solution provider in Somerset, N.J., agreed that tying revenue growth to attach rates clouds HP's program. "It's a difficult program to understand and more difficult to predict, and that's probably its biggest drawback," he said. "Because it's difficult to predict, it doesn't change behavior."

HP, for its part, defended the program. Tom LaRocca, HP's vice president of partner development and programs, Solution Partners Organization (SPO) Americas, said HP does not plan to drop the revenue growth component from Attach Plus.

"We are going to continue with our attach matrix," he said, noting that HP's enterprise partners seem to be the ones voicing the most concern. "That's where we are getting a lot of the feedback centering around our ESS [Enterprise Storage and Servers] attach program. Going forward, we are looking at how we can take the feedback we are getting and incorporate that feedback into some tweaks that what we want to do to the program."

When asked about partners that were seeing drastic reductions in their overall HP rebates because of the Attach Plus growth component, he said, "There is no program that we can develop that takes into account every single situation that happens out in the marketplace with partners. If there are cases where someone had a huge quarter because of some unusual reason, what we tell the partners is let's sit down and figure out what the right number is for you that particular quarter you are going into and let's all agree to that," LaRocca said.

But solution providers seem reluctant to participate in programs designed to bind them too closely to a single vendor.

CXtec, a $114 million solution provider in Syracuse, N.Y., has resisted pressure to carry a single vendor's networking and VoIP technologies. While it does the most business with San Jose, Calif.-based Cisco, CXtec also has strong relationships with 3Com, HP's ProCurve division and Nortel Networks.

"Cisco would really love us to be all Cisco, but at the end of the day, we really want to make sure we understand what's best for our customers," said Frank Kobuszewski, vice president of the technology solutions group at CXtec.

Cisco does not have financial incentives to reward exclusivity, so there would be no inherent benefit to its Cisco margins if it were to ditch its other vendors, he said.

3Com has also approached CXtec about dropping rivals, but that's not what would be best for customers, Kobuszewski said. "We want to give our customers options," he said.

CXtec just opened a $2 million multivendor demo facility at its headquarters that includes new and legacy equipment from all four vendors, but none would provide free equipment if their competitors would also be highlighted, said Peter Belyea, vice president of business development at CXtec.

"We weren't willing to compromise on the multi-vendor approach," Belyea said. "They all gave us a good deal on the equipment, but it wasn't gratis."

NEXT: Channel calls for consistent programs

Other solution providers said, simply put, loyalty must be earned, not bought. Consistent programs, clear and honest communications with their partners, and refraining from competing with business partners are key to winning loyalty, they say.

"If you look at what [IBM's] done, channel participation [the amount of business going through the channel] is up, programs are in place to protect margins. They've been very loyal to us," said Jim Simpson, president of MSI Systems Integrators, an IBM business partner in Omaha, Neb. "They have consistent programs that reward investment, and that's all I can ask for."

Still, Simpson said IBM, Armonk, N.Y., stumbles sometimes when it comes to forging loyalty bonds with its best partners. He notes that many IBM business partners have built up significant services organizations, which often find themselves competing with IBM Global Services in the SMB market. He said that IBM must figure out how it can cooperate with its business partners in SMB services rather than competing against them.

"Microsoft doesn't have a big services organization so they are willing to walk arm and arm with us into SMB markets," he said. "If one major vendor wants to support us and another wants to support us on the hardware and compete with us on services, eventually that's going to be a problem for IBM. Sooner or later some partners are going to say, 'I don't need this,' " Simpson said.

Solution providers say, too, that vendors that don't communicate well risk losing their loyalty. While many HP solution providers are reeling from problems with Attach Plus, even more problematic was that few of them had any advance warning of a major reorganization of HP's channel sales force.

Under the plan, which went into effect Nov. 1, HP abandoned its year-old initiative to align close to 50 of its top enterprise partners with its Technology Solutions Group's (TSG) direct sales force and instead moved management of those partners back into SPO. In addition, the SPO channel field-sales organization is moving from being the general interface between HP and a solution provider to being focused on a specific product area such as storage or personal systems.

"There was no prior knowledge by the partners of HP's changes that occurred," said one HP enterprise partner who was aligned with TSG and who asked not to be identified. "You would have thought that someone at HP would have given us a heads-up on this. There is no upside for the partners with these changes."

Other partners added that the new roles for the SPO channel sales reps would likely put more administrative burden on them because the reps will be focused on specific product areas rather than big-picture issues with HP.

"HP never gives us time to catch our breath before there are more changes," said Sequel's Richie. He said that between 60 percent and 80 percent of his time dealing with HP is spent on audits and delivery issues. The SPO partner business managers used to help him navigate those issues within HP. Now he fears much of that responsibility will fall to him.

"I'll be spending way too much time on administrative issues instead of growing my HP business," he said.

JENNIFER HAGENDORF FOLLETT contributed to this story.