HP's 'Secret Sauce' Remains Its Strong Partner Channel

Hewlett-Packard's sobering second-quarter earnings are more evidence of the recession's continued impact on the technology sector, but HP can continue to count on a fiercely loyal partner channel as it forges ahead in a tough economic climate.

The Palo Alto, Calif.-based computing giant suffered a 3 percent overall decline in revenue in its just-concluded second quarter as compared to the same period in 2008. The earnings picture was bleaker, with HP on Tuesday reporting a 17 percent decline in net income as compared to last year's second quarter. The pain was felt in all of HP's major business segments with the exception of HP Services, which showed 99 percent year-over-year revenue growth and surpassed HP's lucrative printing and imaging business in profits -- thanks largely to the company's acquisition of IT services giant Electronic Data Systems (EDS) last August.

It marked the second straight quarter that HP's earnings in all segments but services took a significant hit, following several years of solid, dependable growth under the leadership of Mark Hurd, who was named CEO on March 29, 2005. What's more, HP didn't offer much comfort to a market desperate for signs of recovery, giving extremely cautious guidance Tuesday for its third quarter and beyond.

But even as the bellwether tech giant continues to brace for declining demand for its PC, server, printing and software products -- to be frank, an outlook that some of its more Pollyannaish peers might be wise to adopt -- the one ace card in HP's back pocket remains a reseller channel that is by its side for the long haul.

"When we all come out of this thing, whether that's 12 months or 18 months down the road, we're going to be in a position to gain share, and HP's going to gain share," said John Convery, executive vice president of vendor relations and marketing at Denali Advanced Integration, an HP Elite Partner in Redmond, Wash.

Convery, like many HP partners, is up-front about the economic downturn's impact on his company's business, particularly Denali's run rate with enterprise customers. He was pleased to hear Hurd speak just as candidly during Tuesday's second-quarter earnings teleconference, during which the HP chief all but dismissed the return of enterprise-level IT spending until next year at the earliest.

The flip side to the slowdown in enterprise spending, Convery said, is that Denali has been able to remain profitable and is even hiring as it refocuses on other market segments with the help of HP.

"With the enterprise customers, we're basically fighting for a bigger portion of reduced spend. But what we've been able to do, with HP anticipating this as well, is to focus on the midmarket and the public sector," he said, dubbing HP's ability to scale its offerings down to fit smaller customers' needs the company's "secret sauce."

Next: The Mark Hurd Fan Club

With its largest corporate customers delaying equipment refreshes and postponing IT projects, HP has recently served up versions of its enterprise-targeted products and services that have been refitted for small and midsize businesses.

These new offerings include the extension of HP Mission Critical Services to smaller business customers and new SMB-oriented financing options for buying and leasing HP office equipment. Meanwhile, HP Partner One Elite resellers like Denali have been able to add a new classification to their portfolios, SMB Elite, with attendant lead-generation help from HP and other benefits.

But to hear some channel partners tell it, the most important thing HP does for resellers is to get right down in the trenches with them in strategy sessions and on sales calls -- with the CEO himself as hands-on as his channel lieutenants. Convery casually mentioned a recent face-to-face meeting with Hurd and North American channel chief Adrian Jones, as did Paul Shoberg, director of sales at Bloomington, Minn.-based IT solution provider Works Computing.

"I talked to Mark Hurd a few weeks ago. The message was that it's still going to be tough, but it's an operational efficiency thing that's going to get you through it," Shoberg said.

Like Denali, Works Computing is along for the ride with HP as it ramps its offerings for SMBs. But Shoberg said that HP would need more help than ever from its partner channel to crack that market.

"I can tell you that I've never seen such a focus from HP on SMBs and the midmarket. They are consciously looking at arming partners like us, because they realize they can't do it themselves," Shoberg said.

"They can't just wave a magic wand and say, 'We're the gods of SMB.' There's a different mindset with SMBs. They're more entrepreneurial. They have different ways of doing business than enterprises. It's why HP needs partners who understand these kinds of customers."

Count Rick Chernick as another big fan of Hurd. The CEO of Green Bay, Wis.-based Camera Corner Connecting Point, an HP partner with its feet in the commercial, public sector and retail markets, was impressed with Hewlett-Packard's second-quarter earnings in a rough economic climate.

"The fact that they made money is huge. Any time you deliver a 7.7 percent bottom line, it's good," said Chernick, who called Hurd "as tough as they get when it comes to cost control."

Of course, one person's toughness is another's ruthlessness. HP's recent cost-cutting measures have included companywide pay cuts and, following the EDS acquisition, the planned downsizing of some 25,000 employees from the two companies' combined workforces. HP announced Tuesday that it has laid off about half of that number and that another 6,400 HP employees will be let go over the next 12 months.