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Q&A: HP Channel Boss Sounds Off On Cisco, IBM And Apple

Stephen DeWitt, the senior vice president who oversees HP's Americas Solution Partners Organization, discusses Cisco, IBM, Apple and the new competitive landscape for the world's largest information technology company and its partners.

Stephen DeWitt, senior vice president and general manager, HP Personal Systems Group Americas, who oversees the Americas Solutions Partners Organization [SPO] for HP, which includes HP's PartnerOne channel program, spoke with CRN about a wide range of issues including Cisco, IBM, Apple, PartnerOne program changes and the cloud software and services opportunity. Below are excerpts from the interview.

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What is the channel program going to look like a year from now. Are you going to bring it into the 21st century with services and software?

Well services and software are massive to what we are doing and they are areas that we have been investing in and they haven't been historically the bread and butter of our business.

There are going to be a few changes. First off, we are getting more global and we are getting better at global and I think this will be good news for a number of our core distribution partners. Streamlining the process, driving more efficiency on global execution is huge.

We don't operate with Bank of America here in the United States. We operate with them in 100 plus countries and part of our value proposition is, between us and our partners, is that it is the same experience. So we have a heavy emphasis on globalization. Heavy motivation on the transformational investments.

Look, we recognize that many of our partners are privately held companies and any decision they make on investing working capital, which is sometimes a bet the company decision, they want to be sure that there is a return on that bet the company decision.

Look, four years ago, going out to the partner community and saying, 'Invest in Procurve' was a big leap because the vast majority of our partners, going back to your price argument, would come back to us and say, 'Cisco is my most profitable vendor. It is my most profitable vendor. So I don't care what you say to me.'

So if you just dropped that line on me, I know it is a really hard decision for you to invest somewhere else because your bread is being buttered by somebody else. We got that. So we had to prove to the [solution provider] community that we had the capability and the products and our own intestinal fortitude to be in the fight.

We demonstrated that and those partners that made an investment decision have far out-indexed the market [growth] and they have had a change in their profitability mix. We have seen that in a lot of our distributors. We brought partners into new growth markets that they weren't touching before because they weren't able to compete inside of the Cisco ecosystem because Cisco, like us, has a number of big partners and those big partners can dominate the landscape. So I think we drove a lot of growth.

For many of the partners, this new dialogue that we are talking, this application level, this service level, is new business for them. I can certainly speak to the client side of the business. Remember if you have been one of our PSG franchise partners, one of our elite partners in one of the verticals, your primary economics have been driven on the gross margin per transaction. And then the services offering that you can wrap around that.

Obviously on the PC side of the business, we are the top PC company on the face of the earth. We make five points of operating profit [in the PC business]. This is a tough business. It is a tough business for us. It is a tough business for our partners. And driving economics beyond the transaction, I would argue, is key to survivability. And our team has done it well. If you look at the fertile ground of applications, there is much more economics to be driven here. This is not a five point vision of a client device. This is now a sticky, tethered, applications-centric experience that should have better loyalty characteristics around it and higher margins.

Next: The Recurring Revenue Opportunity How about recurring revenue?

Big time! Absolutely. And thank you for hitting on that because one of the seminal elements of our strategy inside of PSG side is transitioning away from a transactional model where the way we pay people, the way that we guide R&D [research and development] was based on the transaction to a lifetime value model where, 'Look I am going to make five bucks on the PC I am going to sell you, but I want to make $5,000 on the relationship that I have with you and [the relationship] that my partners have with you.'

So this is a new world. Now the one point that is very fair is this isn't going to all happen in the summer of 2011. This isn't all going to happen in two weeks. The world is going to hear a lot about our strategy and our vision over the next handful of days as [HP President and CEO] Leo [Apotheker] and all of us get up there and share the vision. I think it is an exciting, comprehensive vision. Loud! It is man on the moon which I think is motivating for our 320,000 employees and our 100,000 plus partners worldwide.

It is great for our retail partners. The retail world has changed. You live in the U.S. You know it extremely well. Bookstores are going away. You haven't been in a Blockbuster in a while because they are not there anymore. Circuit City went away. Ultimate went away. This also speaks to the consumerization of IT.

I think our partners are going to be excited and motivated, but like any partner they want to know how do they operationalize this vision in the context of what they are trying to do, how they are going to grow, and look we all talk about things like cloud and connected devices and our industry is evolving at a different pace with a different set of criteria that defines whether you are going to win or lose. So all of us [have to evolve]. We have to evolve. Our operating model has to evolve. Our investment in technology has to evolve. And our partnerships need to evolve.

Provide some details around how the partner program incentives that you might bring to bear to make this happen?

Before I get into the specifics of the programs, I think it is very important to talk about what is the portfolio and the story that we want our partners to amplify and go kick ass with in the market.

We compete with everybody on the planet. I mean who doesn't compete with HP? And who does HP not compete with? If you want to just take from a metaphor perspective IBM on one side and Apple on the other side. Look we compete across the entire continuum both the kind of traditional siloed business. We compete in storage. We compete in servers. We compete in networking. We compete in PCs, thin clients, workstations. We compete in all of those spaces. What you are hearing from HP now though is that above the hardware, above best in class, kick ass, 'my router is better than your router,' 'my switch is better than your switch,' 'my PC is better than your PC,' we are investing into applications experiences, solutions, service led offerings that are above the hardware and from the data centerto the consumer.

Next: The New World Order

So as we try to position ourselves in the new world order, because nobody's position is assured, we are pushing a portfolio that goes from the data center to the edge and an applications and services portfolio that goes from the application to the edge. That is a big change for us. Historically it has been my router against your router, my switch against your switch. We are elevating the story above the hardware stack. So you have to have that as a baseline. So as we talk to our partners there are a number of themes that are coming: One HP. We have got to get much more simplified globally in our relationship with our global distributors.

The PartnerOne program from a how we contract it, how we goal it, how we pay it, has to be a aligned to that strategic vision.

I will give you a good data point. If you think of GDP [Gross Domestic Product] growth the IT industry typically grows at a rate 2X what GDP is. And if you look at those partners historically that made a franchise bet on HP, because most of these are privately owned companies. They have to make a decision. This is coming out of their own money. They have to make a strategic bet on who they align with. Those that aligned with HP a handful of years ago in that best in class vision, this box versus that box, this versus that, realized material growth above the market. We saw growth rates in the mid-20s relative to GDP growth in the high single-digits. So those that invested in HP have realized great returns. Okay that is looking backwards.

Now looking forward, the portfolio being an end-to-end portfolio being much more applications centric, being very cloud centric, and by the way cloud, one of the things that HP is taking a really intelligent approach to the cloud is: cloud isn't going to be the same for Bank of America as it is for Jane's Pizza Shop. There are going to be pure play private clouds, pure play public clouds. There are going to be a lot of hybrid clouds. The fact of the matter is that the global world is going to evolve towards the cloud paradigm at different rates with different motivators, different drivers to the speed and pace and investment they are going to make in moving to the cloud. This fits in perfect for us because we can play that hybrid world. We can go the pure play world if the customer wants to completely transform and move to a different end state we can take them there right away or we can evolve them slowly to match their business evolution because some companies can't evolve overnight.

It is also true that there are going to be massive disruptors in the market. Heck, four years ago we didn't even talk Facebook. Now one out of every 15 people on the face of the earth is on Facebook. That opened up a new model, new concepts. That rate of change. The globalization of what we are doing. The consumerization of what we are doing. Look at how many of these whiz-bang fancy little appliances [handheld devices] are coming into corporations right now and corporations can't turn a blind eye and say - 'No this world of connected devices can't play.' They have got to figure out "How do I incorporate this into my business model? How do I look at these devices not as: is it binary compatible with Windows, but how do these devices amplify my business model?' So we have got a very unique opportunity right now. And who else is going to do this? Is Apple going to go to a partner community and say, 'This is how to do it?' Is IBM? IBM doesn't even play in the client side [of the business].

We have an opportunity to take an applications, a services, and experience architecture from the data center to the edge. But partners have to build practices around that.

Next: The Role Of Distribution In The Cloud How does distribution play in the cloud

Distribution plays a huge role in this. First of all one could argue ultimately distribution has to have a cloud strategy as well. The physical world is going to give way to the virtual world. And shoot, we used to sell packaged software in boxes that people used to put in warehouses. And that paradigm went away.

We work with a lot of companies that span that gamut from the data center to the edge. Let me give you a real life example: a very large bottling company that makes a very popular soft drink like many other companies has multiple sets of problems. One -- you have got a distribution issue. I have got to get my products to a bazillion points of presence. So I have got to do that outrageously efficiently. And when you think about doing that you are dealing with forecasting systems at the hub of the business, translating out to somebody who is sitting in a car driving somewhere.

And then they are going to get to a location and then there is a reconciliation of orders. There is a hand off, a financial exchange, and then the drive of that product out into the local community requires social infrastructure and networking and likely that store has very little capability, digital assets to go drive that conversion because it is a gas station or it is a 7-11. And so they want to be able to extend a social model over their retail network which drives higher conversion. So when you start thinking -- 'sounds great. Conceptually a slam dunk' -- Go do it. Make it happen!

Then you start saying there is an application transformation of legacy apps to modern apps. I have got my old bullet-proof enterprise apps that now have to be Webified if you will. You have got device issues because you are going to have to deal with the right screen in the right place at the right time. It is not a notebook or a desktop or a tablet or a phone. It is a screen that serves a purpose. And then you look at it and then you have got devices where you would like to have some intimacy between those devices so that you don't have non-technical people at the end of the application value chain having to deal with support, having to deal with things that break, having to deal with training people. That has all got to change.

Let me give you another data point. And I think this one speaks to the opportunity of partners and all the junk that was in the press the other day about: is HP trying to sell off its PC division? No, we are not trying to learn Korean and all that kind of stuff. I mean it is absurd. The device opportunity is massive and growing by leaps and bounds. And people that are saying the PC category is dying because of tablets really have a myopic view of technology. The bottom line is in the next handful of years most of the world is going to go online. It is estimated that of the world's 7 billion population more than 4 billion people will be online by the end of the decade. And hanging off that world of a lot of people -- we are talking a lot more than are on there right now- there is going to be 30 billion devices hung off that network.

Next: Facing A Challenging New World

You hear about HP and our partners selling tens of millions of PCs a year. We are talking about billions of live connected devices. Inside of that world of billions of connected devices there is going to be many billions of transactions that go on. It is estimated on a daily basis there will be more than 400 billion online commerce transactions everyday.

Look back a handful of years ago at some of the challenges [system] integrators had on Wall Street. It wasn't so long ago that you and I used to trade stocks. We are out of the equation now. Computers trade stocks. Algorythms trade stocks. And they now can do it a lot faster. They can look at a whole bunch of risk, analytics, make real time decisions and drive it. Compute cycles went through the roof. Storage went through the roof and large enterprises, big banks had to turn around and go, 'How do I capacity plan for this massive scale?'

I would tell you that the challenges that we faced at the beginning of this decade are dwarfed relative to the scale that we are going to have to support in that world I was just telling you about. So for partners, for manufacturers like HP, that world up there is massive relative to the world that we are in today. So our business model, our partner's business model has to be plotting a speed course to solve the problems of 2020 - not trying to hold on to a legacy model, trying to eek out a few more bucks on a server, or eek out a few more bucks on a PC. It has got to be about how do I wrap capabilities, experiences, applications around that opportunity?

Do you think they are up for it?

They have to be up for it. If you are not up for it your relevance will go away. I won't say you will die because in all industries there are laggards that survive. There are still companies that make pay phones but instead of everyone making pay phones, there is one company that makes pay phones.

Legacy markets will exist for some period of time because they have to run their natural course but if you are a partner and you are looking at your capabilities, you are looking at what your engineers have the capabilities to do, what solutions can you package together. If you don't have a vision and a set of skills and capabilities inside of your organization to drive toward that new world order, you will lose relevance in the market. From an HP perspective we recognize fully our position isn't assured. Moore's law is dead. It is not driving our industry anymore.

So if I look out at PSG partners who have been with us forever and ever and ever and have done a dynamite job in moving our gear. Our value proposition has been around quality, has been around delivery times, and responsiveness and engagement with the end customer. All very, very important stuff. We invested in the coverage. Look at the expansion in Rio Rancho that has given our SMBs VARs a huge shot in the arm because for once we are giving them leads. We are doing it hand in hand. And our investment dollars are driving through to their bottom line. But we haven't pitched a story to the PSG partner community that has been about value add beyond a basic infrastructure support service, help desk, TCO type support services, but in terms of transforming the user experience and bringing applications out to the edge. That hasn't been an area that we have historically invested in.

That just hasn't been in HP's portfolio. It is now squarely in our portfolio. So what would I encourage partners to do: just like partners that made the decision a handful of years ago to become a franchise partner of HP and leverage the investment, the billions of dollars that we invest and take their model and take the gaps and the areas inside of HP and run with it and build the business and the capabilities and the intimacy with the end customer.

Next: Incenting WebOS Application Development With PartnerOne

Talk about how you see HP's cloud channel program and professional services enablement strategy. How are you changing PartnerOne to empower the next generation services business model

There are a number of components of PartnerOne. First off obviously simplifying it. We need to spend less time trying to recreate the past and more time focused on the appropriate contracted model moving forward so that the incentive system is appropriately aligned and we are making those changes.

To your point about what specifically are we going to incent? We are going to incent learning and development so that people have the skills. Take WebOS as a perfect example. We are going to talk a lot about WebOS over the next handful of years and WebOS is going to grow and mature as any platform would.

That growth is going to be dependent on a development community extending the value proposition of WebOS to the bazillions of devices that I talked about and from the data center out. So just like you had to invest in becoming a CNE at Cisco or you had to invest in the organizational knowledge, we are going to put that same thrust out there. If partners decide this isn't for them it's a free country.

So what is the program. How much does HP put in the game? How much does the partner put in the game?

I can't give you the specifics right now because we are not closed on some of the specifics.

Talk about the Partner conference. What will be your message to partners?

Develop some apps.

So extend the model from the desktop to the enterprise.

Actually more from the enterprise to the desktop because that is where the legacy application transformation is going to take place. It goes back to the point I made before: we have never talked applications with our partners at any level from the distys all the way up through the direct marketers.

For all of the success of the iPad, and we all get it, 15 million units out the door, nobody is going to argue that hasn't been met with consumer success. And there is no question that we are seeing connected devices like an iPad move into the enterprise. It is being carried in. I want to use something like this. But if you think we are any further than late in the first inning or early in the second inning of this game it is absurd. The numbers speak for themelves. And besides this is a global environment not just a U.S. environment. And these tablets while they have hundreds of thousands of applications, look 50 farting apps does not necessarily define a platform upon which corporate America improves its productivity.

It is going to be about hard work, business transformation, application transformation,security at a level that is not some partial security solution, it has got to be industrial strength. And if people think that industrial strength and hot and sexy can't work together then they have been left in the eighties. We can do both. And we can create high consumer accepted, highly usable in line with the human experience and we can apply the application world to that. And we can train and culturize our partners to have the ability to extend the model.

I'll give you an example: we are working with a very large bank right now that wants to transform their interaction between somepone walking in a bank and a teller. We are working with a half dozen of the largest retail entities that want to transform the retail experience and create an integrated experience between the store and online. Women's clothing online has not been a great success story for a number of reasons. You want to look at it and make sure it fits right. We are working on virtual solutions that will allow you to do that online.

So when you think about the creation of that, the transformation of legacy apps, the transformation of in store experiences, the transformation of your Web model. Think about it. If you think about it, you don't spend money on anything over a couple of hundred bucks where you don't go on the web first and search.

So if you think you are going to compete on a global basis on price, on anything good luck to you because someone is always going to be cheaper in a completely open pricing world globally. So you are going to have to win on something other than price. And if you want to be profitable and you want to be able to compete, I would argue the traditional model of hey let's duke it out for a couple of bucks on a machine or a couple of bucks on a server in terms of that driving a strategic decision is going the way of the DoDo [bird]. And it is going to be replaced by 'How can I monetize relationships over a period of time through the capabitlies I deliver?'

Next: Competing Against Cisco On Application Specific Quality

But the biggest HP play right now is on networking competing 40 percent off on HP routers

I disagree with you. I am going to give you a weird metaphor. I think that Cisco lost its way on pricing. How much did you pay for a notebook in 2000? Somewhere around $2,500-$3,000. The sweet spot of the US retail consumer market right now is $599 and you are running an i3 with 4Gig Memory and a half a terabyte drive.

The evolution of a space as it got mature the average selling price came down because value was placed elsewhere. Networking, routing at the campus level, at the workgroup level, at the wide area level. Look, we are a lot further down that path than we were before. And I would argue networking isn't price per port. It is capability and it is being able to apply application specific quality and application surety from end to end. And Cisco plays in a spot. We play end-to-end. So the economics of networking have to be more -- and I don't want to say commoditized -- but where networking is in the world.

What is the biggest thing Leo has changed that you are pumped up about?

Leo is a very strategic thinker. I think he has put a lot of passion around strategy not just at an operational level which when you are at our scale, at $120 plus billion with a supply chain that is $80 billion and you sell two PCs every seconds, you have to be operationally savvy, but our strategy was very operationally tilted.

I think what Leo has brought is layered on top of that operational excellence is a vision around our technology footprint, a vision around the relationship with the end customer and a vision around one HP. And one HP does not mean we are going to centralize everything. But it does mean in global relationships like with global distributors or global customers that we are going to bring more unification of HP's efforts into those environments so that we get better economices and better execution. I think he has really brought that strategic push to the company.

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