CRN Interview: HP CEO Mark Hurd On His Plans For the Channel

Moving into his second year at the helm of technology giant Hewlett-Packard, CEO Mark Hurd sat down with Robert Faletra, CMP Channel Group president and CRN columnist, for an unprecedented conversation about where the channel fits into his long-term plan. Following are edited excerpts of that discussion, including Hurd’s thoughts about HP's new channel program to increase the percentage of HP products that solution providers sell in a solution.

Faletra: From an attach-rate issue, the argument out there has always been that you have to be competitive. I can put the HP peripherals or anything I want to attach to it, but if it puts me in a position where I'm trying to deliver a solution and it's not price-competitive…

Hurd: Then shame on us. Because our job is to have our products competitive as point products and competitive as bundles. And frankly we want to put more energy behind that attach. Let's say we're going to put this economic hook in place so that you represent these poorly positioned products to the marketplace. Our objective is to say, "We think we've got great products, and we want to put incentives for aligning those products together to put a better configuration, a better basket of goods if you will, in front of the end customer.

Faletra: Can you talk a little bit about when you first came in here, and you were looking at the direct vs. the indirect. What were the metrics you were looking at? And I'll just give you an example: A number of years ago, IBM did a very in-depth analysis on direct vs. indirect, just in the PC space, because everyone said direct was absolutely more profitable. And they went out and did little things like, OK, if that ad in that newspaper is really driven to get somebody to buy direct, then we'd better assign that cost to the direct side of the business. So when they did all of that, in the PC space, they found it was less than one percentage point difference. Obviously, you did this over a much larger product set. Are there places where you say, as you really look at the data, that the channel is more profitable for us and are there places where direct is more profitable?

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Hurd: You can find data to support any thesis. You've got to be careful to normalize the data. For example, it would be unfair for us to say our cost of an order direct is more expensive than the cost of an order indirect if we didn't normalize the volume. Today, the cost of an order for us indirect is actually less expensive than the cost of an order direct. But the bulk of our business is not direct. So you have to go normalize it and say, listen, in a normalized state what would the two look like?

So for example we get tremendous cash-flow turns by dealing with our partners. It's different when you go direct because you actually have to have more people shipping and packing more orders. So when I sell you a PC one at a time, I have to go collect for that PC. When I sell you a thousand PCs and then you sell them one at a time, I'm going to send you one bill for a thousand PCs. I've lowered my administrative overhead. So you've got to get through all that process and understand what is the true infrastructure overhead that you've got to go serve that customer or that partner.

We somehow had ourselves convinced that a person deployed in the marketplace had to sell direct as opposed to creating demand for Hewlett-Packard. We want people in the marketplace creating demand for Hewlett-Packard. Then we can decide what the appropriate route is to get that demand fulfilled. But in the end, we need to make sure we've got the marketplace covered, so that the buying points on the planet that make sense for HP have some sort of demand-creation expertise.

NEXT: Direct vs. indirect

Faletra : Well that's kind of an interesting point, because one of the things you will hear out there is that some solution providers will tell you that HP doesn't have as many people on the street as some others to help them sell. But what you're really saying is if you have someone out there just creating demand, you actually get a bigger benefit out of that than having somebody just dedicated to creating demand for channel or creating demand for direct sales.

Hurd: I agree at a macro level, very generalized without any specifics, I agree with that view, that we have too few people out in the marketplace with a Hewlett-Packard badge creating demand for HP products. And we're going to go fix that. So we're investing in sales people today. That said, I don't want that message to be perceived that we're trying to eliminate the channel as we put people out there. That's not the message at all. We're trying to create more demand for HP. And as I explain in individual partner meetings, I get partners who say, 'This is great!' But sometimes it's interpreted as we're trying to come be in conflict with our partners. That's not the case. If we're in conflict with a partner, it'll be a different issue from this.

Faletra: So are there some markets where it makes more sense to go direct for you than it does through an indirect model?

Hurd: I don't know that I would define it as markets. I think it's better if we define it a bit more by customer. Clearly in SMB, you're going to see us very, very reliant on the channel.

Faletra: What do you mean when you say SMB? Because everybody's got a different explanation.

Hurd: All but the biggest 2,000 accounts. We're going to be almost exclusively channel-oriented through that market. I mean, if a customer said, you've absolutely got to do this direct or they're going to go to or something, that's fine. We want to put multiple distribution methods so the customer can choose. We're not going to dictate in entirety how they do it. But our predominant view is going to be to leverage the channel.

I think when you get into the big accounts, we're actually going to go put more energy into those big accounts and we're going to try to do account plans for those accounts that map partners into those accounts. So I think you're going to find more -- I think the right word for it is more specificity by account the roles those partners play in those accounts. Whereas SMB is probably going to be more market-oriented. We really have to have those partners driving on that small and medium business. It becomes a pretty broad definition because we can define it from a micro business -- that one to 10 seats all the way up to something that falls below the actual top 2,000 or top 3,000 accounts. And that's a ton of business for Hewlett-Packard. A ton of our business sits in that raw definition of SMB.

NEXT: Partner compensation and attach rates

Faletra: Talk a little bit about compensation. This new channel program to me is really a compensation program ultimately. And compensation drives behavior. It drives behavior with a direct sales force; it drives behavior with an indirect sales force. And this is pretty innovative from what I see.

Hurd: I don't think compensation is the only thing that drives behavior. If you went into your own employees, you could ask the question. And I look at the majority of the partners as a very direct extension of Hewlett-Packard. And compensation isn't the No. 1 thing that drives our employees. Sometimes they say it is, but in the end it's being part of a winning team. When you're part of a winning team, we all know, go look at an analogy of a sports team. There are plenty of examples of people who take a cut in pay so they can be on a team that wins the Superbowl. Why do they do that? They like to win. So you can't show up with just a compensation plan. You’ve got to show up with winning products. You’ve got to show up with a winning environment, where partners feel like they can go to the marketplace and they can win.

So one of the real risks you have when you go through the channel -- there's very few of these, but we actually have a few bad actors. If they use our brand as the lead, fill it up with non-HP product, so they can get more margin, but what sits in front of that consumer is the HP brand, then what happens is a huge failure rate in that product. We take a lot of accountability for that. So one dimension that gets some of the direct mania that you see out there is better control structure over all that. I have better control structure over the elements of the solution that go to the customer, I have better control over the support that goes to the customer, and I can align that behavior directly. When you're indirect, you're a little bit more removed. You've got to bank on your partners doing the right thing, and most of ours do.

Faletra: Obviously there's nothing wrong with any company wanting its solution provider partners to sell more of its product. I mean that's kind of a basic tenet of business. But what do you say about somebody who's doing maybe $100 million or more in HP but has large practices in some of your competitors? Is it any different for them than for anyone who might be 100 percent-dedicated to HP and maybe smaller?

Hurd: Well, we think it's easier if you're 100 percent-dedicated to HP. But the world isn't 100 percent HP. We'd like it to be. But I think it's not an objective for at least my tenure. But yeah, we have to deal with a world that's mixed but partners have to decide. To get back to your earlier point, our compensation program in isolation isn't going to drive anybody to buy, by definition, more HP. It's got to be because our products and solutions and our support are compelling. So in the end that's what's going to be the primary driver. I think all the compensation program tries to do is get them more engaged with HP.

We want to make sure you understand the things that motivate us -- the things that motivate us that we think also in the end are the best for our customers. I tried to give some examples of that. And align our behavior and compensation appropriately. I don't think that means that a partner has to say, by definition, ’I'm going to drop every other product line I've got.’ Because if those product lines are still the best for the customer, the solution partner is going to decide.

NEXT: Certifications and the enterprise market

Faletra: Can you talk a little bit about the higher end of the market now and the enterprise accounts? I think you had 56 enterprise solution providers that got mapped into that group last November or so. What's happening there? Some of them will tell you that they haven't really had enough engagement with HP in those accounts yet. They haven't been engaged enough. Is there something happening there?

Hurd: There's a lot of work going on in our sales force right now. In the enterprise, using your term, we created a new chief sales officer. We're doing a lot of work right now. When you go build our go-to-market model, we focus first on the earlier point: deployment. Are we hitting the right buying points? Very frankly, to your point, when you go get those enterprise partners mapped, they have to map in, and you can get a very different set of behavior depending on what accounts you're mapping into. And we've got to normalize that.

Faletra: I moderated a panel a week or two ago. One of the interesting things that came out of that panel was one of the vendors said, 'Hey all you really need to do to see if anything's going to change is say to yourself, is the certification process a cost for the vendor or is it a revenue generator?' Which is an interesting way to look at it. What should it be, from an HP perspective?

Hurd: It's certainly also a cost avoidance. In the sense that theoretically as you're trained and certified, you'll make sure we represent certified solutions to customers because the impact if you don't -- we can tell you in numbers what happens to us from a support perspective.

Faletra: But just fundamentally, should it be a cost center to HP to do that certification, or should it be neutral, or should it be quite frankly a revenue generator? Should the solution providers have to pay, and HP actually make money on that certification?

Hurd: No, I don't think we look on it as a profit center.

Faletra: If you're going to drive one message to your channel partners, what do you really want to say to them? What are you trying to do here?

Hurd: We need you. We can't get to every buying point. And even when we get to every buying point, we can't bring every solution. So we need help. We look at the channel as a strategic advantage and not as a strategic problem. The issue for us, though, is to make sure we get as aligned as we possibly can with our channel so that we eventually go and scale our business together in a way that's not only profitable for both of us but leaves a bunch of doggone happy customers at the end that are going to wind up doing more business with us.