Distributors braced for HP rebate changes

HP CDPs and LSPs are preparing for potential back-end rebate cuts after preliminary details of the new preferred partner programme were circulated to major Middle East distributors. HP has moved quickly to reassure its first tier partners that overall compensation levels will not necessarily fall as a result.

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By  Stuart Wilson Published  October 27, 2005

HP CDPs and LSPs are preparing for potential back-end rebate cuts as preliminary details of the new preferred partner programme were circulated to major Middle East distributors. HP has moved quickly to reassure first-tier partners that overall compensation levels will not necessarily fall as a result. Preliminary details of HP's new preferred partner programme have been circulated to the vendor’s channel development partners (CDPs) and logistics service providers (LSPs) in the Middle East. Possible cuts in back-end rebates and aggressive sales targets are causing some consternation for distributors — despite reassurances from HP that the potential exists to make up any shortfall through transactional front-end margins. Hazem Bazan, HP Middle East SPO manager, urged distributors to wait for full details on changes to the compensation model: “HP always looks carefully at partner profitability before changing a programme. We plan to fully update the distributors in November. We have had very positive discussions with distributors and resellers in the last few days.” The reaction from distributors to the new programme has so far been mixed. “HP is saying that the back-end rebate comes down by 0.8% in absolute terms but the overall compensation stays the same,” said Adnan Al Falah, managing director at Tech Data Middle East. “HP is looking at different compensation elements between Europe and this region. We don’t need a re-engineered version of a European programme in the Middle East; we need a scheme specific to this region. The Achilles heel for HP is the regional sales quota in place and the tracking of the quota set,” he added. “Some of the rebate qualification is still performance-related, but the thresholds and quotas set will determine whether or not distributors can achieve the rebates. It will get tighter in this region because of the quotas. The chance of hitting the rebate targets will get less and less because HP is expecting sales to climb 25% quarter-on-quarter. It looks like higher volumes for less rewards while the chances of over-achieving decrease,” said Al Falah. While the targets may appear aggressive, Bazan insists that they remain realistic and achievable. “HP is the market leader in many product categories in the Middle East and we always set growth targets based on market forecasts from reputable industry analysts such as IDC,” he said. Channel consultants in Europe believe that the changes to HP’s back-end rebate structure for distributors signify a major change in policy. One consultant, who did not wish to be named, said: “This is the first step by HP towards driving down the back-end margin for distributors and making them much more dependent on making front-end margin.” “Currently, on average, most distributors make nothing on the front-end and make it all on the back-end through HP’s complex rebate structure. Basically, it looks like a reversal of the strategy that HP has been driving for the last four years,” he added. With HP only looking to pay target-related bonuses for distribution sales to unmanaged resellers — those not holding preferred partner status — finding out which resellers have made it to preferred status in the Middle East has taken on huge significance for the region’s distributors. With an increased emphasis on front-end transactional margin, distributors will need to stop their current policy of cutting front-end margins to the bone and relying almost totally on back-end rebates for profits.

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