All change

Hewlett-Packard is making major changes to its channel strategy in the Middle East and the rest of the world ahead of the planned merger with Compaq.

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By  Mark Sutton Published  March 7, 2002

HP poised for change|~||~||~|With regulatory approval secured, the merger of Hewlett-Packard and Compaq is now in the hands of the shareholders. But whether the vote goes in favour of Carly Fiorina’s vision of a merged IT giant or whether the dissenters get their way, HP’s channel is undergoing change, both here in the Middle East and the rest of the world.

On a global scale, a new merged company would have a much greater direct sales and services organisation than HP by itself, and Fiorina has said that although it is HP’s intention to leverage Compaq’s direct sales expertise for certain customer segments, any new company would still see the channel as very much a part of the deal.

“This is a company that cannot complete a customer solution without partners,” Fiorina told CRN US. “One of the things we will get out of this merger is that we’ll become the single largest player in the SMB market. It’s a segment that today represents 60-plus percent of our volume. It’s a segment we can’t address without channel partners.”

That view extends to specific product and solution areas, Fiorina said, adding that the merger would make HP the leading server, storage and network management software provider in the enterprise space.

“We need the channel and solution providers [in those areas],” she said. “In professional services, our consulting capabilities are very targeted. We need consulting partners to help us complete our value proposition. In outsourcing, we have channel partners coming to us and saying, ‘let us be your arms and legs. You go to the customer and provide assurance for quality of the capability and delivery, and let us provide you the resources to implement that capability.’ That’s a great deal for us and a great deal for the partner.”

||**||Controlling Middle East markets|~||~||~|In order to simplify the channel set up ahead of the deal, HP is making changes now. At present it has around 30 different solution provider contracts and 35 to 40 channel programmes for different products. These are all going to be integrated into a single programme, called partnerOne. The aim is to make life simpler for customers, allow HP to make business plans with partners on a quarterly basis, and to get a better idea of how partners are performing.

For the Middle East, there is one overall aim—simplification of channels. The company wants to increase the capabilities of the channel, while cutting back on unnecessary elements.

“In the US, for such a huge market, HP has just two wholesalers. They have 580 second tier partners—this is exactly the model we want to have in the Middle East, because these are the guys that are facing our customers,” Christoph Schell, commercial sales director of HP Middle East explained.

For the wholesale, volume business, HP has got the model right in the region, Schell believes. Although the company has nine wholesalers for the Middle East, these are necessary because of the diversification in the region, and the fact that no single wholesaler can possibly cover the whole region. The problem with the volume business comes from sub-distribution.

“Sub-distribution—if there is a guy between the wholesaler and the second tier, is unhealthy—for HP and for the customer. We are fighting this wherever we can,” he said.

Because of the location of the region, between the mature markets of Europe and Asia, and the number of small sub-distributors operating out of Jebel Ali, the grey market is a particular problem for HP in the region. Buyers taking advantage of international currency fluctuations, and the fact that distribution is still a comparatively lucrative business have led to the creation of a confused situation where grey marketing has thrived.

Asad Syed, wholesaler account manager, said that as much as 35-40% of the market was grey a couple of years ago, mainly due to the sub-distributors. To combat the problem, the company has pushed authorised local distributors into developing markets, and is trying to control pricing. Wholesalers are being offered end-of-quarter cash bonuses, to price out sub-distributors; while resellers are being offered cash incentives to buy from authorised channels under the Bonus Plus scheme. “We are pushing the wholesalers with the bonus, and pulling the resellers to them with their bonus, which has helped us cut the grey market to single figures,” Syed explained.

On the high-end business side HP is looking to bring more knowledge into the channel, through the appointment of a VAD. “Bringing [partners] up to speed doesn’t mean we want to ramp up the knowledge within HP,” said Schell. “We don’t want to create a cost overhead, so bringing in a VAD that is willing to invest in knowledge, in local technical consultants and business development managers, will help us dramatically.”

It has taken a while for HP to find a suitable VAD, but the deal will be announced later this month. In the end, said Schell, they had to go to a European partner and ask them to invest in the Middle East, as local distributors simply did not have the depth of expertise, or the cost structure to support the model.

“At this point in time we have appointed one [VAD]. We don’t believe in over-distribution. VAD business is different to distribution business. It is about knowledge, and the ability to sell your knowledge. You have to do business not at 2% [margin] but at 10%, because the knowledge is expensive, and I haven’t seen this in the Middle East,” Schell commented.

||**||Moves ahead of the merger|~||~||~|At present the new channel contracts and schemes are on a soft roll-out, and are due to come into force contractually by 1 May. In the mean time, HP’s channel team are working to put the new contract structures into place, and define areas of business for partners.
This may mean some partners being withdrawn from certain product lines, to try and get them to focus on their more profitable lines of business. Some of those partners that currently buy direct from HP will be transferred to the VAD as appropriate. The overall drive is to ensure a profitable business for everyone, while keeping a structure that will allow the absorption of Compaq’s channel.

“After the acquisition, HP will move back into silo thinking—it is the only way the integration can be made. You have to be profitable on a category by category level,” Schell said.

As far as absorbing Compaq’s channel goes, Schell believes that the structural changes put them in a good position to manage what will be a difficult task.

“The most difficult thing about this acquisition, from the sales point of view, is the channel consolidation. It will be very difficult and time consuming, to make the call, on who is in and who is out,” said Schell. “Since September last year, our phones haven’t stopped ringing, and I am sure Compaq’s phones have not stopped ringing; everybody wants to know what is going on, and that is fine, that’s fair. But we are very clear: We will not keep all contracts. We do not believe in over-distribution, on the volume and on the value side. And it is an outstanding opportunity for us to pick the best.”||**||

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