Gambling on channel loyalty

The delicious irony of HP’s decision to officially launch its preferred partner programme (PPP) in Las Vegas should not be lost on anyone. While the underlying principles behind the new scheme are fundamentally sound, there is no getting away from the fact that it is also a gamble.

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By  Stuart Wilson Published  September 21, 2005

The delicious irony of HP’s decision to officially launch its preferred partner programme (PPP) in Las Vegas should not be lost on anyone. While the underlying principles behind the new scheme are fundamentally sound, there is no getting away from the fact that it is also a gamble.

Put simply, HP is betting big that the positive impact on the sales of the partners that make it to preferred partner status will outweigh the negative effect on those resellers that feel they are being excluded from benefits they previously would have received.

With margins shrinking for vendors and channel partners alike in the IT space, HP’s decision to launch PPP is a brave and necessary move and one that will ultimately be replicated by other major vendors. The big question remaining is whether or not HP is now prepared to sacrifice top line revenues for the sake of better bottom line margins under the new PPP scheme?

“Very clearly, the answer is yes,” says Christoph Schell, ISE SPO manager at HP. “This is what our new CEO Mark Hurd is saying. We have to be more selective in terms of the revenue that we are generating through the channel. By selective, we mean looking much more closely at the level of profitability being generated by particular revenue streams.”

This actually makes a great deal of sense. If anyone should appreciate the need to emphasise profitable revenue streams it is quite clearly distributors and resellers. Talk to the major distributors and they will tell you how easy it is to grow the top line if you’re prepared to sacrifice the bottom line. But selling for selling’s sake is not much fun if there’s no profits to show for it in the end.

HP’s PPP represents the cutting edge of channel rebate and incentive schemes. With the launch of this scheme, the emphasis on pure sales volume has been replaced by a clear focus on commitment, loyalty and a partner’s ability to sell across the entire portfolio.

Hazem Bazan, director channel sales SPO at HP Middle East, says: “This is a continuation of everything that we have in place for channel partners today. Looking at the market structure and the changes in channel dynamics, we saw that it was necessary to change our programmes as well. All the major vendors are now talking about the quality of partners, not just the quantity, whether it is in the volume, value or solution provider space. We will bring in new channel measurements related to loyalty.”

“We will recognise partners for their loyalty and HP’s ‘share of wallet’ and I don’t think this has been done before,” he adds. “It is also about predictable compensation for the channel — regardless of whether this is transactional margin or back-end rebate. What we want to create is a win-win situation of profitability for HP and profitability for committed HP partners as well.”

Let’s take a look at HP’s global numbers. Sales for the year ending July 2005 hit a whopping US$85.17 billion with after-tax profits coming in at US$3.07 billion — a profit margin of 3.6%.

Now, let’s say that HP bosses reckon that US$4 billion is the sort of profits they really should be pulling in. At current profit margins, annual sales would have to jump 25.8% year-on-year to US$111 billion — not an easy task given today’s fiercely competitive vendor landscape and the spending patterns in developed markets.

Is there an easier way to get to US$4 billion profits? Well, yes, there is actually. Raise profit margins by 1% and HP’s after-tax earnings would hit the target of US$4 billion profits even if revenues were actually flat year-on-year.

That’s what the PPP is all about. Getting committed partners to sell across the portfolio, build up the attach rates and making sure that these companies are not just pushing the products that are practically zero margin for HP and coupling them with high-end juicy profit products from other vendors.

HP is leading the way in taking channel rebate and incentive programmes to the next level and there is inevitably a degree of risk associated with being a trailblazer. When all is said and done, profitability for IT vendors and partners alike has now become more important than top line growth and PPP reflects this new channel reality.

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