The reality of rebates

Judging by the response from the channel community to HP’s restructuring of its rebate model, partners should be able to breathe a little easier in the difficult weeks ahead

Tags: Hewlett-Packard CompanyIncentive schemePartnerUSA
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By  Andrew Seymour Published  February 8, 2009

Judging by the response from the channel community to HP’s restructuring of its rebate model, partners should be able to breathe a little easier in the difficult weeks ahead. More importantly, the decision to change things is an indication of how imperative it is for vendors to implement channel reward programmes that reflect the market’s disposition.

The crux of HP’s Pay For Results (PFR) scheme up until this week was that distribution and reseller partners were given quarterly targets, and their ability to meet or exceed those targets determined how much they were paid in compensation.

During times of growth, this model has proved to be extremely effective, particularly for the vendor, as HP’s lead at the top of the Middle East PC and printer charts testifies. It is also lucrative for partners capable of managing the volume pressure placed upon them because the stronger they perform, the greater the incentive.

In times when the market is not as buoyant or less predictable, however, it doesn’t take long for the flaws of the model to become massively exposed.

If partners aren’t able to meet targets, they can’t claim any rebates. And when rebates often make a more telling contribution to their financial health than the margin earned from transactions, it results in one of two things happening.

The first is that the partner’s profitability is heavily reduced to the point where their existence is threatened, and the second is that they become so disillusioned they lose interest in the business, perhaps even switching allegiances to another brand.

Either way, both scenarios are not what HP, or any other vendor for that matter, wants to see.

HP partners say frank discussions took place with company management at an event for Preferred Partners in Monte Carlo during the fourth quarter last year, where it was made clear that with the economic situation worsening something serious had to be done.

Bearing that in mind, it has taken HP around three months to overhaul the compensation scheme in EMEA — fairly swift action for a vendor of its size, but hugely reflective, also, of the urgency of the situation.

HP may be resigned to seeing its revenues come under intense pressure during the coming months, but by restructuring PFR it has at least levelled the playing field for partners and built in a degree of predictability that will shore up channel profitability.

The new structure introduced this week means distributors are no longer compensated on quarterly sell-out targets — but rather actual sell-in data — which should leave them under less pressure to accept stock they know they’ll have trouble shifting. Reseller targets have also been dropped in favour of a model that pays a quarterly fixed percentage for every dollar of business transacted.

It will be interesting to observe if the new structure, which HP insists is not just a stopgap arrangement until the market picks up but its de-facto rebate model going forward, will also curb some of the behaviour that has plagued the HP channel for so long.

By making revenue streams more predictable and giving partners greater autonomy in forecasting the capacity of the market, incidents of aggressive pricing at quarter-end and inventory build-up may become less severe. Theoretically at least.

It now remains to be seen whether other manufacturers follow suit. The majority of HP’s competitors in the PC sector are understood to employ rebate programmes tuned to sell-out anyway, but there are still plenty of vendors putting emphasis on target-based incentives for partners.

With sales visibility showing few signs of improvement and partners insistent that principals routinely over-estimate the true size of the Middle East market, HP is unlikely to be the last vendor that accepts an effective rebate system must embody the realities of conditions in the channel.

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