HP’s channel balancing act

HP CEO Carly Fiorina certainly wants to put the wind up direct sales star Dell. 'It would be inaccurate to describe our direct push as plateaued,' Fiorina says. 'We have a lot more potential in terms of using that direct engine frankly not just for PCs but for other products as well. I would describe our direct push as continuing to gather momentum.'

It is hard to ignore words from the very horse's mouth. In Australia, the giant vendor has been somewhat cagey at times about its strategy. If Fiorina's words are any guide, HP's direct strategy is having an effect. Recent fiscal results suggest HP globally has been putting some serious pressure on Dell's core business for three quarters in a row. And the channel is watching.

HP's recent earnings have been in line with expectations of US34 cents per share on a 12 percent increase in sales to US$20.1 billion for its second fiscal quarter ended 30 April. Second half fiscal 2004 sales estimates were revised upwards slightly to US$39.7 billion to US$40.7 billion. HP shares were trading in June at around US$20.75.

HP's Personal Systems Group (PSG) reported an operating profit of US$45 million on a 17 percent increase in sales to US$6.0 billion, up from US$23 million in the year ago quarter. And it has announced plans to further slash operating and supply chain costs to better fight Dell. Channel partners are sitting up and taking notice.

Michael Sager, PC hardware market analyst at IDC, says HP's performance here is strong too. Quarter-on-quarter, its shipments of notebooks, desktops and smart handhelds have increased 17.1 percent. Year-on-year, its total PC growth was 8.9 percent.
'If you're looking at that 17.1 percent figure, the total PC market in that time was 15.2 percent – that's not bad. Year-on-year total [for all vendors] was 22.7 percent, compared to HP's 8.9 percent,' he says. '[HP] has been and still is number one.'

Compared with other leading brands in that market – such as Dell, IBM and Apple – HP has done exceptionally well, especially considering the merger with Compaq was only about two years ago, he says. The company is certainly solid.
'Notebooks for HP did really well in the first quarter [of 2004]. And their smart [pen-based, not converged] handheld devices have done really well over the past year,' Sager continues.

HP's first quarter saw it take 60.2 percent – up from 40.6 percent – of the declining handheld market. Yet in the pivotal notebook sector, HP is second only to Toshiba, last quarter growing sales a whopping 64.6 percent. Year-on-year, HP notebook sales grew 51 percent – compared to the total market's 48 percent, he says. 'If you look at mobility, HP is one of the more preferred vendors. End users see HP as well up the front,' Sager says.

It is not all about hardware, either. Services has been flagged over and over by HP Australia in the last year as an important area for further development and growth. Fiorina says HP's services growth will come from organic increases and smaller acquisitions. 'We continue to believe that most of the very large players out there have structural issues that we don't want to take on as the services market continues to transform,' she says.
'However, there are a lot of smaller local or regional players, and in many cases an internal IT shop within a customer's organisation that also does work for that customer's partners or suppliers can be a possible small acquisition as well.'

Philip Allen, senior services analyst at IDC, says HP's services growth has been good over the past few years. However, HP would not permit him to give [ita]CRN[end] any figures or percentages backing that claim up. Allen tried to argue the point with HP, but no dice. 'But the comment I'm getting back from the community is that HP is very active and has quite an aggressive sales focus,' he says.

Mid-tier services business in verticals such as manufacturing and communications coupled with an infrastructure-led approach has been strong for HP. In revenue terms, more than half of HP's Australian services revenue is support, less than 30 percent outsourcing and about 17 percent is consulting and integration.
'So their actual services business is nothing like the scale of that of companies such as IBM, CSC and EDS,' Allen says. 'Overall, the shape of [HP's] business looks like IBM's eight years ago.'

HP's global results, available online, show that its managed services grew 21 percent and customer support 8 percent, year-on-year, from the third quarter of 2002 to the same period in 2003. Services 'returned to double-digit profitability' for HP that quarter, Fiorina has said.

In the first quarter of 2004, HP services revenue growth slowed to 6 percent year-on-year. Services accounted for US$3.2 billion of the company's US$19.5 billion revenue that quarter. Managed services still did well, recording 27 percent growth year-on-year. Fiorina at the time blamed the decline on intensifying price pressures, and a weak consulting and integration industry.

Imaging and Printing and Enterprise Systems also did well globally in the quarter, posting 12 percent and 5 percent growth year-on-year respectively.

Win some, lose some

So what effect has all this success had on HP's channel? Impressions locally are mixed, and for various reasons. Some local partners have felt left out. Some are understandably bitter after receiving 'realignment' notices from HP late last year.

Colin Pederson, owner of reseller ComputerLand in Hobart, Tasmania, lost his direct relationship with HP in December last year. '[HP] decided that ComputerLand wouldn't be a direct reseller any more – $8 million per year [in HP sales] wasn't enough to be direct,' he said. As a result, the company has been forced to buy through distribution, which adds 'work to the process', Pederson says.

He cites a recent potential deal with the University of Tasmania. The university had been seeking a supplier for desktop printers. 'I couldn't engage HP because they didn't have enough resources,' he says. 'They're disorganised and not reseller-centric, if you ask me. Our sales guys don't get any love out of HP anymore,' Pederson says.

One of Australia's largest HP resellers, Leading Solutions, struck a direct reseller deal with rival leading notebook-maker Toshiba in December. The company has been an HP-only hardware reseller since its conception 15 years ago.

Managing director Frank Colli says he wants to reduce its reliance on one single hardware vendor partner. He plans to add yet another as-yet-unnamed vendor to Leading Solutions' books in August.
'We're going to do a huge launch next month about introducing some new vendors,' Colli says. 'We've been HP-focused for 15 years, but now we're going to have a very aggressive strategy to supply [more products]. We put Toshiba on and we're going to drive that further.'

Colli met with representatives of HP's IPG division in June and was informed of certain changes within that division that he claims will negatively affect HP partners. 'Certainly on the IPG side, this is going to [have] a very negative impact on the channel,' he says.

HP's Imaging and Printing division (IPG) has announced it will sell direct to 200 of its top customers in a new Corporate Account Program (CAP) aimed at maintaining its share in the 'converged' printer and copier market.

The vendor is using CAP to target customers directly that sp