IT vendors embrace channel partners

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After years trying to bypass sales channels and sell direct to customers, information technology vendors are now reversing the trend and looking to build relationships with channel partners.

Even Dell Computer Corp., Round Rock, Texas, is getting into the act. The PC maker, famous for its world-class direct sales, in August introduced a so-called “white box” PC—a computer that will carry the brand of the channel partner who sells it to customers. The white box PC from Dell will be targeted at companies with 100 employees or less. Dell estimates about half of companies that size buy white box PCs rather than a brand-name system.

Microsoft Corp. said in July it plans to invest an additional $500 million in the channel in the current and next fiscal year, on top of the $1 billion per year it’s already committed to investing.

Companies that sell exclusively direct are missing out on an opportunity to offer end-users not just products but also “solutions”—an IT industry buzzword meaning whole suites of products, plus training and support.

Whereas a product vendor sells PCs, a solutions vendor sells PCs, networks and servers, not to mention software, training and maintenance.

A direct-sales-oriented company will miss out on all those would-you-like-fries-with-that revenue opportunities, according to Janet Waxman, an analyst with IDC.

According to IDC, channel sales will account for about half of the $1.1 trillion in information technology sales next year.

Myth of ‘disintermediation’

Major IT vendors pursued aggressive direct sales strategies in the 1990s, squeezing out their channel partners, Waxman said. IT vendors bought into the dot-com myth of “disintermediation”—that customers would buy directly from manufacturers, and middlemen such as IT solutions providers and retail stores would be put out of business by the Internet.

But it turned out that customers liked doing business with the channel. And that applied to computer technology, just as it did to pet food and travel services and other categories. So much for the dot-com pundits who predicted the demise of the channel in favor of direct sales.

“I expect corn flakes to be at the store; I don’t expect the Kellogg’s Corn Flakes guy to show up at my door and sell me corn flakes direct,” Waxman said.

IDC and public relations firm Ketchum, New York, in July announced ChannelEdge, an alliance to help technology vendors improve marketing and communications with channel partners.

Dell’s White Box

Introduction of the White Box D510 isn’t entirely an about-face for Dell. The company has always had significant sales through the channel. But unlike other PC vendors, such as IBM Corp. and Hewlett-Packard Co., it hasn’t had extensive channel marketing and a support program. Instead, it relies on marketing directly to the end-customer, although it will accommodate buyers who want to work with a particular Dell channel partner.

Despite the White Box initiative, Dell will not go whole-hog for channel support, said Amy King, public relations manager for Dell. For instance, the company plans no joint marketing with channel partners. Instead, it will treat these companies as another type of end-customer, and market directly to them.

To promote the initiative, Dell will run advertising in target publications, send direct mail and have a presence at key trade shows and conferences. The campaign will be aimed at reaching solution providers who act as IT departments for small businesses. Dell would not comment on the amount of money that it plans to devote to the campaign.

While the U.S. white box desktop market is about $3 billion, Dell expects its opportunity to be relatively small, less than 1% of its overall revenue.

Hewlett-Packard, Palo Alto, Calif., has been attempting to balance marketing and communications for two multibillion-dollar channels—its own and the channel it inherited when it acquired Compaq Computer Corp., Houston, earlier this year.

The merger was a marketing whitewater ride. The two companies announced plans to merge in late August 2001. A couple of weeks later, however, the events of Sept. 11 put a virtual halt to business across the nation for about a week. In the following months, while the country flirted with recession, the technology industry fell into a full-blown depression.

On top of that, HP’s and Compaq’s management teams faced a bitter shareholder battle with the families of HP’s founders, who opposed the deal. And marketing was handicapped by the Securities and Exchange Commission (SEC), which sets strict limits on what kinds of information public companies can release during a merger.

Helpful controversy

Putting the best face on the situation, HP executives now argue the controversy drew public attention to the merger and may have given the companies a more attentive audience for getting their messages out.

“As a result [of the controversy] HP went into the merger more prepared, and customers were more aware of what was coming towards them,” said Patrick Eitenbichler, HP partner-marketing manager. He added, “You didn’t hear me say that I encouraged [the controversy], but I think HP made the best of it.”

Tactically, the shareholder fight also forced HP and Compaq to do their homework regarding channel issues.

Company CEOs and other top executives met with channel partners, big customers and other stakeholders on a 20-city tour. Executives worked on and communicated detailed product roadmaps. When the merger was completed in May, HP promised no changes to its channel programs for 90 days, and then, precisely on time, the company unveiled a new program that combined about 40 different channel programs for both companies. HP and Compaq held, and continue to hold, regular focus groups, meeting with channel partners to go over key issues.

“HP is doing a good job,” said John Wood, VP-sales for IT reseller Derive Technologies, New York. “Communications coming into our organization has been plentiful. As information is deployed to the reps, they make sure they deliver whatever information they have,” Wood said.

The common wisdom during the dot-com boom was that the channel was a useless middleman, adding a layer of cost and preventing manufacturers from building direct relationships with customers. Today, IT vendors increasingly see the channel as important, providing services such as network design, training, deployment and maintenance on top of the products the vendors sell.

Moreover, happy channel partners help promote a vendor’s wares.

“We are becoming more capable companies in our own right, and we’re able to very effectively influence the customer one way or another on what products they should buy,” said John Sheaffer, president of solutions provider Sysix Cos., Westmont, Ill.

Sysix is a channel for products from about a dozen major vendors, including HP; Sun Microsystems Inc., Palo Alto, Calif.; IBM, Armonk, N.Y.; Cisco Systems Inc., San Jose, Calif.; and EMC Corp., Hopkinton, Mass.

Room for improvement

Sheaffer said he is mostly happy with the information he gets from vendors, but there is room for improvement.

“I wish they would look at us more as a customer, as opposed to a channel. We move their product,” he said. “As a large channel partner, I certainly would like to have more proactive communications with the vendors, to make sure that I’m steering the business accordingly. We need time to react.”

Chief among his concerns: vendors who pit their own sales forces in direct competition with channel partners.

That’s not to say that vendors should swear off direct sales, but they should pick their spots and not try to sell to the same customers that channel partners are trying to sell to, said IDC’s Waxman.

“A channel partner once said that working the channel is like a game of musical chairs,” she said. “ ‘We, the channel partners, understand that the vendors get a chair. Until we know which is the vendor’s chair, we don’t know which chairs we can get.’”

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