Cover Story
Man Of The Moment
 In an interview with CRN Executive Editor Dhaval Valia, HP India’s Vice President, Personal Systems Group, Sunil Dutt, explains the objectives behind the group’s new go-to-market strategy and clears the confusion surrounding its controversial new distribution model
There has been much speculation about the new go-to-market strategy being implemented by HP PSG after you came on board. Many HP partners are upset with the new distribution model and allege that you have sidelined them in favor of the telecom channel.
Let me start from the beginning. I came on board to head HP PSG in November 2009. Soon after joining, I set out to understand the dynamics of the PSG business and the channel ecosystem. Over the next couple of months I met close to 100 HP partners including national distributors, sub-distributors, retailers and business partners.
One constant feedback I got from all types of partners was, ‘While HP is a great brand with great products and strong customer pull, we (partners) aren’t making money selling HP PCs.’
Retailers said they were never sure if the price at which they bought an HP PC from their supplier was the same as the price the retailer next door got. Price discounting had become the norm, and instead of depending on the value proposition which the HP brand, and the partner could offer the customer, every channel sale depended on price discounting and on how well a partner could negotiate prices with his supplier.
Our national distributors had become mere fulfillment agents because the lack of profitability in the HP business didn’t provide them with the motivation to offer true value-additions. Partners didn’t see a reason to invest in HP business because it didn’t provide an adequate return on capital employed.
The challenge for HP was therefore to evolve a strategy where channel profitability took center-stage. The new distribution model has been devised to ensure that everyone in the channel makes healthy and assured margins.
With the new structure and systems, no longer shall the market operating price depend on the volume of business a partner does. It allows partners to focus on creating a strong value proposition for customers rather than spending time negotiating prices with suppliers. With assured margins, the distribution partners will be encouraged to deploy more resources for channel engagement and market expansion of their HP business.
Could you elaborate on the key aspects of the new model? Is it true that you have replaced many IT partners with telecom partners?
Let me first focus on the consumer business because that’s where we have made major changes. For this business, we have moved away from the national distribution model to a zonal distribution model.
We have appointed 12 zonal distributors (ZDs) or T1 partners across the country. These include three IT partners—Ingram, Savex and Redington—and nine telecom distributors.
Each zone has been divided into multiple regions based on their local dynamics and potential. In each of these regions we have appointed T2 partners, whom we call RDS (re-distributors/stockists). The RDS will buy from their respective ZDs and sell in the regions they intend to work in.
HP will directly bill the ZDs who will bill RDS who will in turn sell to the consumer-facing resellers (T3 channels). So far the 12 ZDs have appointed 150 RDS.
To answer your question about HP showing a bias for telecom distributors, let me point out that only 30 of the total RDS appointed so far are from alternate channels, while the remaining 120 are partners from the IT segment.
Further, out of the 30 RDS from alternate segments, 15 are from either the FMCG or consumer electronics (CE) channel, and 15 are from the telecom channel. Hence, the notion of being biased in favor of the telecom channel isn’t true.
Perhaps the notion arose because nine of the 12 ZDs are from the telecom channel. Consequently, many believe that the telecom ZDs will give preference to telecom retailers.
Telecom distributors were never the first choice for the position of ZDs. We had invited many of our leading sub-distributors to become ZDs.
My team must have met at least 100 sub-distributors to explore a ZD relationship with them.
However, most of them said that their business model was highly dependent on distribution credit, and that they weren’t keen on extending distribution credit themselves. For this reason, many of them chose to become RDS. For instance, in Delhi, we had invited both Aadhaar Computers and SAN Computers to become ZDs, but they said they were more comfortable being RDS.
Many volume partners have alleged that HP purposely introduced a vendor exclusivity clause in the RDS agreement to make it impossible for them to sign up. Positive Systems in Kerala was keen to sign up as an RDS but couldn’t because it wasn’t in a position to accept the exclusivity terms since it is also an authorized volume partner for other PC brands. Positive also says that HP laid a condition that Positive could re-distribute the product only in one of the three regions created in Kerala, whereas it has so far been redistributing HP PCs across Kerala.
HP never made brand exclusivity a precondition for any of its T1 and T2 partners.
If you ensure better profitability and growth for your partners they will automatically do more business for your brand. And if HP isn’t offering that, channels will push brands which make better business sense.
About region-specific exclusivity, HP and ZDs have jointly identified the RDS based on their suitability and strengths. But the call to align a particular RDS to a particular region is that of the ZD. He can decide if an RDS can sell in more than one region. Thus, an RDS can sell in more than one region depending on how the ZD wants to model the PSG business in his territory.
Even though you say that brand exclusivity isn’t mandatory in the new order, the ZDs and RDS we have spoken to have said that it is. We also have a partner communication from an HP RSM which clearly mentions that to become RDS partners will have to give up other competing brands and focus only on HP.
If that’s the case, it isn’t at all desirable. Categorically, we have no policy which requires T1 and T2 partners to exclusively sell HP and give up competing brands. It is preferable, but not a rule.
We are choosing our RDS based on their market strengths and whether they meet the criteria set by HP. Hence, if there is a RDS who is willing to bring great value to HP business but wants to continue with the business model of pushing other brands too we have absolutely no issues with that.
In the coming days I am scheduled to meet up with many partners who have raised issues regarding the new policy, and clearly explain to them the policy framework. Kerala is the state from where we have had the maximum partner queries and issues, and I have already planned a meeting with the partner community there.
Many HP World partners who also own multi-brand outlets complain that the local HP managers have asked them to convert their multi-brand stores to HP World outlets. Is that a norm or is it again an issue of miscommunication?
Even in this case we have no rule which states that HP World partners who also have multi-brand stores need to convert them to HP World stores.
However, we want to ensure that such partners do not get an undue advantage over other multi-brand retailers. As you know, in return for their exclusivity, HP World partners get greater support from HP in terms of incentives, market development funds, advertising and the like, and hence we have to ensure that partners having both HP World and multi-brand outlets don’t use the support meant for HP World for their multi-brand retail business.
Keeping this in mind, we have invited many HP Worlds with multi-brand stores to become HP exclusive partners. Whether or not they want to is their decision and we don’t intend to force it.
Is it true that under the new rules of engagement RDS will not be allowed to carry out retail business and vice-versa?
The answer to this question is also a big NO. On the contrary, in my experience, sub-distributors can be good retailers. In some cases, I have seen even retailers moving to sub-distribution and doing justice to the business.
Even some T1 partners feel they have got a raw deal. Redington, for instance, recently issued a notice to SEBI that the changes made by HP PSG in the consumer business will negatively impact its revenue by Rs 130 crore in FY2010-11.
I am aware of the notice from Redington. Honestly, the figure is overstated. We, along with Redington, have jointly done the analysis, and the revenue impact is much lower than what Redington has stated. Perhaps, being a public company, they preferred to be cautious.
Do you think HP can force the new model on distributors? On the contrary, the entire process of deciding the distribution structure and portfolio allocation was finalized with the consensus of the T1 partners. We shared with them the framework of the new structure and our growth strategy, and invited them to suggest the role they would like to play.
Savex, for instance, said that they weren’t keen on doing commercial business, and instead wanted to focus entirely on consumer products. With their pan-India network, they made a strong case for servicing all HP World outlets in one consistent way across the country. After analyzing their idea, we appointed them as an exclusive distributor for HP World partners.
Similarly, Ingram Micro demonstrated keenness for servicing the LFR segment. They took up the responsibility of the ZD for Andhra Pradesh because they want to improve their market penetration in that state.
Redington got the Tamil Nadu and Kerala zone based on its interest and market strength.
While there is always some give-and-take in such matters, I believe that all our T1 partners are happy with their portfolio. In fact, we have done growth planning for the next three years with each of the T1 partners.
While there might be some impact on the topline in the first few months because the new structure and systems came into play only in June, starting November 2010, which is the start of HP’s fiscal, all our distributors will start seeing topline growth as per the devised growth plans, along with improved bottomlines.
Let us return to a key aspect of your consumer strategy, that of providing assured margins to partners. It’s the toughest part considering the amount of discounting happening in the HP channels for the past couple of years.
Channel profitability is the core of the new consumer channel strategy. To ensure assured partner margins, we have introduced a base-pricing model. Let me explain with an example.
Let’s assume we bill a certain product to T1 distributors at Rs 100. Under the fixed base-price model, all T1 partners will have to bill that product to their T2 at a fixed price of Rs 103.5 for a 3.5 percent margin markup.
Similarly, all RDS will bill the product to their respective T3 partners at a fixed base price with a margin markup of 3.5 percent.
Hence retailers across different cities and zones will be billed roughly at Rs 107 for the product irrespective of the volume.
With assured front-end margins on every product billed, we have removed the back-end incentive for T1 and T2 partners.
The retailer is free to sell at any price between his billing price and the MRP. He may choose to sell a PC, billed to him at Rs 30,000, at Rs 31,000 or Rs 32,000 or at the MRP. The price at which the retailer sells the PC will depend on the premium he can extract based on the value proposition he offers his customers, his business strategy, and the competitive dynamics of the local market he operates in.
T3 partners, including HP Worlds, will also get a good back-end incentive which will be a combination of cash component and funds for market development activities. Of course HP Worlds will get higher back-end support than non-exclusive partners.
But is managing a standard base price at T1 and T2 level realistic? The ZD partners have businesses of different sizes, hence they have different cost structures. The scale and business model of Ingram is very different from Priyanka, your ZD for Mumbai.
Again, let me emphasize that the base-pricing system was not created in isolation. Base prices have been finalized in consultation with T1 and T2 partners. All the factors of all distribution partners were taken into consideration to finalize the base prices for different models.
I agree that the cost of capital for a company of the size of Ingram could be substantially lower than for a Priyanka Telecom. But at the same time, compared to Priyanka, Ingram has a higher cost structure when it comes to people, warehousing, etc. So, somewhere, the cost structure balances out for partners of different sizes.
We hear that HP is planning to put in place systems and tools to ensure that everyone in the value chain complies with the base pricing and territory assigned to them, and that you will be taking strict action against those who breach the rules.
It’s true that we are putting in place a system whereby we will capture daily the sell-outs by models and stocks at the T1 and T2 level. But the purpose of the system is not to monitor if partners are following the rules but rather to help us in planning and forecasting better. Using this information we can get demand patterns, plan our marketing money better, manage price drops, and improve inventory management.
On the consumer side too we have introduced a program called HP First for the same reason. Under this program, T3 partners are incentivized for registering every sale online and providing us end-customer details. They could win incentives worth 0.5 to 1 percent of the price of the PC. This may include cash incentives or even freebies like carry-cases. The incentives could vary every week and by models.
Another major change in your consumer business model is the reduction in the credit period from 21-28 days to seven days. Will this work when other PC vendors continue to provide longer credit periods? Even Dell, which started with a no-credit policy, is now offering 14-21 days’ credit.
Resellers continue to get 21-day credit from their suppliers. While HP will provide a 7-day credit, the ZD and RDS will provide the extended credit that partners require.
However, the credit days will vary depending on the SKU and region. For instance, a fast-moving model in a metro like Mumbai doesn’t require 21-day credit. In essence, we haven’t reduced credit but made it optimal.
Having said that, our overall objective is to improve the channel inventory management. With no volume incentive, partners will not see any gain in taking large inventory positions. Over the next year, our goal is to increase the inventory cycle from one to 1.5 per month for consumer products.
Eventually, we would want our partners to have 2-3 inventory turns in a month. This will depend not only on how well partners manage the sell-through, but also on HP’s ability to manage faster inventory cycles at its end.
Our focus is to improve our back-end infrastructure and systems to support faster inventory turnarounds.
Many would argue that you are trying to cut-and-paste the distribution model of handset manufacturers like Nokia to the PC segment, and that this may prove fatal because the dynamics of the two markets are different.
One can’t cut-and-paste the telecom model to the PC market because the dynamics are indeed different. For example, retailers in the telecom segment work on 2-3 days inventory; such a short inventory cycle is impossible in the PC segment.
But yes, we have incorporated certain of the best elements of the mobile channel in our model. One key element is the focus on sell-through and sell-out as compared to a focus on sell-in. Our entire focus will shift to sell-out to end customers, while the distribution partners will be focused on sell-through.
With assured margins and territorial exclusivity, distributors will see greater benefit in investing more resources to drive HP’s business. Rather than the retailer going to the distributor to get information about new products, pricing, schemes and programs, it will be the distributor who will now go to the retailer to enable him to do more business. Retailers will therefore spend more time focusing on customer needs rather than managing the vendor and distributors.
The regional distribution model gives us wider market coverage and expands distribution credit. Unlike the telecom model, PC distribution hasn’t been able to penetrate beyond 600-700 cities and towns, and 12,000-15,000 retail points. The ZD model will allow us to penetrate deeper.
Any major changes in the offing for the commercial business?
Our commercial business engine is firing well, so why fix it when it ain’t broken? Still, we have consolidated and realigned the distribution portfolio. Ingram will exclusively manage the PC MOQ business, while Redington and Ingram will focus on the back-to-back business.
Rashi will now exclusively focus on the MOQ business related to thin clients, workstations and options. Savex is completely out of the commercial business because they want to focus solely on the consumer business, while Iris no longer distributes any of our product lines.
Business partners keep complaining about major price discounting by T2 volume partners. In several instances, the latter offer prices lower than even the national distributors.
We have addressed the issue of price discounting in the commercial segment by adopting the same base-price model for our MOQ business. The national distributors and sub-distributors will operate on assured front-end margins and bill products at a common base price. On the back-to-back HP and partner-led business there is no issue of price discounting because this segment operates on rate contracts and special price clearances.
Business partners also complain that the ORC offered by HP doesn’t even cover their cost of getting the customer order.
Many partners have highlighted this issue and we have had some discussions as well. The challenge HP faces is that there is no way we can justify ORC payouts on deals where customers have been billed below cost—even if there is no disputing the partner’s effort in winning the deal.
One of the options we have been internally ideating on is to create an ORC program where partners get ORC not on every deal but on the average profitability of all the deals executed over a period of time. However, the ideation process is still at a very preliminary stage, and we need to deliberate further.
Your partners grumble that HP is overpriced by 20-30 percent compared to Dell, that there is no way they can justify such huge premiums to customers, and that they are therefore losing customers to Dell. As a matter of fact, one of your business partners recently told us that he lost 5-6 large customer contracts—not deals— to Dell as they offered a price that was 25 percent cheaper than the best special price offered by HP.
I agree that there was a price premium of 25-30 percent on consumer products 6-8 months back. But in November 2009 we corrected our prices and the premium has come down to less than 10 percent vis-à-vis Dell. That’s a premium we believe HP as a brand can command in the market.
But I am surprised to hear about such a huge price delta on commercial PCs. I don’t think there exists such a huge price differential unless the competition is offering low prices in order to gain entry into the customer account, or discounting to meet their sales targets. But we will look into the matter and correct it if the feedback you are giving is substantiated.
There are whispers in the market that many members of the PSG team have been asked to quit or sidelined because they didn’t agree with your strategy. Sameer Mathur is said to be one such case. Then there are other members of your regional sales teams.
I am not a leader who thinks that whatever I plan and strategize is the only way to do things. I am open to disagreement and criticism. In fact, I encourage people to disagree because that’s when a lot of potential issues come up and get addressed. I believe in the policy of ‘convince or be convinced.’
I have no qualms in admitting that I do not understand the PC business as well as I understand the mobile handset business. Hence, it is all the more important to rely on the experience of key members of the PSG team.
The speculation that Sameer left because he disagreed with the new strategy is incorrect. On the contrary, till his final day in office, he was involved in deliberations regarding the new strategy. I want to also clarify that he hasn’t quit—he is on a sabbatical to study at MIT. Once he finishes his course he will be back with HP either in India or Asia-Pacific and Japan.
With regard to the other members of the teams you are referring to, they left much before I came on board or left because of better opportunities.
Do you think there are too many expectations from you considering that you have to fill the shoes of ex-president Ravi Swaminathan, a man who is regarded as the King of the PC industry?
You betcha! I am aware of the comparisons which everyone in the industry will draw with Ravi every time I say or do something. Ravi’s shoes are too large for anyone to fill. What the man has done for the PC market, the HP brand and the channel over the last 15 years is incomparable.
Will the new strategy win back the market share HP has lost over the last 5-6 quarters?
While I don’t want to talk in terms of market share targets, I believe that if you have the right structure and systems in place you will win mind and market share.
The model we had earlier was a push model where our team went to distributors and retailers and gave them targets without discussing with them how those targets would be achieved. What’s more, even T1 distributors such as Ingram and Redington did not do any forecasting for their HP PSG business.
With the new model, we set growth targets and go to our partners asking them how we can help them to achieve these targets. Structure and systems have been put in place to enable the entire partner ecosystem to reach individual and overall growth targets over the next three years.
What’s your analysis of the future of the PC market in India?
The Indian PC market is highly under-penetrated. It has a very low penetration of 3-4 percent. With the broadband revolution underway, I expect penetration to improve both on the consumer and commercial side.
Telcos with broadband connectivity will get into homes and provide a vast array of edutainment services. With the disposable incomes of families rising, individual ownership of PCs will also rise over the next few years. On the commercial side, the Indian SMB sector is still hugely under-penetrated, and this will be a big growth driver.
Over the next three years I foresee the government and education segments driving the PC market. If the recent policy initiatives announced by the education ministry are an indication, the education sector will be the highest growth segment. |