HP Partners Fear Losing Services Authorization

The clock is ticking for an undetermined number of Hewlett-Packard (HP) solution providers that are in danger of losing their services authorization because they haven’t been selling enough HP maintenance and warranty services.

Under the terms of a program formally launched last November, HP solution providers that don’t achieve a high enough ratio of HP Care Pack maintenance and warranty services sales as of Nov. 1 stand to lose their HP Authorized Service Provider status by early next year.

While a slew of solution providers have expressed concerns about the program and the potential loss of services authorization, HP Channel Chief Stephen DiFranco pledged in an interview with CRN to work with them on a case-by-case basis wherever possible to help them find a resolution. "November 1 they will not get shut off," promised DiFranco. "The plan is to reach out to any resellers at risk and have discussions and put plans together. The objective is to get them at or near the [HP-mandated] industry average based on the type of product mix they sell."

The HP Solution Partners Organization (SPO) will get complete Care Pack sales data in mid-December and then reach out to solution providers "on an individual basis to make a case for what to do," DiFranco said. He also said partners can e-mail him at [email protected] to discuss individual issues.

HP Care Pack Services are extended warranties and support agreements that can be attached to the full range of HP products -- from $500 notebooks to complex multimillion-dollar storage and server solution sales. The Care Pack services effectively act as insurance policies for customers covering on-site repair, service and support of HP gear. HP partners say the services contracts usually carry significantly higher margins for them and HP than product sales.

DiFranco's pledge could bring relief to a number of partners who fear they are in danger of losing their ability to service and support HP products.

Next: How Does Care Pack Work?

HP looks at Care Pack sales-attach rates of partners using a metric called the Performance Rating Index (PRI), a benchmark that aims to measure how much of a solution provider’s HP business is made up of HP services.

Solution providers must maintain a 0.75 score selling HP-branded services for the last 12 months as of Oct. 31 to retain their authorized service provider status, according to HP. A 0.75 PRI score means the solution provider is within 75 percent of the average ratio of all HP VARs selling Care Pack services, according to HP.

HP offers lucrative additional financial benefits, including increased rebates or higher services reimbursement rates for VARs reaching PRI scores of 1.00 (as good as the average HP partner) or 1.20 (20 percent higher than the average HP partner), according to solution providers.

HP informally launched PRI about 18 months ago and officially began using it on Nov. 1, 2009. VARs have been receiving monthly updates regarding their PRI status throughout the year, but many have become vociferous in their complaints about the program as the Oct. 31 deadline looms. In fact, a group of top partners at Ingram Micro's VentureTech conference met with DiFranco in October and pleaded with him to make changes.

Some of the most vocal VARs are those that have traditionally sold their own services and support contracts to their customers.

Next: A Matter Of Choice

One longtime HP partner said he might make $10 to $20 off a three- or four-year Care Pack extended services warranty for a notebook, but he sells his own branded service contract for $100. "That $100 goes in my wallet and I may never get a call on that notebook," he said. "You can see where the profitability lies. It’s probably the same reason HP wants that business. But why do they want this break-fix stuff that’s low-hanging fruit? Why not focus on high-end professional services that we can’t do? We should have a choice.’

"Why are you forcing us to do this when we resell our own services? It makes no sense," said another VAR who asked not to be named. "What drives product [sales] in our industry is the services. For years we won [with HP] over Dell and IBM from the sheer fact that we were able to provide the best possible service to clients. We're the trusted adviser. We have the relationship. Those customers were buying more and more HP than they ever had. Now HP is coming to us telling us we may lose our [authorized service provider status]."

Several longtime loyal HP partners said they are switching customers to competing product lines not only because they make money on their own services warranties, but because they don't want to bring down their HP PRI index score if the customer chooses not to buy any kind of extended warranty.

"I had a $250,000 blade deal that I would have pitched HP," said one HP partner who did not want to be identified. "But I pitched IBM and got the deal. I had a $150,000 notebook deal that normally would have been HP. I pitched Lenovo and got the deal. These are the kinds of things we have to do now [to maintain a stronger PRI score with HP].’

That said, the VAR also recently completed a $400,000 deal working hand in hand with HP that included the VAR's own services because it was the best fit for the customer, said the VAR. "The endgame is what's best for the customer," he said.

Next: To Lead Or Not To Lead With HP?

HP's DiFranco said he was disappointed to hear that one of his partners did not call him to reach a compromise before switching customers to a competitor's product line.

"Every VAR in America should have my personal cell phone number. I'm sure there are lots of individual deals that deserve a conversation to analyze what is the right choice for the partner, for the customer and for HP," DiFranco said. "The second thing I'd say is I'd find it disappointing that brands were being switched around because of services. We hope our partners believe in HP and lead in HP. We think most would do that. I'm not sure if the decision of one brand or another should be based on services and not based on what is in the best interest of the end-user customer. We'd like to think the partner would call and would address the situation."

But the VAR in question complained that HP wouldn't work with him in those two opportunities. ’The word [from HP] is ’Our services programs are flexible.’ They say that, but that’s not what they’re doing,’ said the VAR. ’The message from them is, ’We want to give you back-end rebates for selling our services.’ That’s great, but do you want me to close up my [services] shop so I can live off your rebates? How long will they even be there? Will those [rebates] continue? They can’t promise that."

The VAR said HP programs can get changed or cut with little or no notice to partners, leaving partners in the lurch. ’We need to control our profitability," he said. "That’s what this is taking away. It’s not allowing us to make those [services] decisions with customers.’

The VAR also feels his own branded service level agreements are better than those provided through Care Pack. ’For servers they do next-day delivery. Our SLA is we’ll deliver it within two hours," said the VAR. The Care Packs he does sell often are to customers with branch offices outside of the VAR’s geographic reach or for training that the VAR cannot provide on his own.

Next: Other Vendors Swoop In

The same VAR said other hardware vendors are aware of HP’s program and are marketing the fact that they don’t require VARs to buy the vendors’ service packages. ’Lenovo was in here and told my service manager, ’We’ll let you sell your own services, unlike one of our competitors in California.’ Other guys are starting to do it. But I love HP. I don’t want to do this,’ the VAR said.

’What they don’t realize is we can’t sell what we can’t service," complained the solution provider. "That’s our DNA. That’s our value-add. When we compete against CDW and those guys, we won the deals because we sell our own branded services. They’re selling HP [Care Pack-branded services]. I’m sure guys like CDW, with no real service department, will love this program. But it will push some of us out.’

The VAR has registered to be a Dell partner just in case his HP relationship becomes permanently damaged, he said. He's also become closer to IBM, he said.

"I don’t want to go Dell. This IBM deal we did, they flew my VP out to Raleigh two months ago. There were about 15 VARs from across the country. We spent a day and a half out there. They talked about this issue. They know what HP’s doing. They said listen, ’You guys can sell IBM services, or sell your own. We know you make money selling services. If no one is selling, no one wins, including IBM. We’ll work whatever way you want us to work.’ ’

Next: Denominators And Numerators

Other solution providers haven't reached the point where they are switching HP opportunities to another brand, but at least one said it might have to consider it after winning a $1 million-plus deal that did not include Care Pack services brought their PRI number from above 0.75 to below that figure.

The VAR, whom did not want his name used, won a seven-figure deal through an RFP process. Because it was an RFP, the VAR could not add anything to it and there were no services included in the original proposal.

"It essentially increased our denominator but not our numerator," the VAR said. "It was out of our ignorance. We didn't think about the PRI. We wanted to win a seven-figure deal. We weren't thinking how it would affect our PRI. We just wanted to win HP a big deal."

Then HP told the VAR it was in danger of losing its ability to service HP products. "They told us that was not their intention, but that was what the program said. We said let's put together a plan to get [our PRI] back to normal. From our perspective, that deal shouldn't be included in the calculation. We don't want a situation where we don't want to bid on an opportunity or we want to bid with another vendor because it would hurt our ability to service HP products going forward.

"If we ever had the opportunity on a deal that size again, we'll have second thoughts about bringing in HP. That's not what HP wants," the VAR said.

Next: Are The PRI Metrics Fair?

Another solution provider said HP's PRI is too "black and white" and doesn't take into account nuances that make solution providers trusted IT advisers.

"It appears the metrics HP are using to measure PRI are somewhat unrealistic. It does not seem to matter if you've been a reseller for 20 or 30 years or not. Their service center is just looking at metrics," said Mary Stazi, president of The Computing Center, an Ithaca, N.Y.-based solution provider who also sits on HP's SMB Reseller Council. She said she's had several conversations with top HP executives, including Todd Bradley, executive vice president of HP's Personal Systems Group, both of whom said that metrics would be reviewed and potential changes would be made," she said.

"I stressed very clearly that the deadline is coming up and unless they do something, this really is not a good thing in resellers' eyes," Stazi said. "The division dealing with PRI is [doing so] in black-and-white fashion. I hope that [our concerns] trickle down to the services division."

But HP is intent on driving forward with the program as it stands and allowing VARs to request one-off exemptions on a case-by-case basis, said DiFranco.

"We understand there are situations in any and all programs that need to be reviewed in light of [the circumstances]," DiFranco said. "What's important here, what we want to get out to the community, is we hope that where there are challenges they bring them to David [Twohy, vice president of Americas channel sales for HP Technology Services] or myself. I believe we can make a choice that's beneficial to the partner, the end-user customer and HP."

Next: HP Says It’s Not About ’Culling’ Partners

HP is not telling solution providers to stop selling their own services, emphasized DiFranco. "You're not selling any more HP [services] than the general community is selling. The general community is selling some HP-branded services because it makes a lot of sense. What we're asking is for partners to be pretty close to the average of what their peers are doing," DiFranco said.

"I don't want to stop them from selling their own services,’ he added. ’We're just asking to find the opportunities where [selling] HP services are logical, to be on par with the rest of the industry. We think those are two reasonable things. Having HP services as part of your portfolio is an important part, like the HP products as part of the portfolio."

DiFranco dismissed the notion that the PRI program is being used to cull the worst-performing Care Pack services-selling resellers and said that the program will allow HP to work more closely with VARs that need more help.

"The objective is to get guys who are lower on the scale to get them closer to the industry average, to identify resellers where we need to spend more time with and help them strengthen [their services sales]," DiFranco said. "What this is showing us is where we need improvements and how to reach out to partners. I'd argue this can help identify where we need to deploy more selling resources so we can improve the index and understand how to better train our channel sales teams to talk about services and how to work with services. I'd argue that it's been quite the opposite [of culling partners]. It's been wonderful."

Next: Some VARs See HP Services Gold

Not all solution providers are anxious about the Nov. 1 deadline. Chris Froman, president and CEO of Pomeroy IT Solutions, a Hebron, Ky.-based solution provider, said the program has helped him almost double his HP services business with little impact on his own branded services. Pomeroy's PRI score went from 0.86 to 1.58 after putting an increased focus on it. The result has led to more rebates and profitability selling HP products, Froman said.

"When you look at the back-end dollars, it's pretty hard to say no to [selling] HP services. On the PSG side, our [PRI] score is closer to 3.00. I'm looking at where we're making money and this is one area that is compelling right now," Froman said.

Services account for about 45 percent of Pomeroy's revenue mix, with 55 percent from products. With such a heavy services mix, the VAR has been able to balance selling its own branded services with HP's, Froman said.

"There's always going to be some decision points selling our own branded [services] vs. HP. Every circumstance is different," he said. "The main thing is to get the services sold. The data is pretty compelling that if you sell services on the front end, you have a higher retention rate."

Bob Venero, president and CEO of Future Tech Enterprise, a Holbrook, N.Y., a CRN VAR500 company, said he sees vendor services contracts like the HP Care Pack program as a "vital part" of his product portfolio. "With Care Packs, we don't have to worry about the nuts and bolts of a support contract and we can focus on higher-end services related to customer's network architecture, design and future [IT] planning."

Next: Care Packs Are Good Insurance

Venero goes on to estimate that services contracts like Care Pack offerings carry three times more margin than the actual product sale. He said about 60 percent of the HP products Future Tech sells go out with Care Pack agreements.

The services agreements are nothing more than insurance contract bets that the product will not fail or need to be serviced during the Care Pack contract, Venero said.

"HP Care Packs are good insurance for the customer to purchase because it protects the customer's investment in the technology," Venero said. "HP is the insurance company taking a bet that the product won't need service. The hope is within that [contract] time period that product will not need service. The more people you insure, the higher the profitability."

Future Tech does a detailed analysis on every piece of computer equipment it sells, focusing on the cost of downtime for that product and then deciding what kind of support contract to provide the customer. Often, he said, it is more economical for the customer to buy an exact duplicate of the product to be kept in stock to instantly swap in if there is a product failure.

Venero said he sees all the vendors pushing for higher attach rates, but that HP is definitely being "more proactive in enticing their partner community to attach. It's highly profitable and HP is willing to share those profits with the partner community."

Next: HP Stresses The Rewards

The goal of the Care Pack program is ultimately to help solution providers increase their services mix, which in turn creates a more loyal end-user customer base, said HP’s Twohy.

"Customers who buy services, we expect there to be a mix of partner-branded and HP branded services. When customers purchase services, they are more loyal to that partner. That's what the PRI program is about," Twohy said. "Partners invested in driving the HP portfolio from a services perspective, we look to reward those partners with more back-end rebates, more benefits, more access to tech resources and parts than those who don't."

DiFranco went into specific instances, saying, "[Twohy] and I have had a lot of conversations about state and federal. Some [RFPs] don't include services as part of the bid. We understand that there are going to be certain parts of the business that need to be disqualified from the program because of the structure that the end user created the deal. They buy a lot of PCs and that can negatively impact your PRI number. David has the authorization to adjust the program in those situations where appropriate. We ask [partners] to advise David. and David has the authority to make that change."

Twohy added that VARs should begin the process through their channel sales rep to seek an exception. "We do have a formal exception process like the ones you've mentioned or others as well. A good example might be that the customer is a self-maintainer. We're not going to hold the partner accountable when the end user handles that internally," Twohy said.

The report that each VAR should receive from HP is customized to their own portfolio, Twohy said. For example, if 90 percent of a VAR’s HP business is in PSG, then 90 percent of his PRI is calculated from the average PSG partner. In other words, PSG VARs aren't compared against VARs selling only enterprise products, he said. "Whether it's PSG or industry standard-servers or storage, each platform has a different average.’

Next: Seeking Real-World Solutions

Most solution providers interviewed for this story said they're not looking for HP to abandon the program. They just want it adjusted to meet real-world conditions.

"We agreed with the concept and being measured and paid for performance. Every VAR should be for that," said one HP solution provider. "But we are struggling with how to be measured. We don't feel the measurement process is fair. We've been constructive with HP. We're OK with being measured but we don't feel [the program] measures apples to apples. We don't want to be penalized for selling our own services."

Michael Noordyke, president of the systems division at Trivalent Group in Grandville, Mich., said his company doesn't sell its own branded hardware services and he's on track to meet his PRI demand, but it's still something he has to track closely and he wants HP to address VARs' issues.

’The right hand does not know what the left hand is doing. It’s motivating VARs to sell competitive products to keep ratios in line. In our case, our ratios have been OK but if they change, they threaten to remove your service certification. That just doesn’t make sense to me,’ said Noordyke.

’It’s something to keep an eye on. If customers opt out of buying Care Packs, our ratios would go down and there’s not much we could do about it," Noordyke said. "They’re trying to force our hand to sell their services. That goes against the VAR community’s grain.’

Next: Incentives Vs. Penalties

Rick Chernick, president of Camera Corner/Connecting Point, a Green Bay, Wis.-based solution provider, said he has already been given an extension to meet the services index quota.

"This is getting blown way out of proportion," said Chernick. "I believe the executives at HP will fix this quickly. I am not even worried about it. I think they will see the light and fix this."

Chernick said solution providers understand the value of selling HP Care Pack extended warranty services but stressed that if "you force customers into buying extended warranty contracts you risk losing that customer." What's more, Chernick said, HP needs to make a distinction between selling Care Pack on complex mission-critical offerings like storage solutions and commodity like products like notebooks. "It's a lot easier to sell a Care Pack with a storage or server than a laptop or a desktop," he said. "Every [HP] storage solution we sell goes out with a [Care Pack] contract. But we sold $5 million in desktop systems this year and few of them went out with Care Packs."

HP should provide financial incentives for partners that hit the services mark rather than penalize those that don't meet the services attach sales quota, said Chernick. "We love HP," he said. "But this is not right. We get it. Where possible we are selling service contracts, but not everybody buys a service contract."

Chernick said that if HP did pull a partner’s service authorization, it would be disastrous. "If you take away the service arm, it would be like a GM dealer not being able to service the cars they sell," he said. "What would you do? You would be forced to sell another car brand that you could service. That is it. This is not rocket science. This is Business 101."

Steven Burke contributed to this article.