The competitive pressure on Compaq to come up with a successful direct sales strategy, or a successful Internet sales strategy, is undeniable.
But, according to channel observers, Compaq's best chance of success lies in finding a model that will be successful for its resellers too.
As any VAR knows, selling computers requires pre-sales advice, installation and post-sales technical support, over and above more commercial basics such as account management and financing. Providing these to thousands of customers will not be easy for a vendor used to dealing directly with no more than a few big accounts, corporate resellers and a few distributors.
The situation is complicated because Compaq is involved in selling disparate products to disparate customers, each with different requirements for services around the product sale. But analysts have claimed that if Compaq tries to repeat Dell's model, it is in danger of ultimately failing to deliver. Unlike Dell, Compaq's sales would collapse if it was to completely alienate the channel.
On the trail of the CIA
On the other hand, Compaq's Channels for the Internet Age (CIA) strategy could prove to be the template that other vendors follow. Some resellers have said putting PCs on desks is more trouble than it's worth, and the prospect of Compaq taking on that business while paying resellers an agent's fee is appealing. Likewise, Compaq's proposed zero-margin single pricing model could liberate resellers from having to compete on the basis of product price, and will put an end to the practice of hiding the cost of services in ever-decreasing margins.
Many channel players agree that reseller services really matter and it would make more sense if competition in the channel took place on that basis alone. VARs with a high cost of sale would no longer have to compete against box-shifters selling at lower margins.
Brian Pennington, marketing manager at Brilaw International, a Compaq VAR, said Compaq still has to answer a lot of questions, but remained cautiously optimistic. "I think it [CIA] could potentially help us, if we can retain control of each deal. Our turnover will drop, but we won't have to support the debt." Supplying PCs is "nothing but hassle anyway," he added.
Alan Katz-Summercorn, proprietor of VAR Advanced Micrologic, agreed that the prospect of Compaq handling the product procurement element of a project directly is almost ideal, leaving consulting, integration and support to the reseller. But he doubted Compaq's ability to put it in place. "I know Compaq must move towards direct sales, but I can't see an easy way for it to sell direct and get the pre- and post-sales service right," he said.
Katz-Summercorn said resellers will need to be confident they can introduce Compaq to their customers without the vendor trying to poach business from them. For customers that have gone directly to Compaq without the intervention of a reseller, Katz-Summercorn said the only way he can see Compaq providing the necessary services is to take control of the whole process. This may effectively mean it develops a network of local resellers that act as services sub-contractors, he said.
Nick Offin, director of the channel business unit at Compaq, said concerns that Compaq will attempt to take ownership of accounts are misplaced, especially in the SME market. "The great value partners bring to Compaq is customer management. The market for services in the UK is enormous and we expect the majority to be met by partners," he said.
Offin added the idea of Compaq using services subcontractors is quite accurate. He said: "We've been doing a lot of work developing a network of professional service partners. We'll use that sort of mechanism."
No easy sell
Although it makes more sense for the channel to explicitly charge for services and pull away from reliance on product margin, it is not going to be easy selling that proposition to the customer, Katz-Summercorn said.
Because the industry has hidden the value of its services in the product margin for so long, customers are used to thinking of services as free.
"They're happy to pay an accountant for advice, but if resellers try charging in the same way they don't like it," he said. If Compaq is going to take the lead and introduce its zero-margin model, it must take responsibility for re-adjusting customer expectations. "It's no good leaving it to the channel to explain the customer still has a couple of grand to spend on installation," he added.
Offin said Compaq is not forcing this change on the market but the market is changing because of the internet. "Something I've been saying in partner meetings is that by separating out services from product supply, CIA will allow customers to truly perceive the value of our partner network. It will all be out in the open."
A little local difficulty
Making sure customers who buy direct are offered services is a thorny issue. Hewlett Packard (HP) tried asking its web customers to select a local VAR, but discovered 85 per cent of users left its site at that point.
HP now distributes services leads via its call centre, which leaves the task of getting in the door and selling to the reseller. Offin said Compaq is planning to drive customers to its website which will act as a portal and a link to partners' sites for value-added services. "We'll want our partners to link through to us for product sales," he added.
Online reseller WStore plans to use a network of reseller partners to install and service the products it sells. Tony Price, UK managing director, said Compaq would have to make sure its customers have adequate access to consultancy, but if customers are looking for more than standard products to be fulfilled, Compaq will have a problem.
"On one hand they won't want to risk using independent consultants, and on the other hand customers want expertise with third-party products. They've got to find some way of linking customers to VARs," he said.
Price added that if Compaq wants resellers to feed sales to it, it is going to have to make things profitable for them. Price said CIA looks like Compaq is thinking along the right lines, but for certain types of business Compaq is going to be tempted to take everything direct.
If so, Compaq would do well to remember that the most successful IT company of recent years, Cisco, tries to have as little to do with its customers as possible. Gareth Lewis, Cisco alliance manager at KPMG, the consultant that helped Cisco put together its famous internet-based business, said the last thing Cisco wants to do is handle its customers directly.
"One of the reasons Cisco is worth so much is because, by using partners, it creates a tremendous amount of revenue with relatively few employees," he said.
There is some truth to the argument that the only reason Cisco does not sell directly to users over the net is that routers are too complicated to be bought off-the-page. But if resellers are good enough for Cisco, they are good enough for Compaq.
- COMPAQ IN THE INTERNET AGE
Compaq announced its Channels for the Internet Age strategy in December 1999, aiming to introduce flat internet pricing for users and resellers.
Instead of offering discounts, Compaq planned to reward resellers through two mechanisms: a sales mediation payment and a sales fee. Resellers that take title to product will be paid a sales fee designed to reflect the value they bring to Compaq, and resellers that choose to pass product supply to Compaq will be paid a commission.
In January, Neil Marshall, director of European channel strategy at Compaq, told Computer Reseller News that he expected to be able to announce details of these reseller reward mechanisms by March. But Nick Offin, director of the partner business unit at Compaq, said last week that details will be available in Q3 or Q4 and the scheme will be introduced in 2001.
Offin said it was too early to say how the fees would be calculated, but revealed: "We're not looking at introducing any complex matrix arrangement to calculate the sales fee. It will be a straightforward calculation based upon product sold."
Such a mechanism will reward box-shifters and VARs equally, Offin admitted, but resellers that are concerned should remember that box-shifters will not be in business.
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