Partners: HP's Economic Leverage Having An Impact On Cisco

HP partners say they that the economic leverage that the $123 billion computer giant is wielding is already providing them with bigger profits when they sell HP over Cisco in the networking market.

Rick Chernick, the CEO of Camera Corner Connecting Point, a solution provider based in Green Bay, Wis. that partners with both vendors, said that HP simply has the "best economics in the industry."

"They are easy to work with and you can make good money," he says. "That is the name of the game."

Chernick is one of more than a thousand HP Americas partners that are getting a lesson in channel economics from HP at the Americas Partner Conference this week.

Partners say that HP is leveraging a wide range of PartnerOne channel program incentives to beat Cisco from New Business Opportunity (NBO) rebates to accelerator rebates that kick in when partners meet their sales quotas for the quarter.

Partners said the wide range of HP incentives are in sharp contrast to Cisco, which simply does not have as many channel program levers to pull to provide backend rebates around a broad converged networking infrastructure solution like HP. With only $36 billion in annual sales, Cisco simply does not have as much economic leverage as HP, according to partners.

One top solution provider executive, who partners with both HP and Cisco in the networking market, said the risk -reward ratio for going "All In" with HP on servers, storage and networking products favors HP over Cisco.

The partner pointed to recent rebate checks from HP for the quarter that were nearly $100,000 for New Business Opportunity (NBO) rebates and business class consulting centered on HP ProCurve networking and another nearly $100,000 check for exceeding quarterly sales quotas.

The top solution provider executive said the HP ProCurve networking incentives have been upped considerably by HP. On a recent deal, he said, the additional rebate from participating in PartnerOne programs amounted to an additional 16 percent gross margin dollars. "The new back end money is significant," he said. "On a big ProCurve sale in the past we would only get 2-3 percent. The backend money is the future for resellers that want to be successful. A reseller can't live on 2-3 percent margin."

NEXT: HP Targets Cisco's 80 Percent Margins

HP is targeting what they say are Cisco networking margins that total in some cases as high as 80 percent.

HP CEO Mark Hurd, for his part, gave channel partners a lesson in economics on those 80 percent networking margins. Using a simple paper-pad on an art easel, Hurd detailed the gross margins in PCs (11 percent), server (34 percent), storage (48 percent) and networking market (80 percent).

"Eighty points between price and cost," marveled Hurd. "Did he say 18 (percent). No- 80!" Those eighty percent Cisco margins, of course, are what HP is targeting with its no holds barred assault on the networking business fueled by its $2.7 billion acquisition of 3Com.

Hurd said HP's acquisition of 3Com is "changing the game in networking." He singled out the 3Com networking products as the "best technology on the planet" providing customers with "double the performance, 30 percent lower cost and half the power consumed by previous incumbents we had internal to our company. And instead of nine different software packages to manage our network we now deal with one."

What's more, Hurd said HP is using its $70 billion supply chain to assure that it can provide partners with competitive advantages against the competition.

That kind of leverage is a big advantage for HP, said Greg Spierkel, the CEO of $29 billion distribution giant Ingram Micro, one of HP's largest channel partners. That supply chain power is "important to a big company like us," said Spierkel. "We want to have someone that is going to bring us the lowest cost product to market, the broadest portfolio of innovative solutions."

Spierkel said he sees HP making "good gains" in the networking market. "Over the next three to five years, I would not be surprised that HP grows significantly in this space," he said.

That said, Spierkel said, Cisco is also working hard to "be very relevant as a total integrated solution beyond the network. Cisco has just started that voyage. HP has been more involved with ProCurve and on the (network) edge for a number of years. So I would say HP has an advantage in that regard for now. But both companies are excellent partners and both companies are bringing great solutions from a slightly different angle to their relationships. Customers will make decisions depending on how strong they are in one portfolio or another."

Spierkel said HP has "got more scale, no question about that. As a result they are bringing a lower cost approach to the market which plays well with our resellers and plays well with the end customer. That is the single largest advantage HP has."

NEXT: Partners See HP Networking Becoming A Bigger Business

Michael Haley, CEO of Edge Solutions, an Alpharetta, Ga. HP partner, said he sees HP Networking products becoming a significant part of his business now that HP is upping the incentives for partners. Not only that, he sees Cisco gross margins suffering from HP's networking attack. "When you make 80 percent margins it's not fun to start thinking about a business model where you have to exist on 50 percent margins or less," he said. "Do the math."

William Jacques, vice president of Net Tech, a Kenilworth, N.J. HP patner, said he is planning to grow his networking business by 20 percent this year by focusing more on HP's networking products. In 25 years selling IT products, Jacques said, he has never seen a vendor put more financial muscle behind its partners to attack a market. "HP is going after the networking business with a vengeance," he said. "And it's very lucrative for us. I can make 15 percent on HP ProCurve New Business Opportunities."

Dan Schwab, Co-CEO of D&H Distributing, which partners with both HP and Cisco, said he is impressed by HP's strong channel commitment. "Clearly they are incredibly channel focused," he said. "That message comes through from the top to the bottom of the organization. They are able to engender very strong loyalty from their channel base." That's because HP partners have "confidence" in their channel partnership with HP, said Schwab.

Bob Venero, the president and CEO of Future Tech Enterprise, a Holbrook, N.Y. VAR 500 power who opted to attend the HP conference rather than the Cisco partner conference, says the risk/reward ratio for solution providers clearly favors HP rather than Cisco. He expects to grow his HP networking by a factor of five over the next year. His strategy is to get his customers comfortable with the edge ProCurve networking products and bring HP gradually into the core of the network.

One top solution provider CEO, who partners with both HP and Cisco, said that HP has partner loyalty that will result in partners backing HP rather than Cisco in the networking market. "The message is HP is loyal to their channel partners and they want partners to be loyal to them," he said. "And that loyalty is rewarded. It is a multi-vendor world but you have to pick who your strategic partners are. HP has been a big strategic partner with us for many years. They have been loyal to us. And we are loyal to them. HP has it all. They have the servers, the storage, the networking products and the channel. They have all the pieces of the puzzle."