Happy dealers, solid managers. So what's wrong at HP?

What’s going on at HP? CEO Meg Whitman has pulled out the scythe and is whipping it through the troubled hardware titan, chopping out the weak and underperforming bits and clearing a path back to a market-leading position.

But trouble keeps cropping up. The latest batch came in when HP cried foul play over its $10.3bn of acquisition of Autonomy last year. HP is claiming false accounting on the part of Autonomy and has announced a $5bn write-down on the deal. Among other things, HP is claiming "channel stuffing" - the reporting of licensing deals with resellers rather than with end customers - on the part of Autonomy. This is despite HP getting 300 people to pore over the books ahead of the acquisition.

But who missed what, if anything? The acquisition took place during the short-lived and blighted reign of Leo Apotheker and plenty of HP fingers have pointed at him - though Whitman was part of the board that OK’d the deal.

Taking a broader view, the Autonomy debacle is simply one more symptom of the tech giant’s sickness - a dysfunction that has been clear for several years as we watched a multitude of CEOs walk in and out of its revolving door and watched employee morale slowly seep away like a receding tide.

At times, Whitman may appear less like the grim reaper and more like King Canute.

Channel biz: What me, worry?

It would be reasonable to expect this combination of chaos and paralysis to have filtered down right through the company and into the channel. And yet many channel players are making the most of it and using HP to bolster revenues while keeping a profit-slanted eye on other vendors muscling into the troubled giant’s channel space.

Despite the vendor’s troubles, most HP resellers cite HP-based revenues that are growing consistently year-on-year. One cited growth of 20 per cent, while others claimed as much as 30 and 40 per cent. However, figures from Context, a leading channel analyst, tell another story.

Context analyses UK distributor revenues across different vendors and its figures are regarded as an accurate reflection of distributor sales. In Q3 2010, HP-based revenues accounted for 27.2 per cent of total revenues. In the same period for 2011, the figure fell to 24.2 per cent. In 2012's Q3, the downward decline continued even more sharply and was recorded at 19.7 per cent. Between 2010 and 2012 the revenue plunge is just short of 30 per cent. This is dramatic in anyone's books. So why are resellers enthusiastically waving the HP flag? Have they suddenly become blank-minded, tub-thumping acolytes of Whitman willing to say anything that casts the hardware giant in a positive light? Unlikely. We know dealers.

Smaller cake, even smaller party

Are distributors abandoning the vendor because they have no confidence in its future and the overtures from vendors such as EMC and Lenovo are becoming too strong to resist? Possibly. The answer has several aspects which shed some light on where HP is today, the company's dysfunction at board level, and whether it will survive long-term in its current structure. The discrepancy between reseller and distributor revenues can in part be attributed to shifting channel dynamics. Distributors have traditionally relied on selling high-volume quantities of HP product to large resellers. It's an easy way to hit sales targets and qualify for reward rebates. But with the emergence of online sellers offering large product volumes at discounted prices, distributors are being cut out of the loop.

One reseller told us: “I'm not buying HP products from distributors any longer simply because I can get them cheaper from other sources in the UK. I recently asked a distributor to put in a bid for HP products. The price was too much. I can buy and sell it cheaper than the distributor can. In fact, I now resell to other resellers so I'm not surprised that distributor's HP revenues are falling. HP is aware of the practice but turns a blind eye because it's happy to sell product.”

HP has tried to address the problem by encouraging distributors to extend their range of partners to also include smaller resellers. However, the incentives for distributors to do this are simply not there. It’s easier for them to focus on hitting high-volume targets and reap the benefits that HP awards its top-selling distributors.

At the same time, competition is heating up. Companies such as Lenovo, EMC and to a lesser extent Samsung are increasing their presence in the indirect channel - offering more product and stiffer price competition. With PCs, for example, the margin is estimated to be a paltry 4 to 5 per cent. Someone coming in and offering a just few more percentage points is sure to turn heads. But, that said, many resellers appear to maintain benign feelings towards HP.

Martin Hellawell, CEO of Softcat, says: “Behind Microsoft, HP is our number two vendor. We've grown our HP business by about 30 per cent over the last year. This growth has been fairly consistent. PC sales are healthy and storage and networking products are doing well.”

It's a similar story over at reseller DTP, where MD Howard Hall claims up to 40 per cent annual growth on HP products: “Behind the scenes the company is going through some big changes but we have maintained good relationships and we're seeing growth in PC, managed print services and servers sales, across the board really.”

A company that is considered to be imploding enjoying increased, and unprompted, support from its channel? This might appear to fly in the face of received wisdom. But the view from the academy is that the channel’s sanguine attitude is perfectly logical.

According to Professor Andrew Kakabadse from the Cranfield School of Management, who has made a respectable and healthy living poking into boardroom dynamics, this dichotomy can be attributed to the fact that the company is being run by senior and general managers, who carry on doing what they have successfully done for years.