A dispute between an e3000 HMO site and its application vendor over purchasing extra hardware shows how serious HP has become about resellers adding value during system sales. The HP policy is forcing the HMO customer to purchase an additional e3000 outside HP’s sales channel, according to IT staff at the HMO.

At issue is whether customers using HBOC software can buy new hardware for the lowest available price. The business practice, which HP and its North American distributor Client Systems call “compliance,” can tie many e3000 sites to their application ISVs as their only source of new hardware. The practice is in place for all e3000 ISVs which sell hardware, including customers of Smith-Gardner and Summit Information Systems.

James Reynolds, a systems manager for an HMO with more than 300,000 subscribers, said his attempts to buy a system from authorized resellers other than HBOC have failed. Reynolds said he couldn’t get an authorized quote for a new Series 997/800, one of the largest systems HP sells, from either Surety Systems or Logical, two of HP’s hardware partners which he contacted.

The HMO needs to add another system running the Amisys Payor application to meet needs related to business growth. Reynolds and others in his HMO want to be able to purchase their third HP 3000 from the lowest-quoting authorized reseller. HP wants to ensure that anyone who sells an authorized system adds value during the sale — and believes that opening up sales to the lowest bidder will hurt the e3000 market.

Competing on value, not price

“If your business runs down to the point where everyone is competing on price, no one is taking care of the customer,” said Christine Martino, worldwide marketing manager for the e3000. “We do have channel rules. All authorized HP partners know what the compliance rules are. The key to our rules is added value.”

In HP’s e3000 channel, any partner company can submit a bid for a hardware sale to a customer who owns application software. That bid can then be challenged by the application provider — in Reynolds’ case, HBOC — if the software vendor believes there’s no value being added as part of the hardware deal.

In the HP channel, any reseller must be in compliance with the requirement to add value during a hardware sale. The application software company can call for a hearing to determine if the competing reseller is in compliance.

Reynolds and his colleagues at the HMO say they don’t need any added value as part of their 997 purchase. The HMO’s staff includes four people whose 3000 experience totals almost 80 years. They believe HBOC won’t be able to help them configure or install their system in any measurable way. But HP says any quote from a reseller other than HBOC can be challenged on compliance issues, according to Martino.

“It’s not like the 3000 is something like a calculator, or something simple that doesn’t require any special configuration or integration help,” she said. “The solutions on these are fairly complex.”

Bob Graham, the director of computing support at the HMO, said “There’s four of us that have been on that machine for the better part of 20 years. We know what we’re doing and what we want. The bone we have to pick isn’t necessarily with HBOC. It’s with HP, and the relationship they’re developing with their channel partners and VARs.”

Martino said that these kinds of disputes haven’t been that common in the installed base, and they tend to arise when a software provider’s customer is dissatisfied with the level of service from the provider.

“It gets back to a customer care issue,” Martino said. “Most people go with the reseller they bought from because there’s some element of value, especially resellers who are doing a good job on customer care. The majority of people out there feel like they’re being taken care of by their channel partner, so they don’t look around.”

A vendor’s value

Marc Perlman, the regional vice-president of sales for McKesson HBOC and the person in charge of the e3000 installed base, said his company “is here to take care of our customers and make sure they’re successful. The worst thing that can happen is they get a bad configuration and they go down.”

“We provide a tremendous amount of value in ensuring that Amisys works properly,” Perlman said. “When people go to the broker community or to other people who don’t know our application, what happens typically is that they get configured incorrectly, and they run into a lot of problems for a mission-critical application. It not only costs them a lot of time and money, but is very unfavorable to us from a customer support standpoint.”

Customer support, and its cost, are crucial elements of HBOC relationships. The customers report paying as much as $250,000 in a year for support of their Amisys application.

Perlman said HP’s policies on value and compliance during hardware sales were HP’s choices, not HBOC’s.

“Let them comment on that,” Perlman said. “It’s not our call. HP put their Channels 2000 program in, and we think the distributor we work with, Client Systems, is doing a stellar job in making sure the customers get the best possible value for their money.”

The VP said that he believes HBOC can demonstrate the added value to the HMO in the dispute. “They don’t know how much additional disk it will take to run it. If they want to strategically ensure that their future is being secured with their investment, it’s probably prudent to consult with the vendor and the proprietor of the software.”

Perlman said that HBOC offers used systems through the Phoenix 3000 program run by Client Systems, and “we have absolutely sold some.” Many HBOC installations require high-end HP e3000 hardware, and Perlman said the inventory at Phoenix includes systems large enough to serve HBOC needs.

“Not only has it been at an extremely competitive price, it’s certified,” Perlman said. “A customer has a lot less risk in buying through that channel.”

Reynolds said the quote HBOC offered him on a used Series 997 was still more than $60,000 above the quote he received from unauthorized hardware broker Nextep. Perlman said he wanted to check the quote which the HMO got from the broker to be sure it was for the same hardware. The HMO doesn’t think it’s appropriate to show their quotes to the application vendor.

“The hardware industry is a low margin business,” Perlman said of the broker quotes. “It’s because the equipment is not being compared apples to apples.”

Graham at the HMO disagrees with the HBOC explanation. “We are quoting apples to apples,” he said. The HMO contends that its quotes from HBOC have been 50 percent higher than those from other authorized sources. HP, HBOC and the HP e3000 distributor Client Systems say that kind of difference is impossible. The HMO compared a “budgetary” quote it got last year, but now it can’t get another reseller to quote their 997 this year.

No other quotes

What bothers the HMO’s staff is this absence of any current competing quote from other authorized resellers. The resellers were warned their quotes might become subject to a compliance hearing if added value couldn’t be proved, according to Client Systems’ vice president Evan Westenskow.

Jo Previte of the HMO said she learned from Client Systems that potential challenges to the sale based on compliance issues were keeping other resellers from quoting the business. “Although they aren’t refusing to give the resellers the information, they’re making it pretty clear that there’s not much point in it,” Previte said.

“The compliance thing from Hewlett-Packard is really misunderstood,” Westenskow said. “All it requires is that a reseller add value. If you’re walking into a sale at the 11th hour and quoting hardware, that’s not considered a lot of value add. However, [the resellers] could have done it if they wanted to. We did provide them with quotes.”

HBOC does have what amounts to a “right of first refusal” clause in its contracts with its customers, Westenskow said, a clause that doesn’t exist in HP channel documentation. “We knew that Logical and Surety and HBOC were all working on the same deal. We did tell Surety and Logical, ‘Be careful here.’ That’s because they’re not adding any value.”

Westenskow said that Forsythe Solutions has gone into HBOC accounts and sold hardware, then successfully weathered an HBOC compliance complaint. “They were doing high availability backup and had done consulting, worked for months. They had added value.” Forsythe has also won compliance challenges in Summit sites as well, he added.

HP tries not to involve the customer in compliance hearings, Westenskow added. “They don’t like to drag the customer in on those things,” he said.

The distributor’s VP said a customer’s intervention in such a hearing was possible. “This doesn’t happen very often with HBOC,” he said. “If a software vendor did a really good job of selling to their installed base, this would never be an issue.”

Compliance is in the HP channel rules “because HP doesn’t just want people peddling hardware here,” Westenskow said. “They want their resellers adding value to them, and taking care of them so it’s a good experience. That’s the ideal behind compliance. If the software vendor sold the solution, they should be in the catbird seat. If they don’t take care of that customer, someone else will come in and do it.”

Value versus cost

At sites where a customer feels competent to purchase without consulting, the compliance rules work against the desire to shop. The HMO’s Reynolds said that he’s had experience with buying complex systems in the manufacturing market, but never felt so tied to a single software vendor for hardware.

“We sort of feel like we’re being held hostage,” Reynolds said. His co-worker Previte added that HBOC’s “right of first refusal” clause in their contract “just doesn’t seem like the correct way to do business in a free market economy.”

But HP believes selling the e3000 on the system’s value rather than its price is at the core of what makes the computer a unique and lasting investment. Shopping on price in the authorized channel, HP’s Martino said, could chase software suppliers from the channel.

“It becomes a price war, the price of our product drops to the ground,” Martino said. “And then the people who really are adding value say ‘I don’t want to play in this game — there’s no rules.’ And everyone loses.”

However, what’s being lost in the case of a shop like Reynolds’ HMO is the chance for HP to sell another new system. The HMO has resorted to shopping the hardware broker marketplace for its Series 997 since it learned it couldn’t buy from a supplier other than HBOC. New revenue well in excess of $300,000 won’t go to the HP division in this one deal.

“I would hope that doesn’t happen,” Martino said. “You can take this one isolated deal, but we pay channel partners to go out and add value to our products, not to go out and undercut each other.” Martino said the low-bidding authorized reseller may be trying to “buy the business” in the deal, bidding below their cost to win future hardware purchases from the HMO

“They’re making no money on this, and probably taking a loss,” she said. There isn’t a wide enough spread of profit for a reseller to bid several hundred thousand dollars below another on a Series 997 deal, she explained. “When you look across the gamut of compensation we give our resellers, they are within a few [percentage] points of each other,” Martino said.

HP can’t tell HBOC or any other reseller how to set price, she added. Nothing in a reseller’s contract with HP prevents the company from selling hardware at any price. “We know our resellers pretty well and what kind of margins they try to pass on,” she said.

Reconciling HP’s ideals of compliance work in a user community with ample hardware experience makes a good case for the hardware broker community’s role, Westenskow admitted. Some 3000 customers don’t want any value to be added to their hardware purchase.

“It’s a large number of people, and they operate in the broker market,” Westenskow said. “It’s a healthy, thriving business — that’s why we created Phoenix, to participate in that.”