The name Compaq once brought to mind images of a well-managed company with the Midas touch. But now that golden reputation has become somewhat tarnished. Since the first quarter of 1998, The vendor has been struggling to combat excess inventory and digest its $8.4bn and $2bn acquisitions of Digital and Tandem respectively. These problems have led to a nose-dive in profit and, in April, climaxed with the sudden departure of Eckhard Pfeiffer, chief executive of Compaq, along with other senior management figures.
The difficulty of finding another leader has now been resolved with the appointment of Compaq insider Michael Capellas to chief executive (PC Dealer, 28 July). But the vendor's next predicament is how, as one of the world's biggest PC manufacturers, it can reshape itself as an agile competitor, while still keeping a strong foothold in a fast changing market.
How can it address the competition coming from the direct sales models adopted by Dell and Gateway, while at the same time maintaining its relationship with the channel, which has historically been its primary outlet?
Some industry watchers are uncertain about the company's future. They wonder if Compaq has been honest with its channel and if it can be honest with itself. When it comes to wearing a direct hat and a channel hat, can both fit together? Compaq believes it has formulated the perfect plan to carry out such a delicate balancing act to reverse the poor performance that has unnerved its investors.
Over the past two months, the manufacturer has put into place a radical restructuring policy. In a bid to curb operating costs and cut them by up to $2bn, it has reorganised its global business into three product groups - PCs, consumer products, and enterprise systems and services.
Compaq has addressed the issue of over-distribution and inventory costs by paring back its US distributors - which once numbered 39 - to only four, in a move which it is believed will be mirrored in EMEA. It is also expected that Compaq's key US distributors will co-locate warehousing and assembly facilities alongside Compaq manufacturing plants, a scheme which would enable the distributors to speed products to customers and enable Compaq to compete with its direct rivals. It had previously rejected co-location as a strategy for Europe, stating the market was unsuitable, but it may be in the pipeline for its large European partners.
Compaq has introduced its Compaq Solutions Alliance (CSA), a global scheme which aims to give additional marketing, pre-sales and technical support to its channel and for which no extra qualifications will be needed. But partners will have to pay a membership fee, which has been waived in the UK for the first year. It also plans a Reseller Agency Programme (RAP), in which resellers will be able to pass orders on to Compaq, have kit shipped directly to the customer, and receive a kick-back fee for the sale, without having to touch the order if they don't want to.
But Compaq's attempts to achieve an equilibrium of sorts, between tackling competition from rivals such as Dell, while not alienating its channel, seem to have gone askew with the strategy it plans to introduce in September, with the launch of its ecommerce site in EMEA, a tactic which seems to have used Dell's internet business model as a blueprint.
Through an alliance with pcOrder.com, a manufacturer of online computer sales technology, the website will enable corporate customers to order products direct from Compaq. It will give customers the option to have the order fulfilled by either a reseller or the vendor itself, and provide catalogues, pricing, availability and quotes. Andreas Barth, former head of Compaq Europe, said before his retirement in June, that Compaq wanted its direct sales to hit the 30 per cent mark. Indeed, following Capellas' appointment two weeks ago, he upped the figure to 40 per cent.
But where will the channel fit into the equation? Compaq has sought to keep its channel happy by stating it will be partnering with it, so it can provide integration and distribution services. But, unsurprisingly, the channel, namely its resellers, is sceptical of the ecommerce initiative.
Barry Dodhia, marketing manager at Hemini, a Compaq Systems Centre for 10 years, makes no bones about his concerns: "The announcement of the website shows Compaq will be dealing direct with customers itself - and the majority of our customers are corporates. Compaq is subcontracting a lot of services to itself, cutting out the middlemen - us.
"We used to get a lot of leads from Compaq, but now we get nothing. The vendor has been asking us over the past few months to provide it with our database detailing customer names, order sizes and what was sold and when. It gave us a deadline of 1 April to provide it, but we haven't.
"Compaq didn't say why it wanted the database, but obviously it wants those names so it can start going to those customers to deal direct with them," he claims. "There's no reason why it shouldn't, once it has the details. But if it means we lose our status as a systems centre, we'll eventually have no choice but to give it our customer database. I do feel there is something sinister going on."
The same sentiments come from another Compaq reseller, who wishes to remain anonymous. "We have been less than happy with Compaq recently.
Manufacturers just want to play around with the channel and I'm sick of it. It seems that Compaq has gone into a panic reaction and set up this direct selling model because it thinks it can do a Dell. But how can it keep its channel as well? No matter how hard it tries, it will end up hurting its partners, but it will be to its own detriment. We sell other big names such as IBM, Lucent and Netfinity, but at least you know where you are with them - I'm not about to start competing with them. I don't trust Compaq at all."
Another Compaq authorised systems house, Lanz, is also uncertain about its position with the manufacturer. Sanjay Patel, sales and purchasing manager at Lanz, says: "Selling direct on the web does cut us out. There is no way Compaq can say 100 per cent that there won't be a problem, that leads will come through and it won't take the business away. I can't believe it unless it is put in writing. We've had no notification of Compaq initiatives, no substantial information.
"Customers on the whole may not understand what it means to buy direct or indirect when faced with the choice on the web. I don't think Compaq will give us a look in. If it does pass leads on to the channel, it will more than likely be to a preferred account specialist.
He claims: "There have been situations in the past where we have had large deals with Compaq, and we've asked for favourable pricing. In return it wants all the details of the user, then the next thing we know, it has passed it on as a lead to rival resellers. We have lost a lot of business with Compaq in that way.
"We hope our customers will not be tempted away from us - we do offer a lot of value-added service, but no one can guarantee loyalty," Patel adds. "We've been a Compaq reseller for 10 years and went through the rigmarole of training when our status was taken away at the time of the Digital acquisition - we invested in it and made sure we got our status back. Now our pay-off is that Compaq is going to sell direct and put us in competition with it. All the vendors want to be number one and if that means taking business away from resellers then they will, and they will do it any way they can."
But Scott Dodds, general manager of channel sales for Compaq, is naturally keen to rationalise the move and allay such fears. He argues that Compaq has had to sell direct to satisfy consumer demand for more choice, which he claims is an industry-wide issue.
"Unfortunately, there are customers that will not deal with us unless it is direct. In the past, if that was the case, we couldn't do anything.
Now if we have multiple routes to market we don't have to pass up those sorts of business opportunities.
"Ecommerce is the only way forward if you're a global player," Dodds believes. "It's all to do with offering the most efficient supply chain - whether it's direct or indirect, is becoming irrelevant. It doesn't mean we're cutting out the channel or that it will be to the detriment of our partners - 75 per cent of our UK revenue comes from our channel.
We are already almost hitting the target of 30 per cent direct sales to our corporates, and our channel hasn't lost out.
"We need to make our supply chain slicker - that's where our focus as a business is - but it's doing that with thousands of partners, not just through one website or our operation team. We believe the majority of customers that will buy direct will need our partners to offer support and services - they will be better served by resellers that understand the products.
"We will make it clear to our customers what it will mean to order direct or indirect," Dodds states. "We'll discuss the customers' needs and ensure they can be fulfilled either with us, or through the channel. But it's the services and applications that make the money and that's where our resellers come in.
"The channel provides things a manufacturer just can't touch. It will be good all round. We will hit more customers and have a wider skills base available to us than any direct manufacturer. Our corporate accounts team only hits about 100 customers, but our channel is hitting something like three million.
"Dell is all over our channel on a piecemeal basis, we know that," he adds. "I'm sure that it will start to look at forming channel relationships itself soon enough. We have to move our model on, but it does not mean we have to walk away from anyone. Channels will have the biggest business with Compaq."
Dodds also explains that the products to be sold on its website will be select and limited to the Prosignia range, a small micro business product.
He says he doesn't know of any plans to add different ranges or offer discounts on kit as yet. Linked with the Prosignia sales is Compaq's reseller scheme.
"This is open to contractors, consultants and resellers. If they put a customer in touch with us, they can get a fee," Dodds says. "Ultimately it may be a percentage or flat fee, depending on how high the spec of the kit. There's already hardly any margin in hardware, but at least they can still make some margin for their business without having to handle it or spend any money themselves."
But Dodhia is not convinced: "How is that going to be monitored? Over the past few months, Compaq has been offering something vaguely similar to the channel. If users buy certain items, we can receive a rebate. But to get that we have to disclose to Compaq who the customer is. What better way to get details for its own database?"
But some resellers are not so sceptical of Compaq's actions. Jeffrey Teece, managing director of Excel Computers, says: "Business has changed because of the internet. This move is the best compromise Compaq could make. It will keep the channel happy and allow Compaq to compete with Dell.
"As a system reseller, we will probably benefit as well, avoiding doing tin," he adds. "Doing services will only improve our cashflow. The Prosignia range is for SMEs on a tight budget and we can come in once they've bought the hardware and configure it.
"If Compaq did try to fiddle the channel in any way, it would be counterproductive because it would get found out. I don't think there is anything wrong with the company gathering a customer database from its resellers, although it hasn't asked us. But it would provide Compaq with an accurate database that would be a good marketing tool."
Eddie Hillier, managing director of reseller Cadac, also believes there may be undue concerns among some resellers. "Unless Compaq is offering significant discounts, the more sensible customer will always go to the reseller - we add value. And if Compaq promotes us on its website, it will be a great opportunity for us to get leads. We have jumped through hoops for our Compaq accreditation, but if Compaq does as it says and keeps the resellers as a strong part of its business, then it will benefit us all."
But distributors are also finding their future being assessed in the Compaq restructuring. Distributors in the UK may face a pruning session as their US counterparts have done. But as Dodds points out, that is yet to be decided.
"In Europe it is more complicated, but our distributors know we have to consider cutting back on our distribution partners. Compaq's aim is to ensure more routes to market, more products and to make it simple."
Alice Smitheman, general manager of Computer 2000's PC division, says: "It's a fact that Compaq is over distributed and the supply chain would benefit if distribution became more streamlined. If you listen to the arguments for direct and indirect - the level of inventory, risk and stock in the channel - streamlining and managing the supply chain is necessary to improve costs in the channel. But we are confident of our partnership with Compaq, should it decide to cut back its distributors.
She adds: "We are comfortable with the ecommerce programme it has communicated to us. Nearly every manufacturer is endorsing a mixed model. In the US, top accounts are handled directly. It's not seen in Europe, but if that is formalised globally it will not have an impact on us.
"The veiled threat I suppose is how many other products will go onto the website - so far it is a limited number, designed for the Soho market.
But what we are seeing is the model of choice - multiple routes to market.
From a distributor's point of view, the business Compaq is after sits 99 per cent outside of the traditional markets we address, so we are not nervous about these moves."
Peter Rigby, marketing director at distributor CHS, says: "If this had happened at Compaq 18 months ago, then we would have been alarmed. But now, we see this as a natural progression of business. Vendors have to capture every opportunity they can and the potential offered by the explosion of ecommerce is enormous.
"The key thing will be how it prices the products - that will be vital. We sell a lot of Compaq and we hope that for a lot of businesses out there the impact of these changes will be minimal. But the smaller resellers may start asking where it leaves them. Resellers will need to focus on third-party software and third-party hardware.
"I don't think it's the end of the world for resellers and Compaq," he adds. "I'm not sure how Compaq will rationalise cutting back its distribution partners in the UK. The desktop distributors is where over-distribution really lies. It will be a tough decision for the company."
Viewpoints may differ then with regards to Compaq's plan to sell direct, but there are still outstanding questions concerning its strategy. The vendor still hasn't divulged if prices will be different if customers buy direct over the web, nor has it settled the question of selling other products on the net apart from Prosignia.
And although Compaq reiterates that direct buying is available to corporates, Werner Koepf, general manager of EMEA at Compaq, has made it clear that this will soon open up to SMEs and consumers.
Andy Brown, EMEA PC market analyst at IDC, says: "It's a big shake-up of the European channel and we don't know how detrimental it may be. Vendors are in a strong position because resellers are unlikely to say they won't do business with Compaq anymore.
"Compaq could carry out in-house services because of the Tandem and Digital acquisitions, but it's offering choice to customers to reduce the damage with its channel partners. So it's trying to placate the channel. It will affect margins and its distribution strategy is bound to have casualties.
But it couldn't handle getting rid of the channel altogether - it's more an IBM, than a Dell - it wouldn't be able to match the volume, in the foreseeable future.
"But customer choice and macro-environmental forces have forced Compaq to react this way," he believes. "The company is very keen to offer more products and ranges and to tailor-make them for customers, but its structure won't allow it to. This change is needed to keep its business moving.
"Offering only a very limited range of the Prosignia products shows Compaq is testing the water," Brown concludes. "Once it sees how that is met by customers and the channel, it is bound to start putting other products through the website. Compaq will be a successful vendor, but the real success will be down to how well and how effectively it manages the transition."
The one thing that is certain is that Compaq has shifted the goalposts and its partners are suspicious. Whether they make it to full-time unscathed remains to be seen.
A summary of what you get if you subscribe to our premium market intelligence service
Matthew Polly says CrowdStrike is looking to branch out from the UK and into mainland Europe
Southampton-based VAR states that further acquisitions are in the pipeline
With UKFast launching a public cloud consultancy, Tom Wright asks if this is the way forward for all local hosting providers