There are many different marketing theories about how to manage distribution channels. But everybody agrees on one point: a company should never have its sales force compete with its own channels. Against all odds, one division of Hewlett-Packard has been very successful at doing just that. HP's OpenCall Business Unit (OCBU) sells the same products to Telecom Service Providers (TSPs) such as Verizon or Vodafone, both through the channel of Network Equipment Providers (NEPs) such as Nokia or Nortel and through its direct sales force. How is that possible? The reason lies in one specific characteristic of the Telecom market: it is constantly subject to intense disruptions, where traditional models have to be bended to ease market players' necessary evolution.
Let's look at it in more details. Until 1999, OCBU products, the OpenCall product family, were systems for telecom network applications sold almost exclusively through NEPs: the latter developed integrated solutions on top of the HP platforms and sold them to TSPs. In 2000, the OCBU management team decided to change sales strategy. It created a sales force and a system integration team that would compete with NEPs by selling integrated solutions directly to TSPs. In parallel, it went on selling through NEPs who would build their solutions on top of HP platforms and sell them to TSPs. As Lionel Lapras, OCBU Director of Strategy, points out: "We realized that relying exclusively on an indirect channel did not allow us to continue our growth. We decided that a mixed direct / indirect channel strategy would offer more opportunities". This situation inevitably created conflicts with NEPs that HP managed on a deal per deal basis: if NEPs selected the HP platform in their proposal to the deal, HP would stay away and not compete; if NEPs did not select the HP platform, HP would compete with its integrated solutions.
This awkward sales strategy received good acceptance from the market because of two factors. First, a major market disruption was developing in the early 2000’s. At the time, the telecom market was barely going out of an almost-collapse situation: many TSPs such as Global Crossings or MCI had gone bankrupt; remaining TSPs were strangled under huge debt and had stopped all investments; NEPs such as Lucent, Nortel or Alcatel had seen their orders plunge by 50% to 80 %. At the same time, TSPs began shifting their attention from the “mobile Internet” to a new generation of advanced communication services. This situation created a drastic disruption in the way TSPs behaved when making purchasing decisions. Steve Dietch, OCBU director of WorldWide Marketing, says: "TSPs shifted their business objectives from service quality and availability to time to market and cost advantage. From their suppliers, they no longer accepted inflexible and proprietary solutions that were the norm in the Telecom paradigm until recently. Instead, they were looking at reducing the cost of failure and experimentation by using flexible solutions based on industry standards". The move to more open systems architectures created a wealth of new application developers who generated a new wave of solutions. As a consequence, under the pressure of TSPs, NEPs changed strategy. They no longer tried to develop in-house all components of their solutions, but rather integrated 3rd party products and built solutions based on standardized architectures. In this context, thanks to its unique experience of applying Information Technology standards and Open Systems to the highly demanding telecom network applications, Hewlett-Packard was an attractive player that could help smooth the change. TSPs asked HP to play a more prominent role, by offering complete solutions in competition with NEPs. By doing this, HP helped challenge the status quo and accelerate the change to Open Systems. Meanwhile, NEPs core business of telecommunications equipment was not being attacked. HP ended up complementing the NEPs core solutions and competing on the fringe.
Second, the Telecom market is a complex world where players need to maintain long-lasting relationships. As Telecom Equipment life typically spreads over more than 10 years, HP is now still supplying NEPs with platforms that are integrated in previous generations of equipment. Therefore, HP needs to keep a strong working relationship with them. And both NEPs and HP have an interest in evolving their installed bases to next generation open solutions. Also, HP's systems integration capabilities are limited and are way smaller than those of NEPs: it does not have the capacity to serve the whole market for solutions even if when its open architecture is superior. Therefore, Service Providers are very favorable for HP to continue sharing its open technology with NEPs. Barry Hill, OCBU Sales Manager, says: "By getting direct access to end customers, HP is able to fit better its product to their requirements and in turn NEPs benefit from HP's advanced technology". Thanks to its expertise in Open Systems, HP is able to implement new architectures efficiently in response to TSPs' requests. When its solution has been tested and approved by a TSP, HP has a large amount of credibility to convince NEPs to adopt its architecture in future deals.
As a result, HP has been able to grow it business faster than the market, both in the direct and indirect channels. Even though HP OCBU's sales strategy is at odds with traditional channel management, it is an important factor in facilitating the transition from proprietary to open systems. By selling its solutions directly to Telecom Service Providers, it helps uncover innovative architecture and prove their viability in the network. By continuing to supply its platforms to NEPs, it helps the whole industry absorb faster the new paradigm and overcome more efficiently the market disruptions that they are faced with.
