state-of-the-art data storage

Big Data and the cloud are the watchwords for the future. The
capability to use and store Big Data means ever-increasing demand
for state-of-the-art data storage. Our Parallax systems continue to
lead the pack. The cloud will bring high demand not only for data
storage but also for our industry-leading virtualization software
that lets it all happen seamlessly and invisibly to the user. We are
positioned for major continued growth as these trends accelerate.
The future is bright for FND!
In 2004, Raphaella Munoz, vice president and director
of the Herald Division of FND Corporation, and her
top-management team had just heard those words from
Jack Pizzuti, chief executive officer (CEO) of FND. He
was speaking from a large auditorium in San Francisco,
California, at the headquarters of the Software Division, but
his address was webcasted to all of FND’s facilities around
the world. Cheering could be heard from the San Francisco
audience, but the mood in the Herald Division conference
room was much more somber.
Herald products had not been mentioned once in
Pizzuti’s 45-minute address. Herald made and sold FND’s
second-tier storage systems. The systems were very-high
quality and led FND’s competitors in terms of reliability
and cost of operation, but the systems did not contain the
latest leading-edge technology, unlike the Parallax systems.
Herald systems were targeted to serve the less-strenuous
needs of departmental offices or remote business offices of
the Fortune 1000 firms that bought Parallax systems for their
corporate data centers. The managers in the room realized
that Herald products might be the tier of products most
likely to be negatively affected by a trend to cloud storage.
Munoz clicked off the webcast and turned to her team.
“I have decided that we need to mount a concerted effort to
press more strongly into the small-to-medium business (SMB)
market. To date, our business has been focused on very large
companies. We dominate that market, but it is becoming
saturated and is likely to be slowly eroded by cloud-based
storage. That is not going to happen very quickly. It will take
many years for the majority of organizations to become ready
to adopt cloud storage. Most IT (information technology)
buyers tend to be quite conservative. But before that happens,
we need to strike quickly and expand our market footprint;
and the time is now. The big numbers of potential new clients
are in SMB. We need to significantly expand our market
presence in that segment as soon as possible.”
Tina Johnson, chief sales and marketing officer in the
Herald Division, reacted first. “You are right. That is a
huge market, but it is made up of many quite different
subsegments. One of our salespeople just completed a sale
to a firm with only 16 employees, but it is an internet-based
company and bought 5 of our top-of-the-line RX-50s. That
is a $750,000 deal! The selling process took a long time, and
the customer had many technical questions. On the other
hand, another recent SMB sale involved a large regional
heating, ventilation, and air conditioning (HVAC) equipment
service company. The salesperson expected this to be a big
sale, too. The company has more than 200 employees. In the
end, the customer only bought an entry-level RX-10. The
salesperson said that this customer needed to be educated
ISSN 1940-204X
FND: The Hill Channel Partner Decision
©2019 IMA
Alfred J. Nanni, Jr.
Professor of Management Accounting and
Operational Performance
Babson College
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about basic system storage and that the resulting sale took
some time but not much expertise. In my opinion, that was
a huge waste of the salesperson’s time and effort. My sales
force is not designed to chase those tiny sales.”
For basic information about the RX-10 and RX-50
product lines, see Table 1. These products are the high and
low ends of the RX series of products.
Ken Nakane, manager of the Herald Service Group, reacted
to Johnson’s comment: “We see the same sort of thing in
warranty service. More-sophisticated customers tend to have
more-complicated service needs. On the other hand, some
warranty repairs on RX-10s are almost a do-it-yourself level of
difficulty, but we still have to use our existing highly trained and
expensive service technicians. That makes the simpler products
relatively more expensive to service. Here is a cost and time
analysis of warranty-related service costs for the RX-10 and the
RX-50 that our financial planning and analysis (FP&A) group
put together (see Table 2). This illustrates my point.”
“Speaking of FP&A, they also studied the time our sales
team puts in on each bid,” Johnson interrupted. “You can
see that a similar pattern in relative costs shows up for selling
small vs. big machines (see Table 3).”
Gil Santiago, the chief financial officer (CFO) of the
Herald Division, spoke next, turning to face Munoz:
“Regardless of how much cost sales and service absorb in
this potentially large SMB market, the critical issue we have
to face if we are going to significantly increase our effort
is that we really do not have any excess sales and service
personnel. We have staffed ourselves very tightly to maintain
our final margins. The purpose of having my FP&A group
do those fully loaded activity-based costing (ABC) analyses
was to get an idea about how much we need to budget as
we increase staff in those two areas. If we expect to increase
sales in the SMB market, we can expect our sales and service
personnel costs to increase, as well. There will be training
costs, too, but they are baked into those fully loaded rates.”
“That is not an issue for manufacturing,” said Bhavna
Choudhary, vice president for manufacturing in the Herald
Division. “As you know, we added lots of capacity a couple
of years back, but demand has not yet risen to fill that
capacity. Furthermore, we are continually improving our
process efficiency, which actually expands effective capacity.
Right now, we could produce at least 25,000 more RX-50s
every year without adding any fixed costs. We could easily
make more than 35,000 additional RX-10s.”
“But most of our product costs are variable costs anyway,
aren’t they?” asked Munoz.
“That is true,” Choudhary replied. “We mostly just do
assembly, testing, and software loading. Our supply partners
make all of the components.”
Munoz stood and placed her hands on the table. “We are
going into the SMB market, and we are going in strong. The
question is, how do we organize ourselves to successfully do
it? We have been talking about simply utilizing our current
direct sales and customer support model, and expanding
our headcount as necessary. That might work for customers
like that internet business Tina mentioned, but they are
an outlier in the SMB market. There is an almost instantly
effective alternative, though. We could partner with a single,
dominant value-added reseller (VAR) to act as our retailer.”
Johnson reacted immediately: “VARs are an effective
way to reach particular segments, but who has the capacity,
interest, and existing market penetration to do that job for
us? Beyond that, using a VAR means big sales discounts, and
it means cutting out my sales force for some customers. If
we do that, I strongly feel that we would still need to pay our
salespeople commissions for VAR sales that are made in their
territories. I have worked too hard to create a highly capable
and energetic sales group. They are responsible for billions
of dollars in annual revenue. We cannot risk demoralizing
them and potentially losing them to our competitors. This
move could undercut their motivation unless we show them
that it is a win for them, not a threat.”
“I am glad you asked that question,” Munoz responded.
“Actually, I have been in early discussions with Hill
Computers. You know the company has a close relationship
with us. Its management buys a lot of our enterprise
equipment and related service and software for the
company’s own use. We buy desktops, laptops, and related
software exclusively from Hill Computers. Hill has the
capacity and the market penetration into the SMB market.”
“How would we service products sold through Hill?”
asked Nakane.
“We wouldn’t; we would supply the parts, but Hill would
handle the service,” replied Munoz. “And, yes, Hill will get a
big channel discount—35% less than our standard direct sales
price to be exact. That should give the company enough profit
incentive and allow it to deliver and service the units, too.”
“But there is a real risk of losing all of the customers Hill
sells to. Hill can be ruthless if they see a good opportunity
for profit growth. Do you remember what happened to
Textmar printers? Hill sold Textmar for a while in the late
1990s and then decided to make nearly identical printers
themselves. All of a sudden, Textmar lost the majority of its
sales volume. Do you want that to happen to us? We make
great products, but they are assembled from supplier parts. It
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would not be that complicated, for example, for Hill to make
RX-10 clones,” Choudhary said.
“Let’s see what we are talking about before we worry
about losing it,” Munoz replied. “The people I have been
talking to at Hill think the potential volume is 2,500 to 5,000
RX units in the next year. Some of those units would likely
be sales that we could otherwise make ourselves but no more
than 25% at most. And, Johnson, before you protest, that
certainly would be a noticeable bite from your sales force. I
would at least consider letting them take a commission on
sales delivered in their territories, as long as it was based on
our price to Hill and not on the standard direct sale price.”
There was silence in the room. Santiago eventually spoke
up: “I can assemble a team from my FP&A group to look
into this. Let me do that and get a report back from them in
a few days.”
“Good,” replied Munoz. “Let’s see what they come back
FND Corporation was founded in the 1980s as a manufacturer
of sophisticated direct-access storage devices. This hardware is
the large-scale analog of the hard disks in a laptop computer.
Early in its history, FND management learned how
to target their products and sales to large enterprises and
developed internal organization to support the value
proposition. Products were designed to be extremely reliable
since these businesses needed “7 × 24” uptime for their
mission-critical applications. Since these customers were
very large, they had large teams of skilled professional
IT workers and large (sometimes multiple) data centers.
These IT professionals found FND’s hardware to be
technologically superior to the competition’s, with higher
reliability and significantly lower power consumption and
other data-center-related overhead.
That value proposition resonated very strongly with
Fortune 1000 customers. Within 10 years, FND dominated the
worldwide market for so-called “enterprise” storage hardware.
The FND sales force was highly trained, in terms of
both IT and business and finance skills. Sales negotiations
on these products and services were “high-touch,” often
involving multiple site visits, various presentations and
analyses, and weeks or months of discussions. Additionally,
since any after-sales problems that arose had the potential
to be complicated by interactions between FND’s
storage products and the rest of a customer’s IT operating
environment, FND put together a highly skilled, high-touch,
rapid-response customer support system.
FND rapidly began expanding its offerings with other
kinds of storage and with software and service support to
the same customers. The primary avenue for developing the
product and service lines for this expansion was acquisition.
FND’s first major acquisition was Herald Machines, which
made storage devices that fit the needs of subunit offices of
large businesses better than FND’s existing high-capacity,
high-performance corporate data center products. The Herald
RX product line, however, was also a natural fit for the needs
of small- to medium-sized businesses—the SMB market.
In contrast to the enterprise market, the SMB market was
often characterized by less-sophisticated and less-complex
applications. SMB customers, especially the smaller ones,
were more likely to be concerned with product purchase price
than with value characteristics like unit footprint or operating
cost. They needed reliability, too, but smaller businesses
often ran their machines one shift per day, five days per week,
not 24 hours per day. SMB customers did not have large or
particularly sophisticated IT staff members. In fact, for the
smallest customers, the IT department often consisted of
the business office manager or bookkeeper, who performed
IT duties as part of a larger set of responsibilities. These
customers, then, were really looking for computer system
“appliances,” not complicated machine/software systems.
In the SMB market, the sales transaction was often more
like a retail purchase than a drawn-out negotiation. This
required less salesman time per sale on average than sales
in the enterprise market, but more salesperson time per
dollar of revenue. On the after-sales service side, much of
the demand from SMB customers was for assistance related
to errors in basic care and operation. These kinds of issues
almost never arose with enterprise customers.
Unfortunately, the solutions required a very different
nature of discussion and interface from that which the
support teams experienced with enterprise customers. It also
required far less specialized technical skill and knowledge
than that possessed by the support staff FND employed.
Hill Computers, like FND, was founded in the 1980s, shortly
after IBM released the first commercially successful personal
computer (PC). With that product introduction, desktop
computers immediately became an important business and
personal tool. By today’s standards, these computers were
very expensive and not at all powerful. IBM’s approach was
to make its PCs from commonly available standard parts,
which created opportunities for businesses making “PC
clones.” Quentin Hill began assembling good-quality PC
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clones for friends and fellow students in his dorm room in
college. Since he had little space and little money, he crafted
a business model where he would take payment, buy the
parts, and quickly assemble the computers to order. His
business expanded quickly, and soon Hill Computers had its
own large assembly facility.
As it grew, Hill Computers maintained its focus on the
original customer value proposition—just-in-time (JIT)
made-to-order products at low prices. To keep sales costs
low, Quentin first relied on only telephone and mail-orders.
As internet use began to grow, Hill Computers quickly
established a web presence. The company continued to
grow at double-digit rates. By 2000, Hill Computers made
more than 90% of its sales online and was one of the biggest
computer companies in the world.
Although Hill was generally known for selling to
consumers and small businesses, it sold to larger businesses
as well. The actual final sales to big business customers,
however, looked very much like sales to individual
consumers. Hill’s corporate sales force would talk to chief
information officers (CIOs) and top IT managers in large
businesses. Those managers would then establish parameters
for what types of hardware and software that employees in
their company could buy online. Hill would then set up a
password-protected company webpage for that customer.
Department managers and even individual employees at the
customer company could then order computer equipment
like desktop computers, laptops, and printers and charge
their department business credit cards. The funds would
then be drawn from the departmental budgets.
This arrangement was valuable to the IT managers. It
took IT personnel out of individual employee computer
acquisition and distribution, a time-consuming but low-skill
activity. It also allowed for standardization of the company’s
PC hardware and software, simplifying internal maintenance
and service requirements and thereby reducing the need for
extensive service training. IT managers, however, typically
retained exclusive purchasing authority over strategic (and
high-priced) IT capital equipment.
The arrangement was also valuable to the equipment
users, who could select the equipment that best fit their
needs without bothersome and time-consuming consultation
with the IT staff, as long as the purchase price was within
their budget authority. Industry analysts claimed that part
of Hill’s pricing strategy was to position product prices just
below typical budget authorization ceilings (e.g., US$1,000,
US$5,000, US$10,000, or US$20,000) so that potential buyers
would be free to place the order without initiating further
internal review and approval.
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Table 1. Basic Information About Herald Products
RX-10 RX-50
Position in product line Entry-level Top end
Average selling price $18,000 $150,000
Variable manufacturing costs/unit $9,000 $63,000
Variable unit installation cost $900 $1,400
Sales commission rate 5% 5%
Note: All monetary values are expressed in U.S. dollars.
Table 2. Comparative ABC Warranty Service Costs per Average Service Call
Fully Loaded ABC Rate
Per Productive Hour*
ABC Driver Count Product Profiles
RX-10 RX-50
Service labor type/class
Remote (call center) level 1 $30 0.4 hours 0.7 hours
Remote (phone) level 2 $85 0.3 hours 0.8 hours
Field technician $130 3.9 hours 6.1 hours
Parts $300 $500
Historical service call rate during Warranty 1% 3%
*Fully loaded costs include salaries or wages plus benefits, employment costs, and the costs of associated dedicated tools and assets for that employee. Productive hours are the hours spent performing the
job the employee was hired to do. On an annual basis, they are paid hours less holidays, vacation, sick time, training, and administrative compliance hours.
Note: All monetary values are expressed in U.S. dollars.
Table 3: ABC Sales Profile Data Average per Successful Sales Event
Fully Loaded ABC Rate
Per Productive Hour*
ABC Driver Count Product Profiles
RX-10 RX-50
Service labor
Lead salesperson $125 8.0 hours 24.0 hours
Sales support staff $73 5.0 hours 17.0 hours
*Fully loaded costs include salaries or wages plus benefits, employment costs, and the costs of associated dedicated tools and assets for that employee. Productive hours are the hours spent performing the
job the employee was hired to do. On an annual basis, they are paid hours less holidays, vacation, sick time, training, and administrative compliance hours. For sales, the time consumed pursuing “dead
end” leads is included in the successful event averages.
Note: All monetary values are expressed in U.S. dollars.
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