As the real time clock time-bomb we had to have ticks down to January 1, 2000, it is a commonly held fear in the channel that there could be a marked drop-off in IT-related sales during the last quarter of this financial year. Fact or fiction?
Commonly held theories suggest that as large corporations and government agencies complete their Y2K programs, they will lock-down their IT infrastructures and simply refuse to open the purse strings until the proverbial dark clouds have blown away.
Doomsayers will have you believe this will be the catalyst for all IT spending to cease. Businesses will go to the wall, they say. Massive discounting will commence to help move stock and margins will be cut to new irreversible lows.
Clearly, while there may be some legitimate grounds for concern, this is not the case. The general opinion of channel players contacted for this story is that it is only the salespeople at high-end hardware-centric companies who are going to suffer. Distributors and resellers with a solid grounding and some forethought and contingency planning will be able to ride out the storm into the dawn of strong new demand in January next year.
However, the bottom line is that nobody really knows just what is going to happen at the turn of the millennium, let alone its implications on market volatility in the lead-up. One industry source we contacted didn't want to comment on the matter because he felt: "The more you talk it up, the more it becomes a reality."
Fortunately, not everybody was so reserved in their opinions. David Cullen, managing director of distributor Tech Pacific, said he is "quite optimistic" about third-quarter business this calendar year but conceded there are "some question marks on the last three months because of Y2K lock-down.
"We are definitely hearing there will be very little activity in terms of new rollouts in banks, insurance companies and the like," Cullen said. "That is a lot to do with the fact that they have locked down their Y2K audits and have submitted them to the stock exchange. Financial institutions can't afford to change anything for those reasons.
"We are still expecting to see strong PC business later this year, but certainly we feel that the majority will be coming from the lower end. There will not be any major networking or systems rollouts from an enterprise point of view during that quarter."
Cullen agreed that Q4 could be tough for channel salespeople who are "dealing in the high end of the market" but felt small and medium enterprises (SMEs) would keep the ball rolling for Tech Pac. If he is right, that augurs well for most resellers, as TP's buoyancy is currently a good gauge of Australian channel activity, simply because of its dominance.
"All the indicators are showing there is a major part of the SME market that is not prepared for the Y2K issue," he said. "We believe there will be a significant number of purchases made in the last quarter from that sector as people realise their current systems are not compliant.
"Business should be reasonable because many of these small guys will actually start to do something about it. However, we also feel some of that will be offset in part by others deciding it is all too difficult and putting it off until after January 1, 2000."
Jonathon Fisk, managing director of network integrator Senteq, on the other hand, sees the problem as being a little more genuine. He said that Senteq, like many other leading players, is well aware of the situation and has been planning for it over an extended period of time. As has Tech Pacific.
"Most organisations are talking about going into some form of lock-down in the third quarter," Fisk said. "They would have finished their rollout of Y2K upgrades and will not be adding any new hardware to the infrastructures until January next year.
"Obviously, there will still be day-to-day hardware purchases taking place. These companies will still be taking on new staff, so they will have to buy some hardware, but what you are not going to see is major new rollouts commencing or new, untested technologies being added to infrastructures."
Unfortunately, in Fisk's opinion, this is not good news for the channel. He fears a "significant drop-off in sales" which is going to "send the major vendors into a spin". He believes these big companies are all basically mastered by their Wall Street responsibilities, which will mean they have to do everything possible to maintain sales targets and revenues or face mutiny and desertion from investors.
"The only way some vendors will be able to keep revenues up if demand falls away is by discounting and we all know that it is the channel that suffers first when that happens," Fisk said.
Phillip Tran, sales and marketing manager with local assembler Compucon, said that the messages coming from his mainly corporate client base encouraged him to start looking at a retail strategy.
Tran indicated quite a few of Compucon's corporate customers are now engaging in big rollouts, which is securing their enterprise Y2K readiness. He also said that many of the same customers are saying they will not be buying any new equipment once these rollouts have been completed.
"One of the main reasons we recently announced the development of a retail product was in case there was any slowdown of business in our traditional corporate markets," he said. "We have recognised it as a potential problem and have a contingency plan in place, which is the obvious correct business practice to undertake."
Tran cited a global enterprise client which Compucon services across Asia which was definitely locking down with carefully Y2K-scrutinised configurations after August, leaving it enough time to run final checks.
"This one customer has ordered 400 PCs to be rolled out in July and August," he said. "This is a customer that has ordered sev- eral thousand PCs from us in the past but when I asked them what their commitment would be after August they said they were going to hold off until after December 31 before buying any new PC hardware.
"This customer also has another 1000 PCs which they recognise they need to replace now, but they have indicated they will not be doing that until into next year," he said.
Tran said this case was a good example of what might be happening elsewhere and that it had spurred him into action.
Even though he is not expecting Tech Pacific to be greatly affected, Cullen also talked of contingency plans and "being close to your customers" as being the keys to surviving any pending crises that resellers may see looming in their markets.
"It is the usual story - if you don't want to do anything about it and you don't listen to what people are saying, then potentially you could have a problem," he said.
"There is not a lot resellers can do if their customers decide to not buy anything but I would suggest they need to stay close to them and not be afraid to ask how they are dealing with Y2K."
Resellers catering to the middle and low end of the IT market are unlikely to feel major headaches as a result of any Y2K lock-down that occurs, according to Allan Brackin, managing director with AAG Technology Services. While he agrees many large corporates will lock down, he believes there will be a trade-off in the form of large numbers of SME buyers rushing to upgrade their systems in the last quarter.
"You would suspect that the bigger companies are there [Y2K compliant], but in the medium-size space, I would suggest there is going to be a lot of spending later this year," Brackin said.
"The feedback we are getting is that many of them [SMEs] have not fully sorted out their Y2K problems yet. If that is in fact the case, there is obviously still going to be some spending in the last few months to get that done. We don't see it as a big issue at this time."
All four interviewees for this feature urged resellers to also be in readiness for the increased demand that will come once the whole kerfuffle dies down.
Brackin thinks there will be a "spending splurge" at all levels of the market in January, an opinion that Cullen and Fisk agreed with.
"There are a number of companies that have held back projects and budgets to get Y2K-ready," Brackin said. "They are going to be spending again next year, no doubt about it. We think January will be a strong month, with incremental activity from SMEs," Cullen said. "There is definitely going to be SMEs that did nothing about Y2K and suddenly need to and there will also be enterprise activity because some of them will find they didn't do enough."
The real danger for resellers, according to Cullen, is in making sure their suppliers are compliant. "We are gearing our business up so that we will carry incremental stock into the new year and will have additional resources in place to look after our customer base," he said.
Lack of capital
"Many of the small and medium distributors will have a lot of difficulties across their businesses because they haven't got the infrastructure or the capital to properly address the Y2K issue. We have seen how expensive it is in terms of dollars and resources to make sure your business is 100 per cent compliant. So I would be concerned, if I was a reseller, to make sure my distributor was 100 per cent compliant."
In addition to the feast he agreed would probably be served up early next year, Fisk sees another positive out of the whole situation. It offers the chance for resellers to evolve their business to include more services as everybody keeps telling them they need to do.
"It is not all doom and gloom for resellers," he said. "There is sure to be a rise in hardware demand after Y2K has passed as all those that have held off start to purchase again but there is also going to be a boom in services revenues over the same period. In reality, it provides an opportunity for those in the channel to concentrate on servicing existing customers and developing some revenues in that area."
He said that smart organisations anywhere in the channel community will have contingency plans in place to ride through any bad times and be able to respond to fresh demand when it comes. He felt the last quarter of this year definitely looms as "possibly being negative", so significant players will have mechanisms ready to roll if that eventuates.
Interestingly, Cullen said that it is not Y2K that will be the biggest demand-related issue for the 1999-2000 financial year. He sees the Federal Government's introduction of a GST looming as a much larger issue.
"The GST is only going to tax hardware at a rate of 10 per cent where it is currently attracting 22 per cent," he said. "It is like it never ends. There is always one issue after the other. If we could all spend the time putting all this money and resources into growing our businesses and working with our customer base then we would all be better off."