The channel would not be immune to another global financial crisis and should look to smart strategies in the face of another downturn, industry executives say.
Economic news from all around the world and Europe’s worsening debt crisis have thrown financial markets into frenzy. The last couple of weeks have been marked by a raft of weak data: a sharp spike in the US unemployment rate, lower GDP figures in China and India, Europe’s spiralling debt problems, which have all raised concerns over the possibility of a “double-dip recession” or GFC II.
Meanwhile, Australia is showing strong economic growth.
Channel leaders, while expressing caution and economic realism, didn’t suscribe to the general gloom and doom that has dominated the business and financial press in recent weeks.
Data#3 CEO, John Grant, said, the world’s financial systems are so interconnected that if any one piece starts to fail, the other parts of it are ultimately affected.
“We saw this with the global financial crisis in 2008. Since then, there has been a recapitalisation of financial institutions and better a better understanding of risk.
“However, when you get major economies failing, it has an impact not only in financial terms but also on confidence and perception globally,” he said.
That would eventually have an impact on the way people spend or save their money. For businesses, that often translates into project delays, over-cautious attitude, and at worst, slashing of IT budgets, which have historically often been in the line of fire of operational cuts.
“There will be a great impact on our businesses. For most businesses these days, their opportunities rely on technology. Those organisations that become expense managers in tough times will slow down IT expenditure,” Grant said.
Newport Capital Group chairman, Lou Richard, said vendors dealing within the retail space and the government will be the most affected.
“The main issue is that any channel parties or distributors who are selling to retail are finding it tough because of the flat general depression rates,” he said. “Apart from that, the Federal Government and NSW Government appear to have reduced spending on technology.”
The primary victim, according to him, will not be margins but rather a reduction in sales volume through the retail channel and into the Government.
Channel Dynamics director, Cam Wayland, warns that those channel partners providing only marginally better services will suffer, making value-added and sound businesses practices key.
Reasons for optimism
But there’s also plenty of optimism.
Wayland noted that the sales targets of most vendors his firm interacts with are the same. Most budgets of vendors in the US are already set for the rest of the year as they follow the calendar year.
Symantec APJ channels and alliances director, Jeff Arndt, said it is late in the Australian financial year planning to make big changes that would impact overall strategy, with many businesses already executing strategic priorities.
“[Most companies in Australia] have already decided their budgets, spending plans, and strategic priorities. What they deem as strategic imperatives and projects will go ahead.”
Data#3’s Grant said, “Provided that the global situation can stabilise and be seen to stabilise, then I think that investment in IT will remain because we will keep investing in technology. If the global situation becomes the defining factor, then IT budgets will be slashed.”
WhiteGold strategic advisor, Leigh Howard, sees no difference in the IT market to what it has always been. He sees a slowdown in the market but said the underlying issue for IT has always been the same.
This optimism, however, is confronted by a fair degree of caution, with decision- making slowing and delays in project approvals, noted several industry executives.
“Customers will slow down decisions on projects which require capital expenditure to support,” Grant said. “So businesses have got to look at what the customer is trying to achieve from technology.”
He said the outlook for the next few years will remain flat.
Channel Dynamic’s Wayland thinks these are also part of broader structural changes taking place in the Australian economy such as a shift into services-types businesses that will also play out in the IT sector.
The ongoing financial uncertainty could also lead to further consolidation through possible merges and acquisitions in the channel, say executives.
Mergers and acquisitions among larger players will dominate any possible consolidation, according to Richard.
Symantec’s Arndt underscored this was something the industry saw in the post-2006 period and could repeat.
Nextgen Distribution’s managing director, John Walters, said most of the consolidation among the channel had already taken place, and any further consolidation would be from overseas distributors looking to enter the market.
While mature channel businesses have already come to anticipate a degree of financial uncertainty, a focus on value-added services, cash flows, and understanding the business needs of the customer will be amongst the most important ways the channel can cope with a big downturn.
Newport Capital’s Richard suggests that smaller resellers should focus on their margins by identifying new innovative products that bring in higher margins than traditional products.
While Grant suggested business in general should focus on technology issues in sustaining growth during an economic crisis, he recommended that enterprises should concentrate on what their customers want, as well as choose their projects carefully and execute them without error.
Point of differentiation
Having a point of differentiation continues to gain importance, especially when companies are tightening their discretionary budgets, as that is when the situation of a company’s growth becomes more acute.
“If you look at the feedback from the channel, it is the same story now as it has always been; which is, if you haven’t got any point of differentiation and you’re just fighting for market share on price or if you’re a vendor that does not have any technology differentiation, then you’re always going to struggle,” he said.
According to Howard, many businesses are also adopting sustainable technologies as it presents then with an avenue to save on costs, especially with the proliferation of datacentre growth as power and cooling costs are exponential.
“The end-user community now, is looking for much better value for money and that gives an opportunity for companies to not necessarily carry leading brand technology,” he said.
Business models such as annuity type businesses and managed services type models also lend more predictability to the cash flow of the businesses, and may become more mainstream overtime, Wayland said.
“They should be paying attention to both their own cash flow and that of their end customers,” he said.
The whole emphasis on the Cloud, carbon tax effects, consuming IT as a service will be technologies that will see a continued push, according to him.
Ultimately, the new financial landscape is a reality that most businesses have to learn to live with for a long time.
“Uncertainty is not going to go away,” Symantec vice-president and managing director Pacific region, Brenton Smith, said. “[China and India] will have their challenges, their growth rate will be affected by other things. Smart organisations are getting used to that and will adjust.”