Coping with slowdown
A lowdown on how the channels in the United States is reacting to the economic slowdown triggered by the worst global financial crises ever
By Craig Zarley
 The credit crisis sweeping the global economy is beginning to impact solution providers as end-user customers cancel or postpone IT projects due to their inability to obtain financing.
Solution providers say that despite the $700 billion congressional bailout package and the Federal Reserve's half-point rate cut earlier this month, they expect no quick fix to the economic malaise sweeping the nation.
Most worrisome, solution providers say, is that some customers with otherwise strong balance sheets and ready access to capital are growing more cautious in their IT spending as they wait out market turmoil.
As a result, many solution providers are hunkering down for a difficult fourth quarter and formulating strategies to weather what could be a prolonged economic downturn.
“I've had two deals that the customers would have financed themselves through a bank but they were turned down," said Manuel Villa, president of VIA Technology, a solution provider.
"They then had to look for leasing options, but the leasing companies told them they couldn't do the project. Even leasing companies are getting tight with their approval process. That tells me that credit is tight all over." Villa said that the deals were relatively small, about $20,000 each, but the customers were well-established professional firms that had been in business for more than 10 years.
"If I've got two deals that are put on hold because of lack of capital, there are certainly some other folks that are seeing the same thing right now," he said. "This is a real problem now, but I hope that it is temporary."
Arlin Sorensen, CEO of Heartland Technology Solutions, a solution provider, said that he had a couple of projects slated for the fourth quarter that have been postponed until next year. "The impact we are seeing is in the midmarket," he said. "The projects are being postponed, not cancelled. There is uncertainty and people are waiting to see what happens."
On the flip side, he said, some customers that have budgeted IT projects are racing to complete them by the end of the year because they expect that their budgets will be withheld in 2009. To combat the situation, Sorensen said he's trying to break larger projects into several smaller ones to make them more palatable. And he's staying as close to his customers as possible. "We are staying connected and making sure they understand that technology is an important part of their success and they can't just ignore it."
Liquidity concerns
While solution providers interviewed by CRN said they have seen no new credit restrictions placed on them by their lenders, they remain concerned about how the liquidity crisis might impact customers.
Distributors, for their part, say that credit is readily available to qualified solution providers and, in fact, they are proactively increasing credit lines for solution providers that need more credit to finance business. And distributors note that they are seeing an uptick in demand for leasing to help solution provider customers that may have difficulty obtaining financing for IT projects. Still, solution providers are taking a cautious approach until the economic situation stabilizes.
Even those solution providers that have largely escaped the initial impact of the economic tsunami are bracing for the next wave. "It hasn't really hit us yet, but there is going to be a trickle down and anybody [in the channel] that thinks it won't impact them better think again," said Mont Phelps, President and CEO of NWN Corporation. "This is an unprecedented event. When you see huge institutions like Washington Mutual go out, this thing is bigger than we ever imagined. If it's that big of a splash in the credit markets, the ripples of that have to impact everybody."
While Phelps has seen no change in lending practices from his financial institutions, his greatest fear is that one of his customers' credit will dry up and the client won't be able to pay NWN. "We [solution providers] are all exposed to that problem," he said.
Phelps thinks, however, that the credit debacle could be a boom for solution providers active in managed services. "Anything that you can do faster, better and cheaper than the customer, that's going to give them financial relief," he said. He also noted that technologies such as videoconferencing should do well. "We are seeing decent-size companies doing Tandberg [videoconferencing] installations," he said. "By avoiding one or two [in-person] meetings, a company can pay for the system."
Hard times for hardware
Romi Randhawa, President and CEO of HPM Networks, a solution provider, said he expects lending institutions to tighten up their lending practices in the wake of the financial debacle, especially to those VARs that sell a lot of hardware. "Banks will be pressured to show more profits and less defaults," he said. "We are concerned because we are a privately-held company and usually don't show a lot of profit and banks are going to now want us to do that so they can give us more credit lines. The hardware business that we're in is cash-intensive. The services augment our portfolio but not to the point that we are living off of services."
He noted that clients will also face the same credit crunch, and that leasing and finance companies will look differently at customers' credit worthiness when financing IT purchases. He added that during the past 90 days, he has been closely scrutinizing the credit worthiness of new clients. "If we don't feel comfortable with a client, we'll have them issue the [purchase order] to HP and let HP make the decision if they want to float credit or not. We use the agent model to minimize risk," he added.
Despite his concerns, he said that "IT is still holding up—we had a soft Q3 but we expect to have a huge Q4."
He noted particular strength in blade servers, storage, virtualization and consolidation. "Hopefully, come January, we'll say 2008 was a tough year, but it will get better [in 2009]," he said.
Partner support
Adrian Jones, HP's Vice President and General Manager, Americas Solution Partners Organization, said HP is ready to provide more financial support to distributors to bolster solution provider credit lines if needed. The vendor primarily relies on its distribution partners to extend credit to its smaller U.S. solution providers, he noted. HP helps fund those credit lines through its Channel Cap program, which provides capital to its largest distribution partners so that they, in turn, can extend credit to solution providers.
"We have been talking with our HP Financial Services people about should we do anything to enhance that to help and support our partners in the market and we are looking at how we can do that," Jones said. "We haven't done anything to change [the program] at this point but we are not looking at reducing that. We're looking at how we can enhance that to help our tier-2 partners."
Simon Palmer, President of System Technology Associates, a solution provider, noted that his company finances its operations organically with its own cash. "There are times when that's questionable; there are times when that's a good decision. I'm hoping this is one of those times when it's a good decision," he said.
"If you have a decent balance sheet and a decent business and a demonstrated history and a business plan for the future, [banks] are going to lend you the money," he said. "We have been through five years of a little bit of false prosperity. Some people who had marginal skills were doing really, really well and maybe those are the people who are suffering now." |