Where The Profit Will Be In 2008

"Even with the financial market problems, I am expecting our profitability will improve significantly by virtue of bringing all our heads together and doing things smarter," said Phelps, who in short order has piloted Waltham, Mass.-based NWN to No. 207 on the VARBusiness 500 list. "We've acquired a bunch of companies, and by bringing those together and operating more efficiently, we'll generate more profit."

Doing things smarter is going to be key in 2008 given the subprime mortgage crisis and myriad other economic woes. Forty percent of solution providers polled in the 2008 State of the Market study say they fear a recession.

However, solution providers like Phelps are not deterred by the rough economic forecast. Forty-two percent of VARs surveyed say they expect an increase in net profit of between 5 percent and 14 percent in 2008. And an amazing 18 percent expect their net profit to increase by 15 percent or more. Finally, 98 percent of those polled say they expect profit to at least remain at the same level in 2008.

Phelps said one of the reasons he is so optimistic is NWN's integration plans for acquired companies. That includes migrating business applications and infrastructure to a shared environment to save costs. For example, he expects to benefit from bringing all of the payroll from the acquired companies under a single ADP system.

NWN also has strict policies regarding accounts receivable that it puts quickly into place with each acquired company, Phelps said. He said NWN has taken days sales outstanding from most acquired companies from 60 days to about 40 days. NWN finished the most recent quarter with 43 days sales outstanding.

Phelps said it's a matter of doing all the little things right with regard to customers paying their bills. "If you set up the system and handle it right the first time, you don't have a problem. If you don't, and you make messes that you have to clean up later, it gets very, very costly," he said.

Tighten Up

One of the keys to improving the bottom line is having tight financial controls. NWN holds a weekly Wednesday call for all seven of its offices where it gets updates on three key metrics: sales pipeline bookings, sales for the month relative to goals, and accounts receivable over 60 days as a percentage of total accounts receivable. "You have to know what your goals are, how to get there and have everything line up to support that," he said. "You have to be able to measure it, and you have to do it weekly."

Phelps said one of the reasons it is so important to hold those weekly calls is to take quick steps to cut costs if economic conditions warrant. "You need to know exactly how much business you are booking," he said. "You can't wait for an upturn or downturn to hit before you make an adjustment. You have to hire when bookings are up and reduce staff when bookings are down. The only way to do that is know what your backlog is."

As to whether Phelps himself feels a recession is imminent, he responded dryly: "Nobody knows. ... Anyone that has been in business, especially in high tech, knows there is going to be a rough road ahead. Frankly, I haven't seen it yet. I see all the indicators, but I haven't seen the rough road. Our pipeline is still positive."

More VAR Concerns

The 2008 State of the Market survey uncovered a number of other solution provider concerns as well. Besides the fear of a recession, 43 percent of solution providers polled are concerned that businesses are pulling back on spending. And 42 percent are worried about the decreasing value of the dollar. Finally, 36 percent are worried about the all-important issues surrounding credit, the fuel so critical to a solution provider's cash flow.

John Marks, CEO of JDM Infrastructure, a Chicago-based solution provider ranked No. 231 on the VARBusiness 500 list, believes it's a mistake to get caught up watching the economic indicators. For his money, Marks said the most important thing solution providers can do to avoid getting bitten by a downturn is to keep a firm gaze on business fundamentals including accounts receivable. "I think anybody that sells to corporate accounts better keep on top of their receivables and the financial wherewithal and strength of their customers," he said. And don't think just because a customer is a Fortune 500-class client that they are immune to an economic downturn. For that matter, there are unexpected events like the Enron accounting scandal that took down Arthur Andersen, Marks said. "That is going to be a hazard in our business for the next 12 to 18 months," he cautioned. "You have keep on top of whom you are selling to. Just because they are a big name, don't necessarily think they have the financial wherewithal to pay [their] bills. One bad account can change your entire company."

Marks said he's confident JDM's profit will be up in 2008 but he's not naïve enough to think that there are not some unplanned events that could affect his bottom line. "If you have one hiccup that you didn't plan for, it could affect your business," he said.

Marks said the most important thing for any solution provider is to continue to fine-tune the business. "The way I look at is you are always competing against yourself. In the early days of CDW, we always said we were competing against ourselves. If we can execute and perform for our customers, we will grow no matter what our competitors. Our biggest competitor is ourself. I think our people and staff at JDM are as good as they have ever been."