Solution Providers Brace For Credit Crunch

Solution providers say the growing financial crisis, accelerated late Thursday by the largest bank failure in U.S. history, is sure to send shock waves through the channel as rattled credit markets clamp down on lending.

"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, a Waltham, Mass., solution provider. "This is an unprecedented event. When you see huge financial 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.

Seattle-based Washington Mutual, one of the most profitable and respected banks in the country, collapsed under the weight of its bad bets in the mortgage market. The Federal Deposit Insurance Corp. seized WaMu on Thursday, and then sold the thrift's banking assets to JPMorgan Chase & Co. for $1.9 billion.

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 meetings, a company can pay for the system."

Romi Randhawa, president and CEO of HPM Networks, a solution provider in Fremont, Calif., 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 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. "I'm sure that we are going to get into those situations," he said. "They aren't there today, but when the dust settles down, this is going to affect small and midsize businesses."

He added that during the past 90 days he has been closely scrutinizing the credit worthiness of new clients. "That's where we get helped by HP's agent program," he said. "If we don't feel comfortable with a client, we'll have them issue the P.O. to HP and let HP make the decision if they want to float credit or not. We use the agent model to minimize risk."

Despite his concerns, he said "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.