On The Record

July 24, 2009

I hate to say it, but we are on the cusp of seeing multiple channel bankruptcies. In good times cash flow is the biggest contributor to solution provider failures. In bad times lines of credit dry up, suppliers and distributors get taxed and at some point the breaking point is reached.

We are now at that breaking point and unless we begin to see some real economic improvement we are going to see really difficult times in the next few months for partners.

The recent example of the MIS Group, a Sage partner of the year two years running, shutting its doors is not a good sign.

I'm having far too many conversations with partners and vendors alike where cash flow issues in the channel are coming up as a growing problem.

In some cases partners are closing deals and then having difficulty getting the financing to pull them off.

The only reason this hasn't become a bigger issue is that the credit available through distribution and the vendors has been holding the tide back. With earnings season upon us it's obvious that there is not a lot of improvement. Even in those cases where suppliers are reporting improved profit it's generally a result of cost cutting, not revenue growth.

With a difficult economy showing no real signs of improvement and an unemployment rate heading toward double digits, are you expecting things to rapidly improve? Of course not.

Some solution providers I've talked to recently believe they can get through the next three to six months in the current economic environment, but if it goes much beyond that they are not sure. Others are, of course, well-financed and fine.

This scenario means we are headed toward a period in my opinion where a lot of vendors are going to find their partner base is out of balance. There has been a lot of emphasis on getting more from better partners over the past few years and not enough effort on purging, recruiting and refreshing channel makeup.

Take the MIS example. When your partner of the year two years running goes out, that partner had to be sitting in the 20 percent area we all refer to when we talk about the 80/20 rule. What this goes to show you is that vendors' best-performing partners are not always financially sound.

And direct marketing resellers are being particularly hard hit given the dependence on hardware and not solution sales for this category of partners. Customers are still saying if it isn't flat-out broken we are not replacing it.

For solution providers the trick to remaining solvent during the six to 12 more months it is going to take to see real improvement in the market is going to revolve around cash flow and managing costs. Your distributor is a key element in this but so too is the vendor lineup you represent and whether those vendors are helping with creative cash flow enhancement deals that allow you to stretch payment on deals sold.

For vendors navigating the playing field, it is going to get more difficult. It's always about having the right partners and the right capacity in the right places not only in North America but around the world.

That's a big task in a stable market but as we see more bankruptcies, consolidation or the inability of solvent partners to close some deals because of the financing needs, more work is going to have to be done around maintaining a balanced channel.

My opinion is this is going to force vendors to get deep into the weeds around channel financial stability and it will spark a larger effort for many of them in recruiting.