Credit Crunch Hits The Channel

Craig Zarley

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.

"This week alone [first week in October] 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 LLC, a San Antonio 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 in Harlan, Iowa, 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 canceled. There is a lot of 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."

Next: Liquidity Concerns 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.

"Any solution provider that isn't taking a harder look at dispersing his credit liability is fooling himself," said Dave Gilden, COO of Acuity Solutions Inc., a Tampa, Fla., solution provider.

Gilden said Acuity just completed its best month ever. "But two fairly good-size customers put the kibosh on projects scheduled for next month," he said. "What I'm seeing is not a knee-jerk reaction but rather a proactive move on the part of customers who are waiting to see how things shake out."

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 Corp., 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.

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."

Next: Hard Times For Hardware Hard Times For Hardware
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 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. "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 [Hewlett-Packard Co.'s] agent program," he said. "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."

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- two partners."

Simon Palmer, president of System Technology Associates Inc., a Tustin, Calif., 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.

Palmer noted that he's seen no slowdown in business related to the credit crunch. "But I have a big question mark on Q4," he said. "I think people are going to hang on to their money to see this thing through and see what is going to happen.

"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."

Mark Singh, president of Abacus Computers Inc., a Midland, Texas, solution provider, said he too has seen several projects that he expected to go through put on hold in the past few weeks. "Nobody has told us [that they can't get financing], but I suspect that some deals are being slowed down right now," he said. "Some projects that we expected to go through just aren't going. I think the credit crunch is slowing down some business."

Next: Distributors To VARs: Don't Worry About Credit Lines Distributors To VARs: Don't Worry About Credit Lines

Distributors say they have access to ample capital to support solution provider credit lines and their solution provider partners should see little or no impact from the current credit crisis.

Distributors acknowledged that they have received numerous calls from anxious solution providers worried that their credit lines might be impacted by the fiscal crisis. But they say they are well capitalized, and solution providers will likely be able to dodge fallout from the credit crunch.

Michael Zava, senior vice president of credit and customer services at Tech Data Corp., based in Clearwater, Fla., characterized the credit climate between the distributor and its solution providers as business as usual.

"We have plenty of credit available today, and Tech Data has not changed anything in the way we extend credit," Zava said. "We have not yet seen any negative impact from the credit crunch. But we are more wary and aware, and we are certainly keeping our eyes open to make sure we are not blindsided by an event or by something we had not anticipated."

Kelly Carter, director of credit at Ingram Micro Inc., Santa Ana, Calif., said that the distributor has no plans to restrict solution provider credit and is, in fact, proactively increasing credit lines for qualified solution providers.

"We continue to proactively look at our customers to increase lines. At this point, we do not see any change [in credit policy]. It's really business as usual," she said. "For companies that are healthy, there is still plenty of credit out there."

Carter said that one change she has seen recently is that more solution providers are helping end-user customers finance IT purchases with leases. "We encourage VARs to offer a financing option to their end users if they are struggling closing a deal because the end user doesn't have the funds available," she said.

Carter noted that leasing allows solution providers to get paid immediately, a strategy that would help mitigate the problem of slow-paying customers. "We are facilitating business as usual and we don't see any changes in that," she said. "The advice we are giving to our resellers is to make sure you know your end users and that you understand their financial situation."

In an industry report issued last week titled "Sizing the Impact of Credit Turmoil on IT Distribution," equity research firm Raymond James and Associates noted that major distributors' credit facilities have ample capacity and are with major lending institutions that don't appear to be at risk.
-- Craig Zarley

Next: D&H Tackles Fear, Credit And Emerging Tech D&H Tackles Fear, Credit And Emerging Tech

D&H Distributing Inc. has already added $25 million worth of new lines of credit for its partners this year and is ready to consider doing even more if credit markets remain tight enough to start impacting resellers and their customers.

Dan Schwab, co-president of the Harrisburg, Pa.-based distributor, said D&H continues to take a conservative approach to its business, but the fact that it is a privately held entity gives it the flexibility to work with solution provider customers to weather the current financial storm.

Schwab spoke from the D&H technology conference in Hershey, Pa., where the distributor played host to more than 1,000 VARs and about 130 vendors examining and discussing the latest PC, consumer and network technologies.

"We just had a good September, and I'm hearing many [resellers] had a good September," Schwab said. While acknowledging recent turbulence in the financial and credit markets, he said the company continues to maintain its current credit programs for VARs without changes. "That line of credit is very important for them," he said.

Despite the relatively strong September, though, Schwab said that he has begun hearing concerns from VARs—and from some VARs that have heard concerns directly from their customers—regarding a tightening of credit.

It's still unclear what the total impact of the global financial and economic turbulence will be on the IT space. Earlier this month, IBM said it would beat expectations for its most recent quarter when it formally announces earnings. Other companies, like Intel Corp., have drawn the attention of bargain-hunters on Wall Street ahead of the next round of earnings reports.

The D&H conference in Hershey put on display a number of products and technologies from edge-of-network devices, including HTC Corp.'s new Diamond smartphone, to components, peripherals and network technology.

The distributor also said it is increasing purchase incentives for VARs, ramping up a specialist team to provide resellers with vendor-specific help with integration and technical information, and boosting support and product availability for fast-selling segments including VoIP and Windows Mobile platforms.

"This is our time to double-down on the channel," Schwab said.
-- Edward F. Moltzen

Next: Gartner Lowers 2009 IT Spending Outlook Gartner Lowers 2009 IT Spending Outlook

IT spending growth for 2009 will slow at an even greater rate than previously projected, according to a new report by research firm Gartner.

The firm lowered its 2009 global IT spending forecast to 2.3 percent, down from an earlier projection of 5.8 percent, according to Peter Sondergaard, senior vice president at Gartner and global head of research.

"Developed economies, especially the United States and Western Europe, will be the worst affected, but emerging regions will not be immune. Europe will experience negative growth in 2009, the United States and Japan will be flat," Sondergaard said in a statement.

Gartner blamed global economic problems as the culprit for its lower outlook, but it does not expect to see the dramatic reductions experienced during the dot-com burst, according to Sondergaard.

"We learned that in tumultuous times, CEOs want their executives and managers to be advisers and counselors, not just great implementers of directions given to them," Sondergaard said in the statement. "What they want now most of all is agile leadership, leadership that can guide us through simultaneous cost control and expansion at the same time."

Organizations now view IT as a way to transform their businesses and adopt operating models that are much leaner, according to Gartner. It's a model that solution providers have espoused for several years.

"That's the business we operate in, a business consultancy that provides benefits to customers through technology," said Rob Betzel, president of Infinity Network Solutions Inc., a Macon, Ga.-based solution provider. "Customers look to reduce costs or expand services through IT. They're asking, 'How can we do that? How do we get the most bang for our buck today?' "

Gartner also found that IT is more embedded in running all aspects of businesses, which protects it from drastic reductions in expenditures.

Betzel said his customers are talking about their 2009 IT budgets and are moving IT expenditures out of capital and into operating budgets, especially in the small- and midsize-business market.

"We're still seeing a significant amount of business. They're not totally putting the brakes on, but people are more diligent in considering before they move," he said.

Regionally, Gartner now expects 2009 IT spending to decline 0.8 percent in Western Europe, according to Reuters. The firm had previously forecast spending to grow 2.8 percent in the region.

Gartner expects spending will rise 0.5 percent in North America, a sharp decline from its previous forecast of 5.3 percent growth, according to Reuters. Finally, the firm expects a spending increase of 8.3 percent in the Asia Pacific area, down from a forecast of 11 percent growth.
-- Scott Campbell

Sponsored Post