With Statistics Canada data revealing a contracting economy, Canadian channel partners are only beginning to see the effects of an economic recession that could have disastrous effects on their business. If a flat market continues into 2009 or the market recedes by 10 per cent, more than 25 per cent of channel partners could disappear.
That was the warning that Bruce R. Stuart, president of ChannelCorp, a Vancouver-based channel growth and consulting firm, gave to an audience of more than 250 channel partners and vendors at CDN‘s 2008 Channel Elite Awards, held last week in suburban Toronto.
According to Stewart only 10 per cent of channel partners are in excellent economic standing, meaning they have at least 10 per cent of their revenue in cash or lines of credit. Forty per cent are financially challenged and an alarming 50 per cent are technically insolvent; meaning they don’t have enough cash to pay what they owe. Most channel partners are out of cash 37 per cent of the time and no one notices; but in a poor economy, staying afloat will get tiring and many will throw in the keys, he said.
“From a valuation perspective, there is an underlying draining value on these businesses and a reduced ability to generate free cash,” Stuart said. “These folks are fragile.”
The three things channel partners should be thinking about for the year ahead are surviving the unsteady economy, sustaining their business and growth. Fewer channel partners could mean better sales opportunities and increased ability to meet growth targets in 2009 for those who choose to invest their money in the most economically savvy ways.
From a partner perspective, some will need to push back a little bit, Stuart said. There will be pressure to invest in new markets, engage in new technology and with new clients, but at the same time the historical sources of gross margin dollars don’t exist. The easiest way to survive, sustain and grow: protect the installed base, Stuart said. Seventy-five to 85 per cent of revenue comes from the installed base – it is the cheapest, most profitable way to generate free cash. Ninety per cent of free cash comes from the base.
“If you can’t afford to lose money, you need to make it a lucrative year. If you’re in cash flow trouble already, you should think twice about venturing out of existing accounts and existing products,” he said. “You have to dig a big hole to find the diamonds and my concern is there may be folks in this room that engage in this strategy. It might take 300 feet to reach the diamonds, but you may only have money to get 100 feet down.”
When investing in existing clients and technology, each revenue dollar costs less than 15 cents to earn. With new clients, each revenue dollar costs 30 cents because of client acquisition costs and learning curves. New investments could also become a liability if they cannot pay their bills. In a troubled economy, it is important for channel partners to insure they are investing in quality customers who are able to pay their bills in less than 60 days. The cash cycle for a typical partner is 35 to 45 days. But the faster the cash circulates, the less each channel partner will need to run the business. So, increasing the speed of cash flow alone will allow you to increase the profit, Stuart said.
Only 20 to 25 per cent of channel partners are good at building new business from their existing clients. Every client should be thought of as an individual market, Stuart said. Rather than cold-calling random individuals, a futile strategy in a poor economy, channel partners should be exploring their current clients further and offering more to them.
Increasing the size of transactions to current clients will allow you to grow without expanding. Increasing transaction size can be achieved by pairing products with a service solution, Stuart said. Even if a retailer pairs with a third-party service provider, it will still increase the cash flow and increase profit. “Not everyone is going bust-o right now; people will need to buy what you have to sell.”
When vendors come by with loaded bags, “like Easter bunnies,” make sure that what they have in their bag will have a positive effect on the income statement, the cash flow and the balance sheet, Stuart said. “Say to them ‘help me connect the dots.’”
The highest performing VAR clients don’t make investments that won’t show three and a half times the rate of prime interest rate or provide a payback in nine to 18 months, Stuart said.
“Be disciplined, be clear, be focused and be ready to articulate,” he said. “It will be a tough year to turn a leaf over with all of this grimness, but it’s our job to turn over that leaf because the business is the biggest asset we have.”