Crossing the channel

While some are confident that the effects of an economic downturn in this region could be manageable, the tumbling oil prices suggest otherwise. There have been tremors in the real estate sector and layoffs at some of the industry heavyweights indicate that we could do well to brace for some tough quarters ahead.

“The financial meltdown will impact the ICT industry  as the region’s real estate and banking have already faced the major brunt of it. I reckon that there will be at least 4-5% reduction in IT spending owing to shelving of major projects and retrenchment,” says Ajay Singh Chauhan, CEO of ComGuard.

Developed markets and emerging markets are in it together. There are bound to be shakeouts but some of them could help the industry consolidate.

Dr Ali Baghdadi, CEO of Aptec, says, “The ICT industry has seen its fair share of ups and downs and while there will be some measure of slowdown, these depend on local market dynamics. Situations like the current economic scenario help to consolidate the industry better and allow distributors, vendors and resellers to rethink their business module and look at more sustainable long-term growth.”

That said, it is also inevitable that there would be a slowdown in sales and profits. Some larger deployments of technology could be deferred and budgets slashed across sectors worldwide. The magnitude of it could be lesser in the Middle East, though.

Nicholas Argyrides, General Manager, Logicom Dubai says, “There is no question that the world financial crisis has also affected our industry in the region. Maybe slightly delayed as compared to Europe and Asia but we are all definitely feeling the pinch. We are seeing projects being postponed, partners requesting extended payment terms, and an overall slower demand which is unusual of a historically sturdy Q4 performance.”

However, IT has made its mark as an indispensable framework that enables business processes. Businesses can’t roll back to the days when IT wasn?t so fundamental. They need to maintain the existing IT infrastructure and, indeed, make those essential upgrades such as in security, storage or networks. New technologies like virtualisation will see an increased uptake because of the promise of cost savings that they offer. It would be difficult for planners to cut corners recklessly without affecting business efficiencies. So inspite of fears of recession, the show has to go on till the economies emerge into the light.

“Certainly, the financial meltdown is affecting all sectors of business worldwide, including Dubai. However, IT security still remains in high demand for several reasons. The ‘bad guys’ of the internet do not curb their activities, even if the economy is slowing down. Threats are becoming more sophisticated and businesses today, more than ever, need to maintain high security. Therefore, we expect businesses to cut back on large IT projects, such as SaaS or virtualisation, but IT spending on security is still expected to remain strong,” says Chris McKie, Director, Global Analyst & Public Relations at Watchguard.

Altinordu says, “There’s no doubt that the current economic situation presents difficult challenges for businesses of all kinds, in every industry. But we continue to be optimistic about longer-term global economic prospects. Many of the trends that have made this an era of dynamic business expansion haven’t changed. Technology continues to advance. Productivity continues to rise. New innovations continue to create new business opportunities. At the same time, it’s clear that this is a time when thoughtful business leaders must carefully assess how to best utilise their resources to weather the uncertainty that lies ahead.”

It is a time of change and consolidation, some of it compelled by the unfolding scenario. It wouldn?t hurt the channel to be forewarned to deal with the situation.

“It is perhaps a little early to speak of a meltdown but the ICT industry will be affected. To what extent depends on the level of products and services offered by the various vendors, distributors and partners. In my opinion, as businesses and users assess solutions that are vital to their operations and provide them with tangible ROI, partners who are unable to provide these returns will need to rethink their strategy to create new revenue streams,” says K S Parag, MD, FVC.

Companies offering value services are more upbeat. The industry opinion is that it wouldn?t be wise to cut down costs on some of the essentials required for staying competent, such as training for instance.

Chauhan adds, “Contrary to what some businesses think, that they can trim down their cost by skipping training, it’s actually skilled resources within the organisation that bring about approaches and mechanisms to enhance productivity and efficiency. This will save cost by optimising business and workflow. So it’s prudent to invest in education and strengthen resources that help businesses remain competitive through tough times.”

At the risk of sounding rhetorical, it needs to emphasised, as always, that resellers need to gather steam in their value businesses. Now, as never before, more competencies could make a telling difference.

McKie adds, “Businesses will be forced to re-examine their spend. This in turn creates the opportunity for channel partners to demonstrate true value add, rather than just sell boxes. Channel partners who take on more services and approach their customers with a consultative sales approach will find themselves in a very solid position when the economy turns around and business picks up. This era is very much like the age of dinosaurs those who are quick and nimble to react and adjust to this climate will survive; those who do not will go extinct.”

Industry insiders suggest that markets also consolidate at times like this, and strong companies emerge stronger from the crisis as they can manage the implications better. The impact could be more psychological than real as customers start holding on to their cash, affecting cash flows in the economy.

While it always pays to be quite diligent about cash flow and payments from customers, it would be even more essential in tougher economic scenarios. It is a savings economy that we are heading into and delays in payments could almost be a certainty. Caution needs to be a given in business transactions.

Argyrides adds, “During these difficult times, we see liquidity being the major concern in the market. Demand is being hampered too, but cash flow seems to be a major challenge in the channel. This, of course, makes sense as credit facilities have been shrinking from all directions, suppliers, distributors and bankers. It is for this reason that shortening the (customer) payment cycle is crucial for companies. Getting paid faster means taking care of obligations without having to borrow money or depend on credit facilities. Prudence regarding who you deal with and on what terms is vital, as the risk of not getting paid (at least on time) is higher these days. Cutting down on unnecessary expenses would be another way of saving funds and be ‘cash-prepared’ for any rainy days.

So is the spectre of credit crunch looming over the channel. Dr Baghdadi points out that distributors are always looking at credit options and evaluating the criteria for extending credit. He says, “In other parts of the world, there are well-established credit circles that greatly reduce the risks distributors face. In the Middle East, distributors have their own methods of ‘due diligence’ to assess credit worthiness. In today’s scenario, there is a need for defining the minimum information required for assessing credit worthiness. Distributors need to share information and help prevent a credit crunch without penalising the resellers that are running ethical and good businesses. This reduces the overall risk and cost of business, and means a more stable and equitable trading environment for all members of the channel.”

Logicom’s Argyrides adds, “There is no other option but to exert more diligence and less flexibility when it comes to credit availability to the market. The uncertainty in the market makes it extremely complex to assess each and every customer’s exact financial position; we are therefore often forced to take the defensive, conservative approach of being stringent with credit facilities. Consequently, we are closing some unutilised credit lines and following our credit policy closely to limit overall exposure.”

At the end of the day, resellers that have stayed agile and have adapted to market trends will have an advantage over box-movers. The current scenario makes a strong case for investments from companies that need to bring in more business efficiencies, which means business will keep rolling, in spite of the slowdown.