Winning the fight for survival
As the UK GDP continues to shrink and more businesses than ever are going bust, Hannah Breeze investigates how some channel firms are still growing, and why some are not
Since the recession hit the UK in 2008, businesses across the country have felt the strain, with those in the IT channel far from immune to the fallout. Four years on, with the economy shrinking again and the forecast looking gloomy, times are still tough for the industry as customers look to spend more carefully and less frequently.
Recent GDP figures showed that the economy shrank by 0.7 per cent in the second quarter of 2012, while even some giants of the tech industry posted shaky figures.
Microsoft recorded its first loss in 26 years, while Sharp announced plans to cut 5,000 jobs after a £1bn loss. Figures from Graydon showed that 356 UK resellers shut up shop in 2011.However, against this bleak backdrop, some businesses in the IT channel are managing not just to stay afloat, but post impressive growth figures.
VAR Softcat grew 37 per cent in FY12 to burst past the £300m revenue mark on the last day of its financial year in June, while at Computacenter, the UK's biggest reseller, sales grew by four per cent in the first half of its financial year. So with such contrasting figures posted across the industry, the questions on everybody's lips are: how do they do it, and what differentiates the booming companies from those that are simply hanging on?
David Pattison, senior analyst at Plimsoll, said that size matters when it comes to companies' ability to weather economic storms, and it is often larger companies that are better placed to come out on top.
"Bigger companies are growing faster than smaller ones as a rule. This is because, in these times of uncertainly, [end users] are attracted to brands," he said. "If you are going to invest in a big IT programme, you want to recognise a familiar face as you feel you have more protection and security, and this means that big companies can grow faster."
Having cash in order to make cash is a vicious cycle which can lead to smaller companies having to operate on thinner margins, making it a struggle to invest and grow, claimed the Plimsoll man. And although bigger companies have a larger pot of cash, competition at the top end of the market often means that competitiveness can slash margins due to overcrowding.
According to recent research by analyst BDRC for insolvency trade body R3, about 146,000 UK businesses are on the brink of going under. A change in interest rates, loss of a major client or suppliers upping prices could be enough to push them over the edge, claimed the research.
While these figures seem to paint a troubled picture for businesses, Shaune Parsons, managing director of Computerworld Wales, pointed out that struggling companies' losses can be to others' gain.
He said: "With fewer resellers in operation, we win more business. We are doing extremely well; we have doubled last year's turnover in six months. We have enough cash surplus to employ a lot more people than we do, but we are holding fire
to see what the future holds before we invest. I feel privileged to be sheltered from the economic problems at the moment. However, I am under no illusion that problems could be coming our way."
Trading in difficulty
Although when companies eventually close their doors, their former customers are up for grabs, the fight to hang on can add its own problems to the mix for its rivals. The battle for sales within the channel is not easily won, with competitors in financial difficulty often willing to win trade at any cost just to get a sale, according to Ian Kilpatrick, chairman of distributor Wick Hill.
"It is true that in some ways, companies that are investing and doing well tend to take business away from those who cannot, but there is another side," he said. "Those in financial difficulty will take business at any cost, which poses another problem. They undercut those who are doing well, so that disrupts the market."
But for struggling companies, offering an initial cheaper-than-cost-price deal in the hope of securing a long-term contract is a risk that some companies are no longer able to take, added Pattison, who said that critical cashflow issues mean impulsive price aggression is no longer viable.
"Some companies are up against reckless competitors who throw a price in the ring just to keep the wheels turning. However, these days this is decreasing because it is not as easy to do this," he said. Businesses cannot afford to give away [a product or service] at a loss in order to secure a longer contract because cashflow is so critical."
While IT companies try desperately to lure in end users, the pricing battle is not the only problem they face. With the recession ongoing, many customers may look to make do with their current systems and shop around more when they do have to refresh.
Steve Hennessy, sales manager at Computerworld Business Solutions, claimed that end users' financial problems soon become those of the channel.
He said: "Some [end users] feel the pinch too, so they try to squeeze the life out of their products, which is a false economy. It is better to spend a bit over time to avoid issues if everything breaks at once. People are trying to write off technology after five years instead of three, and in the long run it is not cost effective for them."
It is not just hard sales that are important when measuring businesses' progress, with customer service, motivated staff and new technology acting as important factors in winning business and judging overall success, claimed Softcat managing director Martin Hellawell.
The reseller recently announced the hiring of 44 new staff at its offices in Marlow, London and Manchester, claiming that the investment in graduate recruits was important for its long-term success. But for companies with less cash, lower margins and fewer resources, the prospect of investing in new technology and staff may seem a tall order. However, Hellawell maintains that investment is the key for companies of any size wishing to prosper.
"If you do not have the big profits, it takes longer [to invest], because you do not have enough [money] to throw at it. You can still make some money through investment in the longer term, though, and this is very important," he said.
"When I joined Softcat seven years ago, we built that profit up by investing. If you are a smaller company, you should not give up, you can [invest] if you work smartly."
Invest for success
During tough economic times, cutting back seems a reasonable answer to the problem of having less cash. But scrimping on essential business operations can strangle the company, according to Scott Fletcher, chairman of ANS Group, who agrees that investment is paramount.
He said: "If we sold the same stuff at the start of the crisis as we do now, we would not be doing so well. It is because we invested and changed with the times that we are achieving what we are. We invested in FlexPod and cloud technology, which was really important for us.
"The first thing most firms cut back is marketing. As they do this, we increase ours because it means we get more bang for our buck as we can shout louder than those who have cut theirs completely."
Ian Kilpatrick agreed cutting back is a dangerous game to play, and that investment is always essential, whatever the economic weather.
"I believe that if trained sales and tech staff work for you when times go well, and marketing is good when things go well, cutting back fulfils a self-fulfilling prophecy," he added.