Bad debt calls for desperate means

Consolidation is the name of the game for 1999. Whether it is by acquisition (Simply, Action Computer Supplies), collapse (Roldec, killed by a disastrously misjudged deal to import Daewoo laptops which cost it £2.5 million) or withdrawal (Viglen's decision to get out of the mail-order market), it looks like there will be fewer substantial UK channel operators from now on.

Consolidation is also the name of the game for distributors. Compaq last week removed distribution rights from all but four of its 39 US partners.

Surely it will have to follow suit in Europe. This may be good news for Compaq shareholders, but it's bad news for Compaq dealers. Fewer distributors means less product on tick for dealers and that means a credit squeeze.

Last month, Osmosis retired hurt from the hardware business. It now aims to slim down from a £200 million business to a £50 million operation, which will in effect result in £10 million less credit available in the market. Will its rivals take up the slack? Sure, they can supply all the product Osmosis customers need. But it seems unlikely that distributors and vendors will increase their credit lines accordingly.

Bad debts are on the rise in 1999, and bad debts make credit controllers and credit insurers very cautious. They will be examining the ledgers of their distributor customers with a fine-tooth comb and, if necessary, will withdraw insurance cover from distributors, resulting in yet more credit squeeze.

Bad debts (or poor credit control) are to blame for Osmosis' decision to withdraw from the hardware business. The Brentford distributor was hit hard by the collapse of Roldec and Memsolve, got into a dispute with its credit insurers and saw the withdrawal of credit. A despatch outsourcing deal then went wrong and it didn't take long for Osmosis to run out of road. The hardware business threatened to take the entire group down with it - a disaster for Osmosis suppliers.

The company says it will repay debts on a scheduled basis while it slims down.

Note that Osmosis did not take the phoenix route, which sees companies go into liquidation and re-emerge in a 'new' guise from the ashes, free of debt. Desperate measures for desperate times, but this route leaves a bad taste in the mouths of suppliers.

Tough credit control from suppliers means dealers need to exercise tough credit control with their customers. This means getting the money in before they have to repay distributors, which is easier said than done considering the UK's endemic late payment culture. Maybe we should follow India's example. In Bombay, a debt collector is employing eunuchs to embarrass those slow at paying up. The eunuchs threaten to remove their saris, bringing shame on the offenders, their business and their families.

Desperate times. Desperate measures.