UK disties devise post-2e2 bad debt battleplans

Caution and communication the watchwords for disties burned by collapse of buy-and-build VAR

Distributors are reflecting on how they can mitigate their exposure to risk in the channel after many racked up huge losses from the collapse of 2e2.

Nearly 600 suppliers were owed money by the buy-and-build reseller when it fell into administration in January, with 47 owed at least £100,000 and eight owed more than £1m, according to a list of company creditors seen by CRN.

Worst hit was distribution giant Arrow ECS, which was owed £12.8m. The other three big multinational broadliners - Computer 2000, Avnet and Ingram Micro - were in for £5.6m, £2m and £645,000 respectively.

With the major credit insurers known to have reduced their exposure to 2e2 last year, some suppliers will see little or no return after administrator FTI admitted last month that unsecured creditors are likely to get nothing, as first reported by CRN.

Other major distie creditors included e92plus (£499,000), Exclusive Networks (£460,000), Westcon/Comstor (£824,000), CMS Distribution (£163,000), SDG (£101,000) and Computerlinks (£82,000).

Vendors Cisco and HP, as well as VARs Ipitomi and Misco, also took seven-figure hits from 2e2's collapse. EMC was owed £736,000, Cable & Wireless £427,000 and Dell £383,000.

Richard Hodgetts EMEA CFO at Westcon Group - which was a big supplier of Cisco to 2e2 - said 2e2's demise is a reminder that his financial team must prioritise spending time with customers.

"It is not just about using information that's in the public domain as a lot of that is not relevant, because it's not current. We are not going to change our approach to how we manage credit and risk as I think we have a fairly robust process in place anyway. But we need to spend more time on peer-to-peer relationships."

Hodgetts conceded that 2e2's demise has sparked a "degree of nervousness" among credit insurers, but said Westcon would not be cutting its credit limits in response.

"If you go back to 2009 when a lot of the credit insurers stopped insuring, we didn't cut our limits," he said. "I don't think credit insurers are going to run for the hills but maybe they will be a little more cautious. This means we have to extend a bit more risk, but given the relationship we have with our customer base I am comfortable with this approach. We will look to keep insurance as a nice-to-have in the back pocket but the way we look at credit and risk is to ask whether we give a customer a limit, regardless of whether they have insurance. We need to look them in the eye and tell them we believe in them."

Other distributors said 2e2's collapse has prompted them to tighten up procedures - or increase scrutiny over potential customers - to minimise bad debts.

Mukesh Gupta, managing director of e92plus (pictured, left), said all of his firm's debts with 2e2 were racked up in a single invoice from December.

"It does mean we are looking more deeply into people's trading history and accounts to give us more security," Gupta said. "We ultimately act as a bank in these circumstances and resellers have to realise if they are turned down by a bank and come to us we need to have some form of security."

Juliet Collis, managing director of Sigma Software Distribution - which supplied Quest Software to 2e2 and was hit for an uninsured debt of £16,000 - said 2e2's collapse had re-emphasised the need to look at how its customers are funded.

"We don't have credit insurance and have a very good success rate in credit control, so this came as quite a kick and any loss is bad for us. We took it as an insult to our professionalism and ability to get risk management right. Our credit controller got a mention internally because of how well she managed the account and we did not get hit as much as we could have done through having good procedures.

"Credit is a privilege not an entitlement and people have to play by the rules."

Graeme Watt, EMEA president of Avnet Technology Solutions (pictured, right), said the distributor's £2m debts with 2e2 were entirely insured by Euler Hermes, but argued the fall-out from 2e2's collapse should come as a "wake-up call" for distribution.

"The only exposure we had was the exposure we had within the ts and cs of the credit insurance level," Watt said. "We put a lot of energy and effort into understanding the situation and I am happy with the way we managed it before, during and after. It confirmed we have the right approach and balance between taking risk and managing risk."

Watt argued that credit insurers are unlikely to pull in their horns, arguing that 2e2's collapse will be seen as a special case.

"I don't think 2e2 was typical of the economy at large," he said. "It was an isolated incident so I would be surprised if it had a big knock-on effect."

Alex Teh, managing director of Infinigate UK (pictured, left), said that - due to events like 2e2 going into receivership - the distributor has carried out a full review of its processes to ensure it is not caught by large amounts of bad debt in the future. In contrast to Westcon's comments, Teh said this could include more use of credit insurance.

"We are looking at increasing the amount of insurance cover we have across all of our partners," he said.

"It is important for us to balance bad debt protection measures with ease of doing business and in our 12-year history we have managed to maintain a great record of this."