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The recession is hitting the third-party distribution channel as hard as everyone else – a situation not helped by the apparent raft of merger and acquisition activity among the vendor community, which in many instances is breeding uncertainty and rationalisation.
Moreover, no one really knows how long the downturn will last. Some pundits are indicating that things will start to pick up by the end of this year or early next year. Yet others forecast a double dip, which means that although the economic outlook might appear to be improving, it could worsen again by the end of 2010, just when business is in the process of moving back into growth mode – with all the danger that implies.
So given such lack of clarity, MicroScope spoke to four channel partners to find out what they are doing to cope in today’s tough world and to glean some hints and tips for weathering the storm.
Backup Direct’s current mantra to get through the downturn is ‘what can we stop doing?’ to boost efficiency.
The master reseller provides hosted back-up and data encryption services to about 2,000 small to medium enterprises. It also works with around 150 resellers and affiliates, to which it provides support and billing services, as well as insurance liability.
Its philosophy is based on a book by business management guru, Jim Collins, called Good to Great: Why Some Companies Make the Leap...And Others Don’t. According to Brett Raynes, Backup Direct’s managing director, the main tenet involves “going through a process of working out what you should not be doing and what business processes you should get rid of because they are a waste of time”.
The firm began its rethink at the back end of last year, after finding that customers were starting to go bust at a rate of between four and five a month, a rise from two to three earlier in the year, although numbers have now dropped.
As a result, it started examining all areas of its business, including customer service, to work out ways of streamlining business processes to make them more efficient. “We sat people in a room and literally wrote on Post-it notes on a wall. We looked at who deals with what, what is involved if a customer wants to make a change to their billing, for example, and what we could do to cut out wasteful processes,” says Raynes.
Another variation on the same theme involved adopting the attitude of either funding projects fully or not at all. This approach led the company to put a new service offering on the back-burner until the market bounces back.
“The idea is focus, focus, focus, because you are in a much better position to survive if you can conserve resources by becoming more efficient. A lot of people try to broaden out rather than narrow things down, but then offer something half-baked and wonder why it doesn’t work,” says Raynes.
He points out that the important question to ask oneself in this scenario is whether you can fully fund it and provide it with the right marketing and thought. “If not, don’t do it at all, because it means what little money you have, you will just waste,” he advises.
Moreover, rather than cut prices per se, Backup Direct has taken the tack of providing customers with additional services for the same fee when their contract comes up for renewal.
This means that, while margins may be hit, customers have not been lost and revenues are protected. Moreover, the company has been able to recoup most of the lost margin by using its purchasing power to put pressure on its vendors to cut their prices. The trade-off is a commitment to generate higher volume sales. “It’s a hard battle, but you have to do it,” says Raynes.
Security distributor Vigil Software believes that the secret of riding out the recession boils down to two key factors: finding ways to boost cash flow; and marketing the right products to the right people in a targeted fashion.
The organisation employs 20 staff and services the needs of 1,000 resellers. These partners sell to around 3,000 organisations across the UK, which tend to have between 500 and 10,000 users. The distributor’s most important vertical market is the public sector.
One of the first steps that Vigil took when the downturn first materialised was to review all of its supplier contracts and, where possible, put them out to tender to find more cost-effective options.
Other cash flow-enhancing activities related to incentivising staff more effectively. Since May, employees in the accounts receivable department, for instance, have received financial bonuses if resellers hit 45-day payment targets.
Alex Teh, Vigil’s commercial director, says, “It motivates people to be proactive and we have seen a fantastic improvement in this area of the business. Last year, we noticed that it was becoming increasingly difficult to get payment on time and my accounts receivable average had gone from an average of 45 days to 60. But we are now back to pre-recession levels.”
The change has also been helped by working constructively with vendors. At the start of this year, Teh requested a meeting with the European head of Marshal8e6, which sells web and e-mail security products, and raised his concerns. As a result, an agreement was made to provide customers with temporary 45-day licence keys until they had paid in full, at which point they receive a permanent one.
“In a recession, it is cash flow that counts. If I have had a bad quarter, I want to know that I have enough cash to ride it out,” Teh says.
The firm has also changed the way it incentivises its salesforce to focus on generating cross-selling and up-selling opportunities among existing customers rather than on finding new ones. Key performance indicators now centre on providing quarterly training to resellers on new products, as well as ensuring good service levels.
Another successful tactic to boost reseller sales has been the creation of “call-out” days. This involves developing marketing materials such as e-shots, mailers and banner advertisements and sending them out to prospects in specific target verticals. Vigil has hired one in-house staff member to undertake such work and has found the move to be more cost-effective than outsourcing, not least because quality and speed of service has improved. “Now at any one time, we can run 10 different marketing campaigns with 10 partners, which was not possible before,” explains Teh.
Such activity is subsequently followed up by sending sales staff from Vigil and the vendor concerned to a reseller for a day to help it generate leads. Such activity, when undertaken with CareTower, generated 40 leads – a much higher rate than the usual scattergun telemarketing campaigns – but cost Vigil only £200, Marshal8e6 £270, and the reseller nothing at all.
“It is important to invest in the right areas and to focus on the verticals and messaging that will deliver a return. If you cut back on marketing and PR, you are really cutting back on your future business. And because there is less of it around, you can make a louder noise on the market,” Teh says.
For skills-based businesses such as network integrator Fabric Technologies, cutting headcount, even in a recession, is not a sustainable option.
Therefore, the company, which employs about 70 staff, has adopted two key approaches to ensure it is in a position to weather the storm. The first entails stripping unnecessary cost out of the organisation; the second involves boosting sales by re-evaluating its value proposition.
In the first instance, Fabric looked at its workforce costs and simply asked personnel to be mindful of unnecessary expenses rather than mandating cuts from on high. “We said that we needed them to help keep the bottom line lean as we are in unpredictable times,” says chief executive Misha Gopaul. “It was a powerful exercise because it is about empowering staff to make decisions for themselves. You have to be very careful about implementing new measures as you can start creating ‘them and us’ barriers, which affects morale, so we asked people to look at the business value of each expense decision.”
The organisation also became more cautious about signing off travel expenses and started promoting web and video conferencing more heavily as a way to reduce expenditure in this area. It likewise offered employees the opportunity to undertake both remote working and temporary sabbaticals, the latter of which was taken up by two employees.
To gain access to extra staff resources without stretching itself financially, Fabric struck a deal with a few of its recruitment and training suppliers to provide interns with work experience for an agreed wage. Such activities have helped the firm prune staff-related costs by as much as 40%.
Other cost-cutting measures, include implementing power management policies and introducing central management software to enforce them, which includes powering down PCs at night. The move has cut utility bills by 25% to date, and Fabric intends to package up its solution and sell it to customers as a service.
Another move intended to boost cash flow has allowed the company to tighten up its credit control processes by hiring in the services of external companies to monitor the financial health of its customer base and provide it with alerts if indicators change for better or worse. “It is about escalating and engaging with the customer earlier. Having a monitoring system in place also provides an early warning system so you can start conversations more swiftly. It has made a huge difference,” Gopaul says.
For the second part of the equation, Fabric has undertaken a major review of the business’ “value proposition”, a process that involved comparing its offerings with those of rivals and evaluating where it differentiates itself. For example, the firm has niche skills in latency management algorithm-based trading in the financial services sector, so it is capitalising on such expertise by proactively going after projects in this area.
It is also inventivising its engineers and consultants on the ground to make problem-solving suggestions to customers and to pass on such qualified leads to sales staff. This move has likewise been useful in positioning employees in a more “trusted advisor” role.
“One thing that is key at the moment is you cannot go forward with vague propositions like ‘let’s improve the efficiency of your workforce. You have to say how and by how much because, by quantifying return on investment, you can rise above the rest of the market noise and start having real conversations,” says Gopaul.
The business of distribution is essentially about buying and selling products, but ensuring that such activity is undertaken in as cost-efficient a manner as possible involves streamlining the processes in between – that is, logistics, marketing and finance.
As a result, CCI Distribution, which has traditionally sold peripherals into the consumer market via around 600 retailers and e-tailers, has undertaken a full organisational review and revamped many of its business processes to ensure that they are working as effectively and inexpensively as possible.
For example, it has been able to drop an external supplier by reorganising its warehouse to create more space and has hired a new courier company on more favourable terms after its previous freight provider went bust.
The firm has also extended its former 9am to 5pm warehouse hours to between 7am and 7pm, and now has one collection per day rather than multiple collections. It has likewise started delivering more products directly to end-customers rather than to its channel partners to save them money and has consolidated returns to once a month rather than weekly.
Nick Preston, CCI’s sales director, says, “By extending our warehouse hours, we get better courier rates and we can pack and ship more effectively because it is less of a rush. We have put a lot of quality assurance in place and it is now more systems-driven. By reviewing our processes, we have cut out about 15% of our costs.”
Another action the distributor has taken to ensure that sales are being maximised is to proactively rotate stock among its partners in line with demand. This involves regularly taking back slow-selling lines to replace them with “well-priced products that are selling well”.
“Standard run-rates and margins are being hit so a key way of tackling that is stock management, especially in the consumer market. We have high levels of stock purchase, so we have to ensure it is all in line with run-rates – we don’t want to be holding onto stock for weeks, especially because of currency rates, which killed a lot of people’s businesses at the end of last year,” explains Preston.
CCI has also been able to cut marketing costs by 25% by simply retendering the design contract for its inhouse magazine. It has now taken on new external consultants on a retainer basis rather than paying them per issue.
In finance terms, meanwhile, the company has created a pot of money to provide long-term, trusted customers with credit assurance. Because many insurers have drastically reduced their credit limits, many retailers and e-tailers have been struggling. But the distributor is now undertaking self-assurance by providing them with a credit limit and ensuring that they work to a payment schedule.
“Ten years ago, there was no assurance industry and we worked with financing programmes, so it is the same idea. We decide on the amount we release to the channel, which is our exposure, but it is flexible in terms of customers and we move credit limits from one to the other. But fraud [is growing] so you have to be vigilant,” Preston says.
In a further attempt to boost sales, CCI has also created two new teams. The company is based in Harrogate, but it has set up a new telesales team of five in Andover to support existing customers in the South more efficiently and to take on new ones. The move has reduced travel costs and ensured that staff can focus more effectively on local markets.
The firm has also set up a business-to-business team of five at headquarters to sell storage products to medium-sized companies for the first time. “If you become more efficient, you can create more capacity in the business, and we expect a 15 to 20% upside as a result,” concludes Preston.