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Interview: Financing the road to recovery

Interview: Financing the road to recovery

Westcon Group veteran CFO, John O'Malley, spoke about the role of distribution and tackling the dour economic climate.

Westcon Group veteran CFO, John O’Malley, made his fi rst visit to Australia this month for the local management kick-off. He spoke to NADIA CAMERON about the role of distribution and tackling the dour economic climate.

How has Westcon’s globalisation push affected your financial strategy?

John O’Malley (JO): The ability to know what’s happening in other regions with that customer and to understand the customer’s performance is important. We have corporate governance, compliance and other things we need to adhere to – there are tight statutory fi lings, performance and corporate governance standards with a company that’s public in two countries. When you put it all together, the banks like you, and you’re a great credit to your vendors. Vendors aren’t looking for 100 distributors – they are looking for less, and for better quality. If you can facilitate transactions across multiple regions routinely and consistently, customers continue to come to you and look for you to do more.

The whole business has come down to how much capital is available, how is it structured, how can we deploy it, and how can we assist resellers and grow business in a tough environment. We also need to look at whether we’re on top of our receivables, our inventory, and so on. Then you throw in things like Avaya becoming private, and Nortel becoming challenged, and you have to work through those things. We have had other vendors challenged before. As a distributor, you have to make sure you have visibility and transparency with customers and vendors. The neat thing we have is cross-regional transparency on all key operating metrics of the business.

How has the role of distribution changed during your 10 years if this space?

JO: For me, the big migration in the industry has been around transparency and strategy. There was a time when the strategy, fi nance metrics and adhering to a plan came more from the OEM side and we aspired to be like the vendors. I think in my time, the business of distribution in IT has come a long way. We have our own set of fi nancial metrics and parameters and based upon those, and improvements to our working capital velocity, we’ve become a more credit-worthy group of entities. The ones that weren’t, dropped by the wayside. During the dot-com era, we had a chart of distributors listing who was broad-based or niche. Then we spent years deleting them. They are some super regionals out there and they’re there for a reason – in Europe, it’s much more fragmented for example. But most of the world has settled into people who really do it well and focus on it.

In the past couple of years, it’s become a story of deployment of capital, and really engaging the reseller. There was a time when you didn’t have metrics; now we have them and are running decent capital models. Once you have that, you want to engage with and grow the capital – whether it’s around product or solution options, geographic options, or really enabling the channel, as opposed to just being a participant in it. You’re in the game, and you’re also trying to influence the OEM to bring products and offerings to the channel that help them be successful. I just feel like we’re much more engaged with resellers and the vendors.

Is this because vendors realised distributors have the ability to be that channel enabler?

JO: Absolutely. We are distributing products all over the world. Over time, vendors saw us as a way to get into those places: They could either get there through their own heavy lifting, corporations and funding, or they can ride on what we have. What I’ve seen is more vendors wanting to take advantage of that. These days, if it’s not built right, you know, you have an income tax problem, or VAT issue. People are much more confident to share their business or expand on the back of a multinational distributor that’s clearly doing business properly in all these regions. A Cisco CFO signs a 10-K under Sarbanes- Oxley using POS data we gave him to calculate his revenue. He’s also relying on us for asset support and control, return of hazardous substances and so on. Over the past few years, distributors have put more on display and if a vendor wants to go somewhere, they want that reporting, control and things behind them.

What’s the biggest challenge for you in this economic climate?

JO: It’s access to capital. We were opportunistic a few years ago and lined up a lot of capital. Rates were good and we’ve always been in the mode of financing and refinancing the business. We were a $200 million Nortel business in my first year – within 18 months, we punched through $1 billion in revenue across multiple vendors. Two years ago, we did a five-year deal that allowed us to get a lot of collateral in smaller countries and put it into one group of banks in the UK.

We then converted our European businesses to branches of the UK offices. We also put Canada together with the US, and made good deals with syndicates at committed rates that were pre-crisis and diverse, so we’re not overly exposed to one or two banks. Then we’ve put amazing things in place, like Westcon Capital in Australia, as a foundation to help capitalise resellers selling all day and landing large transactions. Globally, we have a basket of offerings including co-processing of invoices, locked box transactions, leasing and rental opportunities. In this environment, you need the capital and if you remain supported in the timeframe, you’ll be a winner on the other side. Our message to the channel is if you’re having those issues, you should come to us. Today, resellers are far more likely to use things like leasing as this structure makes a heck of a lot of sense. The coat has been on the hanger for a while, but you have to wait until it’s cold before everyone runs for it.

Is the market that bad?

JO: I don’t think it’s that bad here at all. There are some areas where it’s not chugging along like it is in Australia. With a solid model, we’ll weather the storm like we’ve weathered other storms.

What are your top priorities for the rest of 2009?

JO: Top priorities are to focus on marketshare with a lot of our big vendors and monitor how that goes. I’ll also work with Dean [Douglas, new CEO] in the transition to that role. We’ll spend some time in Europe honing that model – we have done two big acquisitions there recently, one being a leading Avaya distributor, the other being a regional security player. We’re also looking at emerging markets and new opportunities there.

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