Protecting partners during Covid-19

In the case of Covid-19 - a once in a generation crisis - it’s accurate to report that the channel ecosystem is under water, with partners drowning due to the heavy burden placed upon their shoulders.

While the world, and the markets, will eventually return to some level of normality, it would be foolish to assume that the channel will naturally follow suit.

Aside from swallowing a substantial loss of revenue, tier-1 providers and global system integrators are expected to recover, likewise the large consultancy firms have the balance sheets to grit teeth, hold on tight and wait for the sun to start shining again.

For the tier-2 ecosystem however, the reality is more sobering.

Some may argue that the rise of remote working has triggered a new wave of demand within the channel, as customers rush to build out business continuity, collaboration and security strategies, underpinned by a digital transformation agenda.

At enterprise level, such a scenario is most likely already playing out but in most cases - especially at SMB and mid-market levels - the problem isn’t necessarily the deployment of technology, rather who’s paying for it.

“Some customers are choosing, rightly or wrongly, to not pay some of their bills,” observed Mark Iles, executive analyst at Tech Research Asia. “Partners are already planning cuts in response because most understand that it’s probably best to make harder and deeper cuts as early as possible, which will result in some quite heavy fall-out.

“Obviously that means redundancies and the people most at risk in this scenario are those on probation, plus new starters and new hires.”

For Iles, the challenge facing partners is a simple, yet startling one.

“Most partners outside of the tier-1 level don’t have balance sheets that can survive a 10-20 per cent drop in revenue,” he cautioned. “Partners simply won’t be able to survive from a profitability point of view. Reporting lower revenue on the same fixed cost base means most will be unable to weather this storm for more than a couple of months.”

Alluding to the age-old adage that ‘cash is king’, Iles warned that in the current climate - with government containment measures placing increased strain on businesses and supply chains across the world - there’s simply not enough cash to go around the market.

“Everyone is turning inwards and battening down the hatches,” he added. “If we start to see customer defaults, this will be the most worrying scenario. If a customer says, ‘we can’t pay you, you can sue us if you want but we simply can’t pay’, then the channel has a huge problem.

“The customer can’t pay the partner, the partner can’t pay the distributor and the distributor can’t pay the vendor. Nobody is getting paid and if you consider services instances in which the work has already been carried out, this could be catastrophic for tier-2 partners.”

Iles’ observations are endorsed further by Forrester, which states that in light of expected investment declines - which are already taking place in Asia Pacific - a fully-fledged recession could “seriously impact” upward of 25 per cent of value-added resellers, managed service providers (MSPs) and independent software vendors globally.

“In 2008, we saw a material contraction of the technology and telecom channels, and this time would be no different,” wrote Jay McBain, principal analyst of channel partnerships and alliances at Forrester. “We have observed models where one-fourth of all technology partners either lose money or struggle to break even (in good economic times). These partners are the most exposed in this scenario and are least likely to get additional capital or other lifelines.”

For Iles, there can be no sugar-coating this; “we will definitely see some partners go to the wall”.

“I think that will be triggered by either not cutting deep enough or fast enough,” he added. “Also, if partners get cash flow modelling wrong and one or two customers then default, that will probably take them down.

“Imagine if a partner bills $250,000 worth of professional services and the customer says, ‘sorry, I just can’t pay’. That’s a hell of a lot of money to suddenly have not coming through the door, that the business has been built around. Cash flow modelling has to be right to ensure partners can understand exposure levels.”

Given that most product price lists are in USD, the volatile exchange rate is further hampering the channel, with Iles acknowledging that “as customers have less money, everything becomes more expensive”.

Responsibilities

In Covid-19, never has the channel been so fixated on one topic, yet so spectacularly misaligned on responsibilities, according to one prominent industry figure.

Speaking on the condition of anonymity, the executive criticised vendor relief efforts in response, asking the question; if the customer can’t pay due to Covid-19, how are vendors protecting the channel from going bankrupt?

“What’s vendor policy here?” the unnamed source asked. “Vendors are quick to run virtual events outlining how partner and customer first they are, but what does that even mean? Now is not the time for vendors to blow up their channel, they’ll be screwed when this goes back to business as usual. It’s time for vendors to get in huddles at corporate level and respond accordingly.”

Whether operating in Australia, Singapore or India, even Malaysia, New Zealand or Hong Kong, the channel as a collective is facing the same challenges. Everyone is seemingly on the hook - customers to partners, partners to distributors and distributors to vendors - one break in the chain threatens to bring the whole supply chain crumbling down.

Take Merivale as a recent and public example, with the Australian hospitality giant ceasing operations of all venues in Sydney, closing approximately 70 bars and restaurants in the process. Likewise in Singapore, several fitness chains have closed outlets across the country, with Fitness First not planning to resume operations until 1 May. And let’s not forget retailers and airlines that have been decimated following the outbreak.

Irrespective of location or geography, such closures are impacting thousands of employees, some of which have been temporarily relieved from duty, placing the channel in a difficult situation.

Assuming an MSP is running IT operations for one of these organisations - or any other of the thousands of businesses impacted - now what happens? The business is closed, should all licences be turned off? Given this is temporary, does the business have enough money to pay for the months in which the licences are not being used?

“Normally, you would expect the partner to say, ‘okay, I just won’t bill you for a couple of months’, but in the world of cloud, monthly subscriptions come into play,” said an executive in distribution, also speaking on the condition of anonymity. “That monthly subscription will just keep on building and building, month-by-month, unless the vendor is prepared to initiate a payment pause, but most have been very slow to react.

“What if the partner is still on the hook to pay the distributor for those licences? That could be what the contract states but the partner can’t pay the distributor, so what happens if the distributor still has to pay the vendor?”

Directly requesting vendors to up the ante in terms of revising payment policy guidelines related to the Covid-19 outbreak, the unnamed sourced said failure to act could result in long-term - and perhaps irreversible damage - to the channel.

“Whenever you speak with a vendor, they generally hold a quota and all they hear is, ‘blah, blah, blah, how can I make more money?’ another source added. “If businesses are falling off a cliff due to Covid-19, who’s going to carry the customer debt? The channel might have enough money in the bank to last a few months but that’s it. We need the vendors to step up.”

Credit: Channel Asia / IDG

Customer billing

Broadly speaking, and in reiterating customer sentiment, Iles said end-users are making “hard decisions” as to which bills will be paid, and not paid, during this period of economic uncertainty.

“Examples of this are already taking place because some customers think that the service will continue to be delivered anyways,” added Iles. “In the case of software-as-a-service [SaaS], we’re finally seeing the downside.

"SaaS is great, contract free and month-to-month, and everyone assumes the graph will keep going up. It’s sticky and it’s annuity and that’s great, until it’s not great. Now the market is suddenly seeing SaaS bite back a little.

“The nature of no contracts means that customers can just turn off the service. Previously, customers would have to go to a little binder housing all IT contracts and providers but in some cases today, they can simply turn off the service, remove credit details and be done.”

Iles acknowledged however that challenges arise when customers hold contacts and simply can’t pay. In this case, the importance of ‘back-to-back’ becomes critical in ensuring everyone is perfectly lined up in the channel chain of command.

“In that situation, it should flow through,” Iles stated. “Nobody is guilty in this scenario but crucially, nobody gets caught in the trap, or they shouldn’t be. Everyone is squeezing a little bit in the middle and will probably have to take a haircut on the way through but the channel certainly can't pick up the slack, vendors will ultimately have to wear this.”

Software and cloud aside, from a hardware standpoint, Iles was also quick to remind that a partner should never place an order until an order from the customer has arrived.

“It’s the golden rule,” he confirmed. “Most vendors generally won’t accept the order and if they did, if the customer pulled out, the ownership would fall on the partner. But the main issue with hardware during this time is the potential of customer defaults. Then there is equipment which the partner may not have the right to return.

“Say a customer purchased $100,000 of kit. They place the order with the partner, who then places with the distributor who then places with the vendor. The vendor ships the product and it arrives at the customer site.

“But what if a customer says, ‘actually, everything has gone pear-shaped since we ordered so I don’t want the product anymore. I’m not paying, come and get the product’. The issue here is that generally, partners don’t have stock rotation capabilities whereas distributors do.

“If partners have to recoup the goods, it's very difficult to return because in most cases, distributors generally won't take stock back. Or even if they did, it would warrant a heavy restocking charge meaning the partners are left with the kit and subsequently the bill, which becomes a challenge."

In assessing the channel landscape, specifically the tier-2 network, Iles said most partners will not be able to survive a decent sized order going south, with the ripple effect of defaulting set to paralyse the supply chain.

“This is primarily a credit risk,” he cautioned. “Vendors will be fine but for everybody in-between, it’s going to be tough.”

Next steps

Despite such troubling times, Iles advised partners to explore pockets of opportunity to help bridge the gap, such as leveraging government benefits in relation to staff payments to help manage cash flow challenges.

“Each country is different but there’s actually quite a lot of cash being offered by some governments around keeping staff employed, which could be factored into cash flow planning,” he explained. “Getting cash flow modelling right will be crucial but in my experience of working with partners, other than the very large providers, forecasting is terrible.”

In this current crisis, Iles advised partners to get “really good” at cash flow forecasting “really quickly”, starting by assessing current loan payments, the possibility of freezing payments on any debt carried and whether any debt can actually be called in.

“Talk to bankers also,” he said. “Now’s the time to have experience in building out a solid cash flow model based on the most likely scenario over the next 90-120 days. Otherwise partners will unfortunately be caught out. It’s back to that question of, what happens if the customer doesn’t pay? Look at the books and assess where current payments are at.”

Going one step further, Iles recommended reaching out to existing customers as a way of strengthening current relationships.

“It’s actually the job of the partner anyways,” he said. “By being proactive, partners can engage with customers and acknowledge that they are hurting. Sit down and talk about reducing their bill and the amount of money they spend in the interim.

“If a customer has suddenly cut 20 employees, that’s 20 less users for the MSP. The bill is going to drop regardless so partners might as well proactively engage because customers are sitting down and having those meetings anyway.”

As a result, Iles said Covid-19 represents an opportune time for partners to move away from a heavy acquisition focus to a heavy retention focus from a customer standpoint.

“Partners must ensure they look after existing clients," he reaffirmed. “Customers will remember the partners that do a good job during this crisis and now is the time to be on the front foot."