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Sun 25 Jan 2009 02:00 PM

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Seeking solace in turbulent times

Sentiment in the Middle East IT market is running lower than it has done for a long while as the channel comes to terms with trading conditions that are markedly different from those encountered this time last year

Sentiment in the Middle East IT market is running lower than it has done for a long while as the channel comes to terms with trading conditions that are markedly different from those encountered this time last year. But while the mood remains sombre, is it plausible that the current turmoil could eventually serve to have a positive effect on the channel?

That may seem a strange question to ask at a time when signs of respite aren’t particularly conspicuous. Even the most optimistic players have begrudgingly accepted that an improvement in the market is unlikely to be noted before the end of the first half. In truth, it is probably going to take a lot longer than that for a meaningful recovery to take place.

Stories of the major IT vendors cutting costs and shedding staff have become a daily occurrence since the start of the month, casting a dark cloud over a technology sector that was always going to bear the brunt of a financial downturn some way or another.

Just this week, Microsoft said it would eliminate as many as 5,000 jobs over the next 18 months, while fellow industry bellwether, Intel, plans to eradicate 6,000 positions through the closure of three factories.

Confirmation of a slowdown in the PC sector during the fourth quarter has heaped further misery on the market. The level of PC growth in EMEA virtually ground to a halt during Q4 — not something that is supposed to happen during the most eagerly-anticipated period of the year for the channel.

Such developments merely compound the level of anxiety felt locally, although it’s clear for everyone to see that events in the Middle East IT channel have been determined by two primary factors — a reduction in the overall availability of credit and softening demand. Whether one is a catalyst for the other is a separate debate altogether.

What this has done, however, is forced distributors and resellers to internally scrutinise their businesses during recent weeks, prompting some to dramatically revise the way they manage cashflow, set payment terms and generally go about protecting their balance sheet.

In the run up to the new year we polled a number of senior executives in the region about the challenges facing the channel, and the overriding message from all of them was that proficient financial management remained more important than ever.

The regular practices and policies used by some channel players aren’t necessarily effective in the current environment, where the term ‘know your customer’ has swiftly come to assume added significance. When times are tight, and credit availability is reduced, companies are wise to place emphasis on their risk assessment strategies. After all, that’s exactly what the insurers are doing.

Again, however, if this culminates in resellers or distributors paying greater attention to key financial principles, which itself drives greater transparency and accountability, then it may create a more stable market place much further down the line.

The last few years have been all about soaring sales growth and lofty revenue targets in the Middle East. There has been no time for the channel to breathe and take stock of things. While companies aren’t going to ditch those sky-high sales aspirations just because the market is in a rut, they probably won’t chase them at all costs as they would have done in the past.

One Middle East distributor I spoke to recently admitted it is reining in potential deals that would have gone through before: “In the past if a reseller didn’t pay on time, we would continue giving them credit and hope that the situation would correct itself. Now that is not the case. We are looking very carefully at credit and collections — there are indicators that we use so we can identify which customers are in trouble as early as possible.”

It is idealistic to think that if enough companies took a more responsible approach to account management then the long-term result would be a market far less volatile than we are used to now. But at the very least it might go some way towards fashioning a more structured channel environment, particularly if you follow the theory that weaker, less professional outfits won’t make it through the storm.

Channel sources also cite a recent change in vendor expectations, a development welcomed by resellers who have long accused manufacturers of over-estimating the real capacity of the Middle East market.

Some of the more unscrupulous sales behaviour witnessed in the market is arguably created by vendors setting unreasonable targets for the channel. With limited credit in the channel, perhaps this scenario will correct itself by pushing vendors to either reassess the true appetite of the market or develop tools that help partners meet rebate targets rather than revert to discounting.

While some markets in the region are clearly more affected than others, players in all tiers of the channel are inevitably having to adapt themselves to the new climate they find themselves in. And if that results in a greater level of diligence being exercised it certainly won’t do them any harm.

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