Picking a winner in the current economic climate

The phrase “in the current economic climate” is so commonly used that an acronym (ITCEC?) can’t be far behind.

But however overused the phrase, it does actually still mean something to businesses and individuals the world over – uncertainty.

Or does it?

There is much evidence to show that today’s challenges are simply a part of the normal business cycle.

The difficult part, admittedly, but a familiar scenario through which economies and businesses have battled on a 10 or so year loop for the past 30 years.

Although the effects will be no less severe, if we can agree on its pattern of recurrence (always in a slightly modified guise) then we can begin to logically calculate how to get through this turbulence.

For the channel, these past learnings can be incredibly useful when picking partners and suppliers.

Perhaps most importantly, we can put this knowledge to use in ensuring that when we emerge into the sunnier side of this business cycle we are ready to capitalise on the opportunities that good times bring.

Because it is making the most of these changes, rather than simply surviving them, that separates strong companies from the also-rans.

Some of the signs of a good partner are obvious and the criteria you employ during good times should not be rejected now.

But start to ask a few of the questions below and you will get a clearer picture of the strength and value of your potential partner both today and into the future.

Does the company have a broad product profile, or is it dependent on one area
of the market?

This is a classic question to ask, but its power should not be underestimated. Use your instincts.

Customers rarely stop buying completely – they just prioritise purchases when cash flow is tight – and a company with a broader technology portfolio is more likely to ride out the storm.

That said, do not be lead too far from niche or specialist players as superior technologies will still win any tender or consumer purchasing decision.

In our world of memory for instance, flash memory has a massive overcapacity at the moment, so to survive in our sector you need a finger in the DRAM pie, too.

This diversity does not even need to match your own company’s specialism, it is more about balancing risk within your supplier’s company so that a market wobble does not knock them totally for six.

Seems simple, but there are a lot of companies that made money from a very limited product set while the economy was buoyant.

It remains to be seen how well they fare in the next 12 months.

Who does the company partner with and what does the partnership bring?

In difficult times we all get by with a little help from our friends and the company your partners and suppliers keep says a lot about them.

But do not be dazzled by their big-name partners – the Microsoft, Citrix, IBM and Oracle partner programs all bulge at the seams.

Look for the more exclusive partnerships and look further up and down the food chain.

Does the supplier own their own manufacturing process?

If not, who does it for them – and how healthy is their business?

Is the company owned by a larger entity and what does that parent company bring to the party?

You will need to ask some pretty direct questions to find out whether the parent company provides any protection or whether they simply harvest the profits from their smaller subsidiary.

The parent company can hold all the cards when decisions are made about investments in R&D, which is important because...

Is the company still investing in R&D?

R&D is expensive, and Google’s recent announcement about changes to its development strategy demonstrate that for many it is a luxury only afforded during times of plenty.

But if you are to continue selling, and each sale is getting harder, you need new products to offer and they need to be good.

Also, while predictions of exactly when we will emerge back into more comfortable economic conditions vary wildly, we will get there.

And when we do, channel partners of companies that are ready with something new and revolutionary will see the most of the boosted IT budgets and fatter consumer wallets.

Just look back at VMware’s rise after the dotcom bust and the powerful position that virtualisation still holds on the CIO shopping list even now budgets are tight.

What cash reserves does the company have? Is it spending or saving?

R&D is one of the biggest but not the only outlay on your suppliers’ balance sheets so consider their other costs.

Mergers and acquisitions are often seen as a sign of a company battening down the hatches in times like these, but sometimes it can be quite the opposite. Right now, any technology company sitting on some healthy cash reserves is finding that (like a home buyer) their money is growing in value in comparison to their purchase target.

If you take a long-term view, hard times can be the best time to acquire a fabrication partner (for example), or even a competitor as things get even more uncomfortable.

They made the money when times were good, and if they spend it when prices are low, they will be poised and ready to cash in again when times pick up again.

Possibly the most crucial thing to watch for among vendors is whether they are making any changes to their capacity.

If they are maintaining or increasing their capacity, it may seem like they have not noticed the downturn.

But anyone who sells capacity for cash when times are hard is firing a great big emergency beacon into the air – they need cash quickly, they are thinking short term and when the market turns they will have to work very hard to compete.

Ask questions about their spending plans with your own interests in mind, too.

It’s common for companies to reduce marketing spend almost as an automated reaction to a more challenging sales environment.

There is a very obvious disconnection in logic in this approach – marketing helps sales, so companies should invest more, not less, when sales are harder to close.

Still, you may need to make this suggestion to the potential partner, otherwise you will be left on the frontline trying to make sales with little or no marketing support.

Make contractual requirements of your partners, insisting that your targets and incentivised rewards are tied to their own marketing and channel support investment.

That way, if everyone’s marketing noise quietens, your own will shout comparably louder, with the obvious advantages.

What debts does it have?

A simple one this, when money is short, lenders want it back.

They get nervous about their investments and even more so when the riskier ones fail to deliver returns.

You only have to look at the sub-prime debacle in the US for affirmation on this point. Cash is king in the current economic environment.

Debt in a slow market puts your supplier in the hands of their lenders and limits their ability to respond to market changes.

Acquisitions become tricky for them, capacity might need to be sold and R&D will be cut. Quite simply, debt reduces “wiggle room”.

How has the company behaved in previous downturns – does it spend
or save?

Can a leopard change its spots?

Does it want to?

Without downplaying the difficult times ahead, the fact is that taking another lap around a familiar business cycle is a great advantage to the channel when assessing vendors.

Simply take a look at what they did last time around.

Here is an illustrational example from the memory industry.

In the 1980s there were 17 DRAM companies in the US.

By the next boom/bust cycle in the 1990s there were three.

There is now one.

A distributor or retailer partnering with that one can be reassured that the company knows how to deal with this next cycle.

Who emerged from the last cycle having made gains in their space?

Find that company, you want them as your supplier to give you confidence that they will do it again.

In fact, their CEO is probably nodding sagely as they read this article because they know all this already.

Is the company a buyer or a producer of technology?

It is very easy to compare brands when making partner decisions.

Do we want to sell brand X or brand Y?

But often the brand hides some fundamental details that, once revealed, might just change your decision.

What if brand X is a logo stamped on the side of their own product and brand Y has more customer recognition but it is their own logo stamped onto someone else’s product?

What if the product behind brand Y is actually made by brand X?

Suddenly the weaker brand is the stronger supplier to go with in difficult times.

When deciding on a partner, knowing whether they are a buyer or a producer of technology is crucial to making the right decision.

Consider the other side of the cycle...

The concept that should underlie all business decisions during difficult economic times should be that any relationships need to work both in
the short term and the longer term.

A partnership should be the right one for today, addressing the business challenges that come in times of scarcity, but should also align your business to make the most of the good times to come.

Filled with fear and uncertainty at the moment, it can be hard to remember that just as “what goes up must come down” so the downturn in a cycle is followed by a corresponding upturn.

Good times will come again, and making calm assessments and sharp decisions now can make all the difference in being ready to reap the rewards of the easier climate to follow.