Beating the recessionary blues

1 August 2020 IT infrastructure

At the start of 2020, the South African economy was already on the back foot. GDP shrank 1,4% quarter-on-quarter in Q4 of 2019, following a contraction of 0,8% in Q3. That was even before COVID-19 arrived.

The Moody’s, Fitch and S&P; rating agency downgrades in March and April all signalled that the South African economy is in for a rough time over the next year at least. Recent research from Investec shows that most South African corporates are expecting a 10% to 20% decline in GDP for 2020 and they expect negative or flat GDP growth to continue in 2021.

Mike Rogers.

With industries such as hospitality, mining, manufacturing, construction and transportation under pressure, most companies are looking to eke out savings by sweating technology assets a bit longer and by trimming IT operating costs. Most resellers will not be able to grow their businesses without winning market share from competitors or diversifying into new markets.

Here are some approaches they can take to defend their market positions so that they can emerge stronger from the downturn.

1. Horizontal expansion

Many resellers have carved out comfortable market niches and focus on doing one thing really well. But with companies cutting back on capital expenditure and making their assets last a bit longer, a lot of these technology dealers are struggling to maintain or grow their revenues. For these resellers, a relatively fast way to bring in more revenue is to expand into adjacent markets. For example, a company that specialises in printers and copiers can look at providing office automation and workflow software, too.

2. Climb the value chain

e-commerce has taken an enormous toll on the traditional box-dropping business. It’s becoming increasingly difficult for smaller value-added resellers (VARs) to compete with the product range, speed of fulfilment and pricing that online competitors can offer. One way they can reinvent themselves and grow profitability is by moving up the value chain. For example, they can look at wrapping managed services around the products they sell or add consulting services to their business.

3. Cut the fat

When the options for revenue growth are limited, the best strategy is often to focus on strengthening the bottom line. A downturn is an opportunity for every business to impose more discipline on its internal operations and look for opportunities to improve efficiencies, enhance productivity and cut unnecessary costs. Technology companies can streamline their own processes with the same solutions they are selling to their clients – for example, automating business processes with workflow tools and enterprise applications.

4. Focus on cloud revenues

On the one hand, the way that business users are moving towards as-a-service and cloud models for IT means they are buying less hardware and software from the channel. On the other hand, this market is thriving and offers resellers some interesting opportunities to earn annuity or subscription revenues. Most of the cloud providers have well-established partner programmes and there are many ways resellers can add value in digital and cloud enablement. We are seeing many resellers pivot from selling software licences to providing cloud consulting, integration, and configuration solutions to their clients.

5. Get niche

Resellers that have carved out a strong position in niche markets can often benefit by focusing on the highest-margin areas of their business. Companies that have developed capabilities in specialist areas such as information security, big data analytics or artificial intelligence will be well positioned in nearly any market conditions. It takes time to build up these competencies but having a rare set of skills will put a reseller in a highly defensible position in a volatile market.

6. Consolidate

Further consolidation of the industry is inevitable because there are simply too many companies competing for a piece of the pie. As the cloud erodes demand for traditional products and services, the competition will only get fiercer. The question that some resellers may want to ask themselves is whether they will benefit by bulking up via mergers and acquisitions. As part of a larger entity, they can provide more complete solutions, expand into new markets, and leverage a stronger balance sheet to compete for big contracts. The opposite approach can work, too -- being nimble and running lean.

Even in tough economic times, there are several things that a service provider can do to survive, or even thrive. The key is to focus on the approach that plays to their strengths and that offers the best value to their customer base.

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