No doubt, it’s been a tumultuous week, what with hurricanes and a Wall Street meltdown – both of which are having a detrimental effect on the economy, even up here in Canada. Up until now, even with all this talk of a recession, many in the channel were continuing with business as usual.
But this week, financial crisis struck Wall Street giants Lehman Brothers, Merrill Lynch and AIG. The U.S. economy was already on shaky ground, thanks to the sub-prime mortgage meltdown – a disaster that was just waiting to happen.
The channel won’t be immune to Wall Street’s woes, especially when combined with soaring energy costs. It’s expected the economy will slow down because of a clampdown on credit, as commercial banks tighten lending policies and increase interest rates.
Forrester Research has reported that nearly half of U.S. enterprises have cut back on IT spending and nearly all have frozen discretionary spending. Not surprisingly, the deepest cuts are coming from the financial sector. It also revamped its 2009 forecast: Tech spending in the U.S. is expected to grow at 6.1 per cent next year, rather than the previous estimate of 9.4 per cent.
The first signs of strain in the distribution channel were revealed when Ingram Micro cut its third-quarter profit and revenue outlook, saying “economic softness” this summer was continuing into September and putting pressure on operating margins, both in Europe and North America.
Ingram also plans to get out of low-return businesses, particularly in its largest operations, and will review other cost-cutting actions over the next several quarters.
We could see more of this from other distributors feeling the effects of the Wall Street meltdown, as well as vendors that rely heavily on the financial sector. But it probably won’t go over well with resellers, since some have been complaining that distributors are passing on their cost increases (prices have gone up, while discounts have gone down), at a time when they’re already struggling with slim margins.
Or, perhaps we’ll see an injection of cold hard cash. Last March, D&H Distributing attempted to quell the fears of its reseller community over economic doom and gloom by extending credit lines to 1,000 of its top partners – by about $10 million.
What’s happened has happened. What matters now is how the channel is coping. Perhaps customers will delay projects or scale back on current ones. But we could see more IT spending in areas around data governance, such as risk management, compliance and auditing. And cost-cutting projects will always be in vogue.
And there’s always a silver lining: Central banks around the world (including the Bank of Canada) are injecting billions of dollars into money markets – to the tune of $247 billion – to weather this storm.
