Staying Afloat: 6 Tactics for Surviving the Downturn
As recession trickles through the economy, those in IT need to make sure operations remain ship-shape through it all. Here's a guide.
- By Anne Stuart
- May 01, 2008
If there's one thing certain about the fate of the U.S. economy, it's that, at this writing, those in power haven't said for sure whether we're headed for a genuine recession -- or are possibly in the early stages of one already.
But nobody seems to be disagreeing with the Scarecrow-like line of thinking that we'll continue traveling a rather gloomy road for awhile longer.
There are plenty of hard numbers indicating that, as Federal Reserve Chairman Ben Bernanke put it in his testimony to Congress, "the U.S. economy is going through a very difficult period." Unemployment and inflation are up. Consumer spending, housing starts and sales of existing homes are all down. The Fed cut interest rates 3 percentage points between September and March, and analysts were predicting another cut to occur in late April. The Dow Jones industrial average took a couple of roller-coaster rides during the first quarter of this year; the U.S. dollar continued losing value against the euro and other currencies worldwide.
The current downturn -- a term that, at this point, seems safe to put into play -- was a few years in the making, fueled by the subprime lending crisis that burst the nation's housing bubble. Meanwhile, rising energy, gasoline and food prices prompted homeowners and businesses alike to tighten their belts. All those factors led Congress and the Bush administration to authorize a massive tax-rebate program that they hope will help stimulate the sluggish economy.
Of course, the IT universe hasn't been immune to the slide. In February, Forrester Research Inc. revised its 2008 forecasts for both U.S. and global purchases of IT goods and services, estimating that such spending will grow by just 2.8 percent this year, down from an earlier projection of 4.6 percent growth. Globally, Forrester now expects IT spending to grow by 6 percent in 2008, down from an initial prediction of 9 percent. In comparison, during 2007, IT buying grew by 12 percent worldwide and by 6.2 percent in the United States. (The research giant wasn't among those shying away from the "R" word: "Our forecast is based on a mild recession in the U.S. economy in the first two to three quarters of 2008," Vice President Andrew Bartels said in a press release announcing the revised estimate. "While it is by no means certain that the U.S. economy will in fact experience a recession, the risk of one is high enough to justify a more conservative outlook for the IT market.")
"If there's going to be a recession, the way that you keep customers is by treating them well."
Dan Price, General Manager, Price Data Systems
At the same time, Microsoft apparently isn't yet feeling the pain. In January, the company announced record second-quarter results representing 30 percent growth in revenues, 87 percent growth in operating income and 92 percent growth in diluted earnings per share over the same period a year earlier. (Because Microsoft's fiscal calendar begins July 1, its second quarter runs from October through December.) The company's $16 billion in revenues for the quarter exceeded its prior record by more than $2 billion, CFO Chris Liddell said in the company's earnings statement, adding: "Throughout the first half of our fiscal year, all of our businesses met or beat our expectations."
Still, all those dire (if vague) economic forecasts are likely to make corporate IT decision makers look especially hard at how they spend -- or don't spend -- every IT dollar. That caution and scrutiny is making some partners nervous.
But other partners see potential rainbows behind those storm clouds. The majority of the 500 partners participating in a survey co-sponsored by BlueRoads Corp., a provider of opportunity-management solutions, expressed optimism about their revenue potential for this year. "They feel that they've got the adaptability and the flexibility that it takes to really respond to the market," says Craig Downing, director of product marketing and demand generation for the San Mateo, Calif.-based Registered Member. (For more on the survey, see the Channel Report story, "State of Vendor Leads: Worthless.") "What the channel is demonstrating, year after year after year, is that even when things get lean, they can find a way to make money."
Here's what several partner companies are doing to accomplish that goal.
1. Go Back to Basics
There are two stacks of paperwork on prospects sitting on Dan Price's desk. As the general manager of Price Data Systems, Price saw the volume of new customer sales for the Louisville, Ky.-based Gold Certified Partner's Dynamics GP and NAV solutions start tailing off last fall and get steadily slower this year. He's expecting business from new projects to be about half what it was last year.
"We're not losing to the competition. The competition that we're dealing with is procrastination," Price says. Time to close deals is getting longer and longer, even after customers have made the decision to go with a Price Data Systems solution.
Any company that's been around since 1978 has some institutional knowledge about how to survive and even thrive in a downturn. While Price isn't looking for growth, he does expect to do about as well this year in revenues as he did last year.
"If there's going to be a recession, the way that you keep customers is by treating them well. What we found after Y2K, which hurt companies like ours, is everyone blew their [money] in '98 or '99 and there was no money left to spend in 2000. What we found during that period was that customer services and customer relations are the things that keep you going."
In fact, while the company's sales team has had trouble lately closing new implementation deals, the company, which straddles Microsoft's Heartland and Midwest sales territories, has started inheriting a lot of existing Dynamics customers in Kentucky as well as in Indiana, Ohio and Tennessee.
"We're picking up [at least] one or two existing Dynamics clients per month," says Price. That boost in business represents a significant number for an 18-person company with about 120 total clients. "We don't know who those people are until they come to us. They're actually contacting other people in their communities and hearing that Price Data Systems can help."
As a managed partner, Price chuckles that his Microsoft partner account manager (PAM) isn't thrilled with his success, because as existing Dynamics customers, the new business doesn't help the PAM with sales goals. But it is getting Price Data Systems through this rough patch.
"This year on new business, we will probably only have half the new [implementations] that we had last year. Yet from a revenue perspective, I believe we will be at about the same level as we were last year," Price says.
2. Get Creative
Construction cranes still scratch away at the skyline in Calgary, Alberta, Canada, and with oil selling for more than $100 a barrel, nearby oil fields are hopping.
As director of business development for IT Matters Inc., a small business-focused, Gold Certified Partner and systems integrator in Calgary, Stuart Crawford is still constantly monitoring economic indicators for any signs that his pipeline might slow.
"It's really hard to understand what's going on when the Dow is up 400 one day and down 300 the next," says Crawford, who was named vice president of the International Association of Microsoft Certified Partners (IAMCP) chapter in Canada in March this year.
Given macroeconomic conditions, Crawford says, "If we finish 2008 flat or plus a little, we've had a great year. I'm not expecting the 20 percent growth we've had in the last year."
Even in a regional economy buoyed by a booming energy sector, the price of gas and energy in general makes transportation, power and heating cost more for everyone. Crawford is looking at those trends and retooling his sales pitches. Business pitches that resonate right now include virtualization, the movement toward green computing, the ability to do more with less, ways to enable workers to be productive from home and business-process automation.
BlueRoads' Downing, himself a former VAR, says that the CMO Council survey indicates that partners all over the country are thinking along those lines. "If this is a year of belt-tightening, that means that we can go in and we can sell them virtualization," he says. "If a customer is looking for a way to shave $150,000 off phone bills, let's talk about voice over IP."
"When people aren't writing quarter-million dollar checks for services, they might be willing to finance something."
Stuart Crawford, Director of Business Development, IT Matters Inc.
3. Keep Financing in Your Back Pocket
Crawford is used to customers paying for projects out of cash on hand, but he's alert for changes.
"Our hit rate on leasing and financing is relatively low right now because of [positive] economic conditions. However, if it does turn here, I can see that percentage going up, and Microsoft Financing would be part of that," Crawford says. "When people aren't writing quarter-million dollar checks for services, they might be willing to finance something."
A downturn is a good time to remember Microsoft Financing. For deals involving some Microsoft software, sometimes for just one license, Microsoft is willing to offer customer financing for the entire deal -- software, hardware and partner services. The partner gets 100 percent of the payment up front, while the customer sees a comparatively small monthly payment at a competitive interest rate for a term that usually ranges from 24 months to 60 months. Being able to break a $75,000 project down into a $2,500-a-month payment can be the difference between making a sale and not making one in tough economic times.
4. Maximize the Stimulus
When Congress and the White House cooperated to pass the $168 economic stimulus package in February, there was more to the legislation than the $600-per-person rebate offered to most taxpayers. A less-trumpeted provision is an expansion of the "Section 179" deductions for small businesses.
Los Angeles-based Afinety Inc., a Gold Certified Partner and consultancy, is a pioneer of using Section 179 to bolster sales and close deals, and the company jumped on the new tax provision immediately when it passed in February.
"Whenever this kind of stuff happens, we call our accountant to start looking at it," says Afinety vice president Doug Hafford.
Section 179 had a brief notoriety as the source of the Humvee tax break, which businesses were using to write off the purchases of luxury SUVs. Basically, the tax provision allowed businesses to take a one-year write-off for tangible business purchases. Importantly for partners, the Internal Revenue Service includes computer software as a tangible business purchase. The stimulus package raised the permissible write-off to $150,000 from $128,000. It also increased the revenue limit for participating businesses from $500,000 to $800,000 annually.
Hafford wasted no time working the details into customer conversations. "I was talking to a client before the measure passed. I said, 'Oh, by the way, Section 179 this year is $128,000, but if the stimulus package is approved that's going to take it up to $150,000," he recalls.
"We definitely gear a lot of marketing toward this stuff," Hafford says. "I need to be first to market with this."
"I was talking to a client before the measure passed. I said, 'Oh, by the way, Section 179 this year is $128,000, but if the stimulus package is approved that's going to take it up to $150,000."
Doug Hafford, Vice President, Afinety Inc.
5. Lead Customers to the Big Easy
Melodie Guthrie started filling out paperwork for her customers on Microsoft's Big Easy partner subsidy offer, without them asking, on the day it came out.
Guthrie is vice president of sales operations with A.T. Distribution Inc. of Charlotte, N.C. The company is a custom builder with a network of 500 to 600 resellers of its own.
"When the economy starts having trouble, our business model kind of changes. We don't sell as many home units, but we get more of the corporate market," Guthrie says. In addition to holding events in a conference center in its new facilities to train resellers on Windows Server 2008's features and selling points, Guthrie is pushing hard with the Big Easy.
The Big Easy combined and expanded about four partner subsidy programs into one comprehensive offer. It's designed to reward partners on a sliding scale for upselling, cross-selling and selling licensing. Although the $10 million campaign runs out with Microsoft's fiscal year on June 27, Microsoft officials say they're thinking hard about extending the program or using it as a model for continuing programs. When customers buy Microsoft software under the Big Easy offer, they get rebate checks made out to the partners of their choice.
Christopher Large, group manager for U.S. Sales Programs in Microsoft's U.S. Partner Group, says the partner subsidy program is popular with partners like Guthrie because the checks act as a multiplier on future purchases.
"What we've heard from a lot of different partners is this actually enabled them to sell from five to eight times the amount in additional products and services" compared to the original value of the subsidy, Large says. The rebate checks must be spent by the end of July, so additional spending from the Big Easy will happen quickly.
6. Maintain a Positive Outlook
Wilderness-survival instructors teach that the first priority in an emergency -- even before applying first aid, looking for shelter or starting a fire -- is maintaining a positive mental attitude. Believing that you're going to find a way to survive is key. It leads you to look for actions you can take, rather than just hoping for rescue or at least a relatively painless death.
You can look at a downturn the same way, and several Microsoft partners are showing that kind of mental steel.
"I am a firm believer that there's always a success story in any market," says IT Matters' Crawford.
That's a belief Price shares: "Even in a recession, there are winners," he says.
As these anecdotes illustrate, Microsoft partners are using a variety of tactics to survive the current economic storms. Some are concentrating on their core strengths or getting creative about market-sensitive solutions they can deliver with those core strengths. Others are looking to rely more heavily on financial vehicles and promotional programs that can pad the bottom line.
Obviously those aren't the only approaches out there. Still, they can serve as a useful starting point for thinking about proven ways to survive despite the downturn.