The biggest mistake we see is waiting too long to reduce costs. What we frequently see are solution providers who convince themselves that recovery will come faster than it actually does and that they need to stay fully staffed up for when it does. As a result, they wait too long to take action. The longer a solution provider waits to react, the further the negative impact of a recession.
CF: What can enduring the pandemic teach channel partners about potential tough times ahead?
PK: The longer a solution provider waits to react, the further the negative impact of a recession. To help businesses survive the pandemic, various government financial aid programs were created worldwide. Most significantly in the United States was the Paycheck Protection Program (PPP) in 2020. While solution providers focused on certain verticals, such as hospitality, struggled in 2020-2021, the solution provider community overall did very well. When we looked at why, what we found was these government financial aid programs, such as the PPP, were only a small part of it. Most profitability was due to significant cost control measures taken by many solution providers in mid-2020.
When the economy rebounded in late 2020 and into 2021, we saw this cost come back as solution providers were able to rapidly staff back up to meet demand. It’s interesting how much cost can be cut without the much-feared inability to take advantage of a rebound. No one could have conducted a cleaner test case for solution providers.
Another key to surviving an economic downturn is that solution providers should begin understanding their likely today-to-nine-months cash situation. They should determine what their likely revenue reduction will be, what their likely reduction in gross margin dollars will be (because you can only pay expenses with gross margin dollars, not revenue dollars) and how much cash will they likely have on hand to pay the bills. Solution providers that head into a recession with a strong cash position will be in a much better position to take advantage of opportunities that come along, such as acquisitions of solution providers that are struggling.
CF: How can channel partners cut costs while at the same time increase revenue? Is that the key to surviving during economic uncertainty?
PK: It is amazing how, when facing difficult times, expenses that were previously thought of as essential suddenly become optional. In March 2020, no one knew how long lockdowns would last nor when the economy would recover. It was a scary time for all of us in the industry, to put it mildly. As a result, we saw solution providers cutting costs throughout their operation.
What they frequently found was that they had employees who they probably should have terminated earlier that they had allowed to stay on too long, or marketing programs that they were spending money on that weren’t delivering sufficient results, and processes that could bring them efficiency to allow them to scale their help desk to run with less staff that they had been talking about but hadn’t yet acted on, and so on. These types of cuts are more a matter of the will to act and operational discipline. And when done right, they can leave the solution provider more effective, more nimble and better positioned for growth. As they identify opportunities in the marketplace, they then need to be willing to move quickly to pivot, to go on offense and start to make more investments in their business again.
CF: What are you hoping attendees take away and make use of from your session?
PK: What I want the attendees to know is that solution providers are resilient. They have survived past economic downturns and many will not only survive the ones that follow, they will emerge even stronger. The key is to be proactive. Take the necessary steps now to get as prepared as possible, so when the downturn happens you are ready and not scrabbling trying to figure out what to do. When I present, I’ll show data from the Service Leadership Index, the largest solution provider quarterly benchmarking database in the world, to back all of it up. And attendees will leave the session with the knowledge of what they should be doing today to prepare for whatever may come next.
