2014: The year of the cloudy biz bankruptcy... or maybe it isn't?

Classic channel insolvencies stay steady according to gov stats - not all doom+gloom

Once again the channel has proved to be a hardy bunch as insolvencies remained pretty much stable in 2013, despite a meltdown in some areas of tech infrastructure spending.

Some 293 resellers bit the dust in the previous calendar 12 months, versus 285 in the previous year: a 2.8 per cent rise. 66 hit the wall in Q4, up from 57 in the previous quarter, data from credit reference agency Graydon UK revealed.

This may be the wrong time to break out the champers but it is a better result than appeared likely last January when titan 2e2 went under owing creditors £412m, the largest ever channel bankruptcy.

Alan Norton, head of intelligence at Graydon UK, tipped his hat to the resilience of local tech suppliers that weathered the recession but also issued a warning.

"Insolvency rates remained flat in 2013 but there's a risk of increasing failures in 2014," he told us.

Previous economic stumbles showed that company failures rates can rise as industries recover and the tech sector was no different, added Norton.

"Businesses that have cut costs, avoided borrowings, and survived the downturn simply do not have the capacity or capital to securely enter a phase of growth and the risk of overtrading increases.

"With the banks still not lending at levels the government would like, there’s little reason to assume that history will not be repeated," he said.

Laurie Beagle, divisional director at credit management specialist P&A Receivables, said the severity of there recession hit "everyone hard", forcing business owners to re-think costs and strategy.

"Many started to looked to see how they could do things differently, the revenues streams they could bring on and the non-profitable lines they could discard," he said.

Some have clung on and Beagle also expects a rise in corporate fatalities later in the year, particularly if interest rates rise as now look a distinct possibility.

Stats from the Office of National Statistics issued yesterday show unemployment has fallen from 7.4 per cent to 7.1 per cent, edging closer to the seven per cent figure that could nudge the Bank of England into raising interest rates from the 0.5 per cent base figure. That would be the first increase since 2009.

And according to a CBI study, more than half of Brit firms (51 per cent) it polled expect to create new jobs in the year - the best outcome since 2008.

The tech companies most at risk of failure this year were cloudy businesses, said Alastair Edwards, principal analyst at Canalys.

"Cloud companies were built on the understanding that everyone will move to the cloud [very quickly], which of course they will not, so they don't have the flexibility to provide what all customers need."

Many resellers on the other hand, the Canalys man argued, had built managed services operations, to sit alongside traditional on-premise tech divisions and were getting involved in the cloud.

"The key to survival and success is building a diverse business model that allows you to capture growth as opportunities emerge. We expect more bankruptcies in the cloud space than the traditional channel," he added.

There are challenges ahead for some in the classic reseller space, with more business consuming IT as a service, service providers and integrators setting up reselling operations, and those holding budgets on organisations shifting from CIOs to lines of business people.

Edwards said complacency was a good enemy to any business but there were reasons for channel firms to be cheerful.

"Forecasts that the channel is in the death throes are wildly erroneous, [as a group] it is remarkably resilient," said Edwards.

The largest cloud providers, albeit in the infrastructure services space, have not been able to turn a profit with market kingpin Amazon WS selling below cost to hoover up customers. SaaS firms have also struggled to improve the bottom line.

At a more local level, many cloud service providers are turning to the reseller channel, realising they need of army of sales people to convince customers that cloud is the away to go.

The Cloud Industry Forum (CIF) reckons that 69 per cent of firms it surveyed have deployed at least one cloud service, but 71 per cent were in no rush to dump on-premise tech.

Andy Burton, founder of the CIF, agreed large service providers that invested in infrastructure to sell cloud services were under some pressure to deliver the numbers.

"Recurring revenue business have to generate sufficient turnover to secure the long term future and they need capital resources to grow, but it is a nascent market and adoption of cloud services is healthy."

There are also many smaller firms developing IP on Azure and AWS that are not necessarily facing the same economic test as IaaS titans, Burton argued.

He said challenges facing the entire IT sector was a "supply chain issue in the broadest context, the channel is a changing landscape of how people buy IT.

"There is supply chain disruption with some vendors going direct, ISVs becoming service providers, and resellers transitioning to managed services".

Tech firms of all flavours can perhaps take some comfort that UK economic indicators are looking better than for some years, which could translate into a higher tech spending bounce.

The IMF this week raised growth forecasts for Blighty to 2.4 per cent, and the Office of Budget Responsibility estimates the economy by year-end will finally be larger than it was in 2008.

According to Graydon, IT spending has risen by 15 per cent in the UK over the last five years, compared to 13 and nine per cent declines in construction and manufacturing. F

Forrester reckons UK tech spending will jump three per cent in 2014 and five per cent in 2015, though Brazil, Mexico, China, India and the US will be the fastest growing sectors. ®

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