Money Matters

The quest for financial transparency continues as the Middle East channel attempts to move to the next level of sophistication.

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By  Stuart Wilson Published  April 2, 2006

Financial transparency|~|fintransaj200.jpg|~|Sajid Sarwar, finance and operations controller at Aptec|~|The ongoing quest for financial transparency has stepped up a gear in the Middle East during the last 12 months. With several distributors actively considering the potential for an IPO, the need for sophisticated financial processes that provide a high level or corporate governance has become more pressing. Vendors are also driving this process as they look to improve the financial management skills of distributors and resellers alike in order to create channel conditions where business volumes can be scaled up to meet the growth in demand. The Middle East IT channel is poised to usher in an era of improved financial transparency in 2006. For forward-thinking distributors and resellers, the change cannot come quickly enough. For those that have resolutely clung to some of the traditional — and slightly shady — ways of doing business, the evolution of financial processes is being met with a degree of trepidation. Distributors such as Aptec are leading the charge in improving their internal financial processes while simultaneously trying to drive through the benefits to their reseller channel as well. The recent court case that Aptec won against the owners of PCI highlighted the financial wrangling that can still occur in the Middle East channel. For Aptec, the court case provided a watershed moment that reinforced the validity of its ongoing drive towards smooth financial management and processes. Sajid Sarwar, finance and operations controller at Aptec, explained: “From my perspective it is very straightforward. Aptec is keen to build relationships with customers and provide an excellent service based on trust, respect and transparent business practices.” “We now have very solid systems in place to demonstrate where business has taken place and under what terms we have conducted business and when we expect to be paid,” he continued. “Where that doesn’t happen we look to resolve the issue without escalation. However, if we do not reach a satisfactory solution we will pursue all means open to us.” ||**||Operating focus|~|fintrangandhi200.jpg|~|Anil Gandhi, PSG general manager at HP Middle East|~|The internal processes now in place at Aptec have developed rapidly during the last year. CRM systems track interaction with each customer and every deal can be assessed in terms of its profitability with those that do not meet specific criteria escalated to the general manager and financial controller to be approved or rejected. “It is part of a wider process of looking at margins and driving transparency throughout our business and ideally throughout the whole channel,” added Sarwar. Vendors too are playing their part in increasing channel awareness in the Middle East of just how important financial processes are to the health of the business. HP has held training sessions for key partners to educate them on financial processes and uses incentives such as its cash discount programme to drive responsible distributor behaviour in the region. Anil Gandhi, PSG general manager at HP Middle East, explained: “We work with our partners to give them the skills and expertise that they need to manage capital and to make sure that they do not run into obstacles through under-capitalisation or poor utilisation of resources.” “Those that want to do volume business should have the capital base,” added Gandhi. “They should have the financial DNA in the organisation to understand the value of stock turns and the importance of return on capital employed. If they do that and have a lean cost structure they can make money in volume distribution. If the gross margin is greater than the operating expenses that equals happiness.” As always in the channel, it is a question of partners — be it at a distribution or reseller level — identifying their strength and focusing on it. There is a reasonable margin available for volume players that achieve the economies of scale and develop the internal processes that create an efficient organisation. ||**||Credit crunch|~|fintranadnan200.jpg|~|Adnan Al Falah, managing director at Tech Data Middle East|~|Credit remains an issue in the channel with distributors torn between a desire to increase their credit exposure in the market to boost revenues while simultaneously minimising their risk. Ali Baghdadi, CEO at Aptec, believes it is sound business logic for distributors to increase channel breadth and develop small credit lines with hundreds of resellers rather than relying on massive credit lines that are extended to a select few resellers. “Credit terms should not become a competition for distributors,” explained Baghdadi. “If it is then it becomes dangerous. Some distributors do silly things to meet targets like offer extended credit and are then unable to pay their vendors. Eventually, it is not worth investing millions in distribution if the returns are too small. You need to manage the capital that you have and should never extend credit at the expense of not paying vendors.” Distributors understand that managing their finances is a balancing act. Nicholas Argyrides, GCC general manager at Logicom, talking about the trends he expects to characterise 2006, explained: “We expect stable revenue growth, fierce competition and razor thin margins. It is the distributor that offers the best overall value-add in the channel that will be the winner.” With margins in the Middle East slender at best all distributors are starting to understand that chasing revenue for revenues sake is doomed to failure. Tech Data has also implemented internal changes to increase the company’s focus on profitability. “The margins in the Middle East have always been aggressive,” commented Adnan Al Falah, managing director at Tech Data Middle East. “We have really put in many steps to make sure that our people — by that I mean Tech Data staff, vendors and customers — really appreciate that we all have to make a profit and to achieve this you have to make a margin. That needs to be at the forefront of our thinking and we need to keep it there rather than chasing revenues.” Standing up and saying no to a deal that makes no financial sense is not something that many channel players have been comfortable doing in recent years. However, the market has now reached an inflection point where those that fail to implement the processes and systems that allow them to do this are simply digging themselves into a deeper hole. ||**||Saying 'no'|~|fintrannich200.jpg|~|Nicholas Argyrides, GCC general manager at Logicom|~|“If we [the distributors] learn to say no and the resellers learn to say no then the whole channel will benefit in the long run. The margin has to be there. Just turning money for moneys sake has never been the right thing to do and I think some people do it because they think it will balance out across their portfolio of business activities. However, once you say yes to one deal the treadmill starts getting faster and that margin opportunity that you think will eventually correct the losses never happens because you keep saying yes to the bad deals,” added Al Falah. As always, there is some resistance to change within many channel organisations, but these barriers are gradually being eroded as a new financial paradigm starts to make its presence felt in the Middle East market. “Once we explain the reasons behind the changes to internal processes and show how it will benefit both Aptec and its customers, people start to understand,” continued Sarwar. “We are happy to invest in support, service and education for partners but this needs to be targeted and measurable. Through this process we are able to ensure profitability both for ourselves and our reseller base, which ensures healthy long-term relationships.” The massive expansion in terms of the sheer scale of the IT market in the Middle East has elevated the role of financial management. Distributors that were four years ago recording revenues of US$50m now find themselves turning over several hundred million dollars a year. This also increases the challenges relating to inventory management. “If you have US$5m stock in a warehouse that is very different to holding US$30m. If somebody says to me they have US$30m and their operation is healthy and I walk into the warehouse and there is some dust on the product then I know it is not clean. Distributors cannot afford to have stock that is not moving,” added Al-Falah. For some distributors, actually taking a financial hit by selling off stock that is not moving by cutting the price is not something that they are totally comfortable with. Those that truly understand their balance sheet are prepared to take these decisions to ensure the health of the overall business. ||**||Clean the books|~|fintranTheGate200.jpg|~|Any distributor with IPO aspirations will need to a clean set of books|~|With more and more distributors eyeing up the potential of listing their company, the need to understand channel finances has become a pre-requisite. The same applies for any distributor that has aspirations to eventually sell their company. At the reseller level, vendors are working in tandem with distribution partners to introduce innovative credit schemes into the market. While the Middle East still has a long way to go to match the sophistication of leasing schemes that are operated in regions such as Western Europe, resellers can help themselves by opening up their books and being totally honest with the companies they wish to source credit facilities from. It is time for everyone involved in the Middle East channel to clean the books (as opposed to cooking them). For the market to reach its true potential in terms of volume, financial processes must improve. The days of battered suitcases stuffed full of cash have now ended. Some distributors in Dubai actually now refuse to do cash deals above a certain value. For true progress to occur, it is necessary for the channel to move as one. Vendors are laying the foundations for change and the major distributors are now moving in the right direction. Now the resellers need to join in to ensure that sound financial planning and transparency becomes the norm. ||**||

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