Risky business

Talking with several distributors this week there is a growing feeling that attitudes towards credit management are starting to improve and insurers are beginning to restore faith in the channel again. Now is the time for the distribution sector to responsibly build on this sentiment for the sake of healthy business.

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By  Andrew Seymour Published  May 1, 2007

Talking with several distributors this week it is clear that attitudes towards credit management are starting to improve. Almost a year since the first tremors of the Dubai ‘runaway resellers’ episode were felt in the market, there is a growing feeling that credit insurers are also beginning to restore faith in the channel again.

Now is the time for the distribution sector to responsibly build on this sentiment for the sake of healthy business.

Let’s face it, distributors do not find it particularly adulatory to be looked upon as banks, but for as long as I can remember the ability to extend credit has taken on the same kind of operational importance as more traditional functions such as stock availability and logistics.

The relationship between credit insurers and IT distributors in this region isn’t exactly renowned for being intimate. There are a number of reasons for that. On the one hand, an unwillingness to take risk and a lack of true understanding about the idiosyncrasies of doing business in the regional IT sector has left insurers wary, while on the other hand distributors have been quick to cite a lack of choice and high costs as explanations for their reticence.

There are also historical reasons why some distributors in this region continue to operate without any form of comprehensive credit insurance. Many regard it as an unnecessary commodity because of the unwavering belief in their ability to manage risk independently of third parties. They have built trusting relationships with their customers over a period of years, instilling in them a sense of self-assurance that they can spot a defaulting reseller a mile off.

This approach has its flaws, however. Last summer’s credit crisis resulted in several distributors getting stung in the pocket when fleeing resellers vanished into thin air without settling their balance. The lessons that can be learned from failing to obtain adequate credit insurance are plain for all to see.

I firmly believe that any local distribution house with serious aspirations to grow their business to an enviable size must develop a coherent and responsible credit management policy. Furthermore, they truly have to buy into it and view it as a business enabler, not an inhibitor.

Reputed credit insurers such as Atradius and Euler Hermes have experienced their ups and downs with the IT channel over the years, what with massive consolidation in Europe and the volatility of the market in general. As a result they no longer trade with just anyone and distributors wanting to strengthen their relationship with such providers need to understand that.

These guys want to engage with distribution houses that have the processes, systems and controls in place to manage their credit in a logical and consistent way, instead of taking an irrational scattergun approach to financial management.

What is also becoming clear from distributors that are engaging with insurers of this nature is that an increasing emphasis is being placed on customer breadth. Who you extend credit to, and exactly how much you extend, counts for everything when it comes to risk assessment. Those distributors guilty of overtrading with some of the resellers that went AWOL last year still have the financial scars to prove it.

“These days you have got to make sure that you don’t have 10% of your exposure concentrated into the hands of one customer,” explained one Middle East distribution source just recently. “Credit insurers want to see you splitting the risk — that really is the key.”

Fortunately, the concept of customer breadth plays firmly into the hands of the distribution channel given it is also a major focus area for the vendor community. In the volume market at least, manufacturers want to work with distributors with access to the widest customer base possible. A reliance on just one or two big-spending customers is no longer seen as an acceptable strategy.

If tales of credit insurers showing more confidence in the Middle East distribution sector persist then it should be welcomed because the chances of business being conducted in a healthy, and ultimately less risky, manner will increase tremendously. Not only does credit insurance have an important role to play in protecting cashflow and profit, but it can strengthen the business relationship a wholesaler enjoys with suppliers, customers and partners.

A study carried out in Europe last year revealed that in terms of credit operating costs as a percentage of sales volume, an average of 1.38% of a company’s annual sales could be saved by the existence of a credit insurance policy.

Let’s assume for a moment that this figure is relevant to the Middle East and put it into some kind of context. On the basis that the average turnover of the top 15 largest UAE-based distributors in 2006 was US$200m, the saving from having credit insurance would equate to US$2.76m a year — not exactly a figure to be sniffed at when you consider the challenges of operating in this sector.

What’s more, research shows that credit insured firms generally enjoy healthier relationships with their banks, leading to such advantages as better access to short-term finance and capital. Now is as good a time as any for distributors and sub-distributors to decide if adequate credit insurance is an unnecessary luxury or a vital tool for growth.

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