Channel talk this week has, unsurprisingly, been dominated by the collapse of 2e2.
It was announced on Monday evening the firm had been placed in administration after it failed to secure additional funding. 2000 staff could potentially now be laid off from the firm which was a top level partner for Microsoft, Cisco and VMware, to name but a few.
The news was received with surprise from some quarters, and sadness; 2e2 has spent a decade – and more than £200m – buying up firms such as Morse, Netstore and Compel, creating one of the UK’s top tier system integrators. So what went wrong?
Talking to experts, it seems the company simply built up too much debt and was unable to service its repayments from profits. Even with record low interest rates, re-financing was not deemed possible due to the firm’s shaky long term viability.
With hindsight it appears that 2e2’s acquisitive strategy over the last few years was building a house of cards. I spoke to one channel observer who told me: “The theory was fine: take out a cheap loan, buy a firm with a good revenue stream but low profitability, make savings through economy of scale and increase profitability to allow repayment of the initial purchase loans. However, factor in a few bad years like the financial crises of 2007–2008, followed by severe recession and profits start to dip. The big deals also dry up which is a hammer blow to a heavyweight firm like 2e2, which means debts start to tick up.”
If anything, these events have made it clear that larger SIs are increasingly vulnerable. The landscape for IT suppliers is not great. The UK economy is still going through a retrenchment and the combination of government spending cuts, poor consumer confidence and weak European demand provides little room for major growth. If you talk to the larger vendors, many are talking about partner recruitment freezes or even culling partners to focus scarcer resources on the committed few.
What should the channel do? It's not an easy question, but if you look at some success stories, especially amongst smaller firms, there seems to be a pattern of specialisation. That could be around a market sector like education or retail, or a Or a high demand technology such as Big Data, mobile device management or virtualisation.
More flexible staffing and project delivery strategies may help. Is it better to have a dozen expensive technical staff as FTEs or would a mix and match of subcontractors prove a better option? Should the channel be looking to move customers onto as-a-Service as fast as possible and switch to a smoother recurring revenue stream? There are questions to answer and options available.
As for 2e2, its administrator, FTI Consulting, is reporting significant interest in the business from potential buyers.
We wish everyone involved with the firm all the best for the future.
