A (salutary) tale of two resellers

(By Anthony Miller) Both Computacenter and Morse issued trading updates this morning and the contrast in tone (and the numbers) is marked. Whereas Computacenter CEO, Mike Norris, reported continuing positive trends, with Q4 starting pretty much in line with same time last year (see here), Morse Executive Chairman, Kevin Loosemore’s, report was much more a tale of gloom, though not yet doom (see here). Both players had direct hits from the current financial crisis, with Morse charging £500K on its Lehman’s exposure, and Computacenter recognising a hefty £1.2m bad debt following the bankruptcy of a “major financial services client”.

The big difference between these two players is in services. Computacenter has always chosen to ‘stick to its knitting’, concentrating on infrastructure services that support its hardware resale business. Morse, as we have told the tale many times before (e.g. Morse still aims for 7.2% margin), rather got the ‘pattern’ confused, branching out into application services (via Diagonal) and investment management consulting. The latter business generated zero profit for Morse this period (1st July to current) though application services profit rose from £100K to £300K against a 5% revenue decline to £11.2m, still not even a 3% margin. This unit is still mired in “fixed price contract issues” and below-par operational metrics.

The lesson is clear. Sure, resellers need to ‘move into’ services as product margins are mercilessly massacred (even in ‘good’ times). But the services need to support the core business (and, please, let’s not lose sight of the fact that product resale is both these players’ core business). For resellers, services diversification, far from mitigating risk, is more likely to lead to the sorts of problems Morse finds itself in today. We think Kevin Loosemore absolutely understands the mess the company is in, and his moves to ‘unglue’ the enterprise into separately managed units is bang on. The big problem is that he may need more time to do the ‘proper’ job than current market conditions might allow.