Canada's largest VAR files for protection from creditors 13 August, 2006 By Liam Lahey

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Mississauga, Ont.-based NexInnovations applied for and obtained a court order that would initiate the restructuring of its finances and operations under the Companies' Creditors Arrangement Act (CCAA), according to its' law firm Aird & Berlis LLP.

The move would provide NexInnovations with the necessary protection in which to address its challenges in the interests of its stakeholders, develop a restructuring plan, and move forward, a statement read.

"We're facing a lot of the same industry-wide challenges as our competitors and resellers, namely the direct sales model," explained Todd Irie, NexInnovations' director of marketing. "The direct sales model is a low-touch transaction with minimal service levels -- that doesn't feature services to the customer -- and this in turn creates a pricing expectation so the average selling price decreases and that has hurt our profitability. That also hits everyone's margin industry-wide."

For now, it's status quo, as the current management of NexInnovations will continue to conduct the business of the company without interruption.

"With this (industry environment) backdrop, we took a number of measures to adjust but unfortunately they weren't enough," Irie said. "With this court order we're fortunate we will be able to continue to service our customers and partners.

"This is court protection from our creditors but it also enables us to continue doing business and serve our customers and partners during our restructuring plan."

Irie could not clearly define what those restructuring plans would entail, when the company would unveil said plans, or if layoffs could be a part of that effort. Nor could he confirm for what length of time NexInnovations will remain under the court's protection. A customary CCAA court order protection is 30 days but thereafter NexInnovations could re-apply to have it extended.

The company's operating lender, Wachovia Capital Finance Corp., would provide financing while NexInnovations remains under court protection. This enables the company to meet its customer commitments during the CCAA proceedings, officials said.

Michelle Warren, senior IT industry analyst for the Evans Research Corp., said 'restructuring' is what jumps out. Big time. Thus layoffs will probably be a part of that plan, she said.

"Certainly the direct sales model makes competition difficult for resellers, no questions there. However, NexInnovations has far reaching partnerships with major vendors -- software and hardware alike. And they have weathered that industry changes for so long," she said. "Yes, when vendors sell directly, resellers face some challenges, but it is also an opportunity for the reseller to provide services, installation and follow-up, notwithstanding.

"NexInnovations has to find their position within this opportunity. CCAA protection will hopefully be the catalyst for change that they need to realign themselves with industry changes, and with customer requirements."

In a letter to its' vendor partners, suppliers and other creditors, NexInnovations president and CEO Hubert Kelly said the changing nature of the industry is such NexInnovations had to reduce its' cost structure in order to compete and to ensure a sustainable future.

"Previous measures we had taken to address our challenges were not enough. It was necessary to take [this] action in order to protect the interests of our stakeholders, including partners and suppliers," the letter read.

NexInnovations' creditors will be paid for goods and services delivered on or after the date on which the court order was granted. The company said payment terms would be discussed with those creditors via Ernst & Young Inc., the court-appointed monitor, regarding all claims and the process going forward.

"Our goal is to emerge as a cost-competitive provider of integrated technology solutions," Irie added. "We see this as a beginning. There is a place for high quality services but it has to be balanced with this ultra competitive environment."

When asked if NexInnovations could emerge as a cost-competitive entity, ERC's Warren said yes, it is possible.

"They definitely have to pull out of this quickly in order to minimize damage to their reputation. I believe they can do it but they must act quickly and swiftly with a solid plan in place," she said. "Employees and management must buy-in to the strategy for it to be successful."

Warren added NexInnovations have weathered this industry direct movement for many years now. Something must lie in the company's overhead expenses, in its' go-to-market or in customer service strategies, that is not as effective as it could be.

"This time granted to them should give them the chance to smooth everything out," she said. "Many companies have closed up, or been acquired, since the direct model came to Canada, but not recently.

"We have also seen vendors tighten their waistlines to become more cost-effective. Which makes good business sense. We were spoiled in this industry in the 1990s. Looking for cost-cutting practices is now a reality."