The world economy was a bit bumpy this month, shall we say. Banks are coming and going, and as I write this the US House of Representatives have just turned down the $700bn funding bail out of US banks. So what are the implications for elearning? Perhaps it’s not as bad as the rest of the economy would suggest.
No sign of elearning demand falling
While banks are shedding jobs it seems that elearning companies are bucking the trend and continue to grow. We see this anecdotally with companies such as Line, Brightwave and ourselves at Kineo growing strongly. In Dublin Houghton Mifflin Harcourt (HMH) – formerly known as Riverdeep – is to create 450 jobs at a new R&D headquarters. This is great for the industry. We might look to Dublin for our own expansion in future years. As Michael Hanley points out there are over fifty other elearning development houses in Ireland. Not bad for a country with a population of under 5 million people.
Watch the fundamentals
We have been accused by some of being too optimistic about the elearning market, despite the growth in the demand for elearning. So this month we join the prophets of doom (briefly, mind, as it’s not in our nature) to take a look at possible threats to elearning suppliers in the current market.
Some of the potential threats we see to elearning suppliers are as follows:
Cashflow will be an issue for many companies in the current climate. A lot of client organisations, especially the larger ones, are moving payment terms from 30 days to 60 days and in some cases 90 days. Managing cashflow is a more critical task than ever. Agreeing to invoice in stages and upfront invoicing are sensible steps to take. Avoiding the need for overdrafts is critical for companies as current overdraft rates are punitive, 8% over base in some cases.
Debt: If one thing will kill elearning companies it will be debt. The last thing you want in this market is a lot of debt especially if you have to do any refinancing. So elearning companies with high debt levels could be at risk and probably best avoided if you are a buyer. We’ve been cautious from the outset on this at Kineo and carry no debt whatsoever.
Profitability. As they say turnover is vanity and profit is sanity. A lot of elearning work does not necessarily mean high profits. Higher revenue, providing overhead costs are controlled, should mean the potential for greater profits, but size does not equate with profitability. Large elearning projects also do not mean greater profitability. Long term projects can burn costs even when little is happening on them and reduce margins. Lots of work can also create difficulty resourcing projects and over reliance on contractors can increase costs. As always, managing margin project by project is key.
Deferred projects. In these turbulent times, many projects can be put on hold or deferred. This can have a major impact on elearning suppliers if a large project is deferred. Thus ironically large projects can actually be a source of risk for elearning companies.
What to do if you are a worried buyer?If you are a worried buyer elearning of services our top tips would be:
Ensure the company you use operates profitably. Ask for accounts and avoid non-profitable businesses, as in this climate they will be relatively high risk.
Look for suppliers with no debt and strong cash reserves
Work reasonably with suppliers for example, agree to staged payment terms and reasonable payment periods – help them to be successful, it’s in your interest
Ask for source code and files to be placed in escrow or with a third party if you’re really concerned
Look for companies with a wide base of clients and aren’t over-exposed to one sector or industry
Stay away from any elearning company that’s carrying a sub-prime mortgage book in excess of $1 billion (come on! We haven’t lost our sense of humour in the midst of all of this, have we?)
Threat or Opportunity?
In the current climate it is possible that some elearning companies will fail, but in our view the current market will create opportunities as we see a shift from more expensive classroom training to faster, more flexible, lower cost elearning. At Kineo we are optimistic and see many opportunities for delivering innovative, cost-effective services which will deliver real business benefits to our clients. New rapid models of development, better authoring tools and open source technologies make this an exciting time for nimble, smart elearning companies.