Thursday, March 08, 2012

IT financing is not a deal saver

But it is a great sales tool if introduced early enough

The idea of IT financing is anything but new. Leases and loans for IT equipment have been around for years. The financing game has moved on considerably in recent times, however. The options available to customers today are more comprehensive and flexible. Want to finance your whole project - hardware, software, services and all? No problem. And it often doesn’t matter which brands of hardware and software are in the mix.

The biggest problem with financing is that it is too often overlooked as an option. While it’s not right for everyone in every situation, many who could benefit from it are unaware of what’s on offer. Even if they think of it, financing is frequently perceived as complex, limited and costly.

I was discussing this state of affairs recently with Bill Harmer, Marketing Manager for IBM Global Financing (IGF) in the UK and Ireland. IGF runs as a discrete business within the IBM group, and has access to a huge chunk of capital to support leasing, loan and other financing arrangements.

IBM is not the only vendor offering financing services - Microsoft, HP, Cisco, EMC and others do too, to name but a few. Harmer’s perspective on how the financing business has developed is particularly interesting though as IBM has been in the game longer than most, from the early days when computers were hard to buy outright because they were so expensive.

Asked about the scope of what’s possible, Harmer confirmed what we have heard from other vendor financing arms, i.e. that deals have become very inclusive: “While we expect a reasonable amount of IBM product or service in the mix, it’s not a problem if other branded products or third party services make up the bulk of the investment. IGF regularly finances projects that include an element of software from other vendors, ISV applications, and even bespoke development and integration services from partners”.

But why would anyone be interested in financing anyway?

For the customer, a common motivation is cash flow management. This doesn’t take much getting your brain around; rather than pay for everything up front, you spread the cost out over a number of years. This has broad relevance in the current economic environment, but is particularly attractive to growing or more dynamic organisations, who would rather put cash to work elsewhere than lock it in IT assets. Whether it’s a lease, loan or combination of the two (e.g. lease the equipment, and put a loan in place to spread payment for software and services), the basic motivation is the same.

Financing also has the advantage of allowing investment and business benefits to be better aligned over time. A typical IT project is ‘front end loaded’ in terms of cost, and ‘back end loaded’ with respect to delivering anything useful to the business. By smoothing out the cost curve, you minimise the commercial overhead on the business during the development and implementation phase, thereby removing what can often be a significant financial burden.

Financing can also make securing funds for more ambitious projects easier, though it’s important to acknowledge that the organisation is still committed to the contract, and that the ultimate amount to be paid becomes a binding commitment. Financing is therefore not suitable if your business is not inherently sound.

So what’s in it for the partner, i.e. the VAR, reseller, integrator or ISV?

The most obvious benefit for a partner is that you get paid immediately, once the customer accepts the solution, thus avoiding the normal 30,60 or 90 day terms - this can include future committed services. You might even get a commission on the finance deal itself.

Financing then helps with the selling process. The focus is switched from the funds available in this year’s budget, to the budget that needs to be allocated per year over a 3-5 year period. This can broaden the scope of deals and assist when articulating the business case. Expressing savings or contribution versus costs on a quarterly or annual basis can often be appreciated more easily by business stakeholders than assumptive lifetime ROI calculations.

Leasing in particular also helps create a ‘stickier’ and more profitable ongoing relationship with the customer. Options often exist to upgrade during the contract term, and older kit can obviously be replaced for the modern up to date equivalent at renewal time. This allows upgrades and replacements to be sold without relying on the customer finding huge chunks of capital. And when the contract comes to an end, there is an automatic ‘compelling event’ for the customer to do something rather than ‘sweat their assets’.

It’s also worth saying a few words about fees. As Harmer explains, “We reclaim old equipment at the end of the contract, and it’s refurbished and reused through our Global Asset Recovery programme. Lease rates can therefore reflect the cost of asset depreciation more than the inherent capital value of the equipment per se.” This principle translates directly to an upsell opportunity for partners as higher end equipment often keeps its value better than low-end commodity kit.

Coming back to the question of financing being complex, rigid and hard to understand, Harmer dispelled this myth pretty convincingly by demonstrating an incredibly easy to use IBM portal for rapidly getting a quote, which is accessible from the IBM Global Finance web site (http://www-03.ibm.com/financing/uk/index.html). This can be used by partners to put financing options on the table with very little hassle.

Such facilities are important as the trick to making finance work is to introduce it early into discussions with customers as a way of smoothing and enhancing the sell. Contrary to popular belief, financing is not the best way to save a deal at the 11th hour when you are losing it for cost related reasons – that almost never works.

Originally published on CRN

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