IT financing is not a deal saver

But it is a great sales tool if introduced early enough, confirms Dale Vile

The idea of IT financing is anything but new. Leases and loans for IT equipment have been around for years. However, the financing game has moved on considerably in recent times.

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 far too often overlooked as an option. While it's not right for everyone in every situation, many who could benefit from it do not know what's on offer. Even if they do 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 and EMC do too, to name but a few. But Harmer's perspective on how the financing business has developed is particularly interesting because 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: 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," says Harmer.

But why would anyone be interested in financing?

For the customer, a common motivation is cash flow management. This reasoning isn't hard to understand: rather than paying for everything upfront, 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, which would rather put cash to work elsewhere than lock it in IT assets. Whether it's a lease, loan or combination of the two (for example, 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. However, 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 - 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 also 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 three to five-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 by assumptive lifetime ROI calculations.

Leasing 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 explained to me: "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 to an upsell opportunity for partners as higher-end equipment often keeps its value better than low-end commodity kit.

Coming back to the notion of financing being complex, rigid and hard to understand, Harmer dispelled this myth convincingly by demonstrating an incredibly easy-to-use IBM portal for rapidly getting a quote. This can be used by partners to put financing options on the table with little hassle.

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

Dale Vile is managing director and chief executive officer of Freeform Dynamics