Author: Kit Craig
It’s no news that we live in an economic environment that is tough for business. Cash is tight and the economy uncertain; no matter how many ‘green shoots’ we hear about, we’re not out of the bleak times yet. In July the Shanghai Exchange recorded its biggest drop in 8 months, and both the OECD and World Bank were forecasting global economic “stagnation” in 2010.
The upshot of all this is that, globally, credit markets are still conserving cash, leaving clients with fewer options to fund their IT endeavours. Across Australia and New Zealand the cost of borrowed capital has roughly doubled in the last 12 months.
Channel partners are hurting from slow client decision making, reduced revenue, squeezed profit margins and delayed client payments. Few, however, are selling to their clients’ finance departments or using financing to help change the game.
Who’s the Buyer Today?
Clearly, the new economy is more challenging than ever for businesses, and it has changed IT buying behaviour in Australia and across the globe. One of the results we’re seeing is more power now shifting to CFOs, as they become the leaders in major decisions.
More than ever, cash is king. Earlier this year a report from Moody’s Investors Service predicted that in 2009, 10% of public companies around the world will face liquidity shortfalls. That means the CFO has a tremendous focus now on short-term financial matters like cutting costs, preserving cash and maintaining access to financing and working capital. The CFO has to report to the board of directors about his or her actions.
This requires the CFO to take the lead on inspection of all significant business cases to make sure they’re rigorous. It has had a major impact on the way IT projects get approved today
IT project proposals no longer stop at the CIO’s office. The CIO has to walk down the hall and see the CFO or somebody in their organisation and say, “Here’s a project that we need invest in.”
The proposal will need to make a compelling business case that addresses the priorities inside the head of the CFO. Anything that doesn’t fit is going to get eliminated.
The CFO’s Priorities
CFOs tend to be critical of expenditures, even in good times. Today they’re even more critical.
The CFO has three questions that any IT project proposal must answer:
- Does the project have a satisfactory return on investment in a reasonable time frame?
- Is the benefit to the business clear?
- Is there a viable execution plan?
Good project management will usually answer the third question; good needs-based selling will usually answer the second. Answering the critical first question, especially today, is normally the show stopper.
CFOs are tightening the time horizon for return on investment. Global research by the IBM Institute of Business Value has found that payback periods of less than 1 year have become the standard operating model. Many Australian companies are reporting that their CFO now requires a payback period of less than 6 months.
If an IT project can’t meet that payback period requirement, the project will be classed as discretionary and will be deferred. Channel partners all around Australia are reporting that their clients’ projects are being deferred, which proves that they have failed to answer the CFO’s first question satisfactorily.
This is where Financing can help.
Meeting the CFO’s Priorities with Financing
Here in Australia, IT buyers and sellers, are loathe to engage a financier. According to IDC, we use financing at about one third the rate that equivalent organisations in the US and Western Europe do. But Gartner says that, “Tightened credit markets and a scarcity of capital funding for many organisations will increase the appeal of leasing … Most companies will find that a combination of lease and purchase is the optimal solution.”
IT asset-based lending companies, including vendor financiers like IBM Global Financing or Cisco Capital, offer leases based on the marketable value of the equipment being financed. Asset-based lenders know there is an opportunity to make money off the asset when the lease ends, either as a refurbished machine or through the sale of its parts. Regular banks don’t have these capabilities, but specialist IT financiers understand IT valuation and can build that into the leasing package. They will usually finance hardware, software and services from their own company and from third parties, including the partners themselves.
This will help channel partners to build the technical business case in conjunction with the financial business case. Financing can provide client organisations with an additional source of funding, allowing the CFO to preserve existing credit lines for other investment opportunities.
A financier can help to tailor payments to meet clients’ specific cash flow or budgetary requirements with options such as payment deferrals. This can be very attractive if the CFO wants to defer payments for IT projects until they generate a return. One software company channel partner recently said they were funding such deferrals out of their own cash flow – a disastrous formula for eroding the partner’s working capital and profitability.
Most importantly, financing helps better match project costs to expected benefits and overall can help to deliver a faster time to value. That is, to meet the CFO’s payback period requirements.
In undertaking a project, initial upfront costs can be the real challenge, especially when capital budgets are tight. Scaling back a project to reduce these initial costs can result in a project not producing the expected benefit or ROI. What’s more, many of these projects involve software and services components from multiple vendors, adding to the complexity.
By defining the right payment streams, financing helps better match project costs to expected benefits and overall can help you deliver a faster time to value. At IBM Global Financing, we have found that such structured funding can reduce IT project payback periods from over 18 months to under 6 months for such diverse projects at IP telephony, server consolidation, ERP implementation or creating a new data centre.
Leveraging financing can also help to reduce project or financial risk. Further, project financing can allow for more predictability for more accurate, dependable cost projections and timing can yield better, less-risky decisions.
Overall, financing an IT project can help deliver reduced payback periods, free up client’s existing credit lines and lower long term project risk, which will appeal to the CFO.
Benefits to the Channel Partner
Financing will deliver benefits to the channel partner above helping to get the client project underway.
Firstly, it improves cash flow. In addition, most vendor financiers pay a commission or rebate to the channel partner for a financing deal. This goes straight to the partner’s bottom line. And anything that increases partner profitability will also increase partner loyalty.
Secondly, because financing moves the client discussion from discounting to payment streams and cost/benefit trade offs, it allows the channel partner to retain more services margins, which are the lifeblood of most solution providers.
Thirdly, most IT financiers pay the channel partner faster than clients do. This reduces the partner’s accounts receivables days-sales-outstanding and improves the partner’s cash flow.
Finally, it strengthens the channels partner’s sales engagement. Most financiers recognize that selling financing is a specialist task, so they will co-sell with the partner using their own financing experts. These sellers speak the CFO’s language, and they will engage with the client’s CFO while the channel seller drives the technical sell through the IT department.
Today, delivering a proposal to bring in an IT project on time and within budget is not sufficient. A proposal must resonate with the CFO because it meets the client’s key performance metrics. Failure to do that will lead to the project decision being deferred, impacting product sales and channel profitability.
Financing, using a specialist IT financier, can help meet the CFO’s key measures. It can deliver reduced payback periods, lower long term risk and free up working capital. At the same time it can improve the channel’s profitability and cash flow and strengthen the channels selling.
It is an opportunity all channel organisations should seize on.
Kit Craig is the ANZ Marketing Manager for IBM Global Financing. He can be contacted on firstname.lastname@example.org