Finding Funding in a Tight Credit MarketBy Michael Vizard | Posted 2008-09-03 Email Print
VARs, ISVs, solution providers and IT consultants are turning to software leasing and other alternative funding vehicles as a way to close deals in tight economic times.
Just about everybody has a different opinion concerning how steep the current economic downturn might actually be. But one thing everybody can agree on is that credit has tightened to the point where it’s affecting the willingness of customers to fund new IT projects.
With limited access to credit, customers have been husbanding that resource for projects that are directly related to driving revenues or enhancing profits within a one-year time frame. That puts a lot of pressure on IT projects unless they can be funded in some other manner.
According to IBM, the effects of a tight credit market are already being seen in the form of a significant increase in the amount of software leasing. As customers increasingly find it difficult to fund major IT projects on their own, many of them are turning to vendors such as IBM for help. The good news is that most of the large IT companies are still pretty flush with cash, which gives solution providers a pretty good source of funding that can also help them navigate all the complexities associated with leasing. And if it turns out that there isn’t enough product in a deal to get a vendor to back the deal, distributors have always been more than willing to step in and help fill in the gap.
But the current tight credit market is also having other side effects. The folks at Intermedia, a company that provides hosting services for running Microsoft Exchange and other applications, say that business is actually up because customers are increasingly opting to outsource applications rather than spend capital on applications that would run internally.
Because the applications are delivered as a service by Intermedia, it makes running, for example, Microsoft Exchange, an operational expense as opposed to something that has to be funded out of the capital budget. Increasingly, Intermedia says CIOs are interested in this option because if they only have a limited amount of capital expense budget available, they would rather reserve that money for strategic applications rather than spending that money on delivering something as utilitarian as e-mail.
This same logic also extends to any number of managed services or SAAS (software-as-a-service) applications. The simple fact is that customers right now are pretty risk averse when it comes to IT. For the most part, customers seem only willing to fund projects that take less than three to six months to deploy and show a return on investment in less than a year.
Things won’t always stay that way, but for now that’s a pretty good rule of thumb to follow. And given that things that are delivered as a service stand a much better chance of meeting that requirement than products that need to be configured and installed on the customer’s premise. Of course, not everything can be effectively delivered as a service. In those cases, it only makes sense to look at leasing as an increasingly viable option for funding in a financial world that is currently turned upside down.