Tight Credit Market Shoots Software Financing Growth into the Stratosphere

IBM Global Financing’s software leasing business skyrocketed in the first quarter, up 90 percent year over year, in part due to recent shock wave sent across credit markets by the mortgage market meltdown.

"I knew it was growing at a good clip, but I was surprised to see how big it was in the first quarter," says Dan Ransdell, general manager of IGF’s client financing organization.  "I was personally expecting it to be in the 20 to 30 percent range."

The huge growth of 90 percent – to a little over $500 million — was driven through both IBM’s direct sales force and through indirect sales by resellers, VARs, solution providers and other channel partners.

"Part of the big growth was driven by the mortgage meltdown and banks tightening up credit," Ransdell says. "In the past where IT organizations used their banking lines to finance software, they are trying to conserve their banking lines for other purposes. So they turn to people like us instead and use IGF for a financial wrapper around their software." 

Plus, Ransdell says, IGF is more familiar with new financing concepts such as software leasing. With hardware leasing, much like auto leasing, the creditor retains ownership of the asset at the end of the lease, and that ownership retains a residual value, often 10 percent.  But software, which is based on licensing for a period of time, doesn’t offer this so-called residual value.  Because of that some lenders may be more reluctant to participate in these kinds of deals or not offer as attractive terms.

Ransdell says another possible reason for the huge rise in software leasing deals is the technology industry’s increased focus on "solution" sales that bundle hardware, software and services together. IBM itself made a major shift to solutions sales a few years ago, and now offers "financing wrappers" to help customers digest those kinds of deals too.  That was a big change for IBM which built itself on hardware and as recently as three years ago had assigned each direct sales rep to sell a single line of hardware products.

"IBM’s internal shift was driven by the external market as the IT marketplace shifted to place more emphasis on these other components," Ransdell said.  For example, in the mid-1990s, 50 percent of IBM’s sales came from hardware and 50 percent came from software and services.  Now that’s shifted substantially.  A full 74 percent of sales come from software and services and just 26 percent come from hardware.

That marketplace shift also comes as customers are looking to extend the lifetime and efficiency of hardware through virtualization, or because of corporate acquisitions and mergers that require large integration projects.  In these cases companies are more likely to buy more software without buying hardware, Ransdell said.

While IBM had no hard numbers that broke out the software leasing growth for direct sales versus channel sales, Ransdell believes that channel partners may not be as adept at putting together financing and using software financing as a sales tool. 

"One of the feedbacks we get from partners is that financing is an easy conversation to have when you are talking about a $1 million solution sell," Ransdell said. "But if it’s a $25,000 Intel sell with software it is too complicated for customers to go through the process of financing."