Ray Wang, principal analyst, Forrester Research talks to Biztech about the emerging practice of Software Financing and discusses some key industry trends with Rajendra Chaudhary

In what ways is financing relevant in modern enterprise context?

Financing is extremely important, simply because it gives technology buyers flexible payment options when they purchase IT assets such as software, hardware and services for running their business operations. Moreover, financing options provide buyers with control and the ability to open up capital and put it to best use. For example, if you’re spending US $10 million on a large software project, you can spend the funds on hardware, software and services and spread the payment over a period of several years. By doing so, you not only control the deal flow but can also execute several projects simultaneously.

With constrained IT budgets, most organizations have smaller capital open to them and they have to work within those limits. By choosing financing options they can match payments with the realization of business benefits from their software and services initiatives, conserve cash for use in other parts of the business and simplify financial management of complex projects.

What are some of the emerging trends in Software Financing?

The most apparent trend in the financing arena of late has been from the vendors’ side wherein they are increasingly expanding their coverage beyond software. As opposed to the earlier trend of just financing software, vendors now a days are financing every piece of the deal, meaning they now provide coverage for the complete technology platform which includes database, middleware, and hardware, installation, education, and backfilling of resources. They are even financing software which is not their own. Today’s financing programs apply to not only software licensing but also services, support, and related IT infrastructure costs and vendors are able to extend their credit capability by doing so.

The reason why they can do this is because the current environment is very conducive to such an arrangement. Traditional banks ask for collateral on financing, which is extremely difficult in case of software. However, this is not the case with speciality banks such as Siemens, Microsoft Financing, IBM Financing, Oracle Financing and others.

Don’t these financing programs present a risk of vendor lock in?

There can be a situation of vendor lock in. But it really depends on how you negotiate the terms of the contract. If customers don’t negotiate their contracts carefully with the financing vendor, then a situation is most likely to arise wherein the customer will be stuck with the vendor for good. So what you have to do is that in conjunction with choosing the single technology platform from a vendor, customers have to negotiate their licenses and structure their contracts around the entire lifecycle of the purchased IT assets.

While negotiating these terms customers need to ask questions regarding the maintenance fees, interest rates and questions such as what will happen when new add-ons are brought in or will there be any penalties when the hardware is replaced and so on.

What should one look out for while contemplating financing?

When enterprises consider financing, they have to check whether it’s a lease or lease-to-buy type of situation they are getting into. Also, some businesses have cyclical nature meaning their payments come in on a seasonal basis, so they have to consider seasonality. Some vendors also allow customers to pay more during high growth seasons and less during the flat times, so customers can also take advantage of this facility. The other important thing to consider is the rate of interest and what are you tying your prime interest rates to.

But the most important aspect of any financing program is the terms of the contract. These days, vendors have gotten very flexible with their financing options and the duration for which customers might want to avail the financing programs for. It could be as little as 12 months and as long as 84 months depending upon the size and nature of the deal.

And who should take the lead the CIO or someone from the business side?

When it comes to financing, I think it should be the CFO who should take the lead, simply because he’d have the greater understanding of the financial matters. However, this doesn’t mean that CIO is not required here. The CFO and the CIO should work together and understand the overall footprint of any such deal.

I think financing doesn’t make any sense if you haven’t gotten your 5-10 year IT plan. Once, you have chalked out your IT agenda for the next few years, you will be in a better position to zero in on your total capital expenditure for those years and then you can guesstimate your savings and the opportunities accordingly. It is here where a CIO can play a very crucial role.