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Feeling the crunch of a buyer's market, technology companies publicize zero-percent financing rates and quietly discount products for corporate clients.
Sarah Johnson, CFO.com | US
December 4, 2008
Even if they're wary of investing in a new car, drivers often feel compelled to visit the local dealership to check out advertised offers, such as the ubiquitous zero-percent financing that automakers promoted earlier in the decade. Nowadays, it's the major technology companies promoting the zero-percent rate — with the same hope for buyer compulsion.
In the past month, SAP, Microsoft, and Dell have announced deals letting corporate clients rack up no interest if they finance certain products within a certain time frame. Analysts say the promotions reflect the effects that the economic downturn has had on the tech industry as potential buyers put the brakes on large IT projects as part of major cost-cutting strategies.
For companies willing to buy, but nervous about giving up some of their working capital, financing is becoming a more popular option. IDC predicts that 8 percent of all IT spending in the U.S. will be financed this year, and estimates that number will increase by 1 to 2 percent in 2009. Two-thirds of IT leasing and financing is conducted through vendors' finance arms, according to Joe Pucciarelli, IDC's program director, technology financing and executive strategies.
Major tech companies have noticed a recent uptick in corporate clients asking about their borrowing options. "The number of credit requests and inquiries related to financing has increased as companies look to alternative funding sources in the current challenging economic and banking environment," says Gareth Pettigrew, spokesman for Cisco.
Financing an IT purchase through a vendor's finance arm is similar to taking out a car loan. You have to hand over your financial background, consider the pros and cons of various terms, and sweat over the fine print. And just like auto loans, publicized rates from software and hardware vendors could quickly change during the negotiation process as they are "subject to credit approval."
For example, Dell last week offered its zero-percent deal for "qualified large businesses" that lease Dell and EqualLogic hardware for 12 to 48 months. The company is also allowing "best credit" large businesses defer their payments for three years if they buy at least $40,000 worth of hardware by January 23, 2009. Smaller companies can also defer payments, if they qualify, but could end up with more variable monthly payments, depending on their creditworthiness.
The tech companies aren't forthcoming about specifics on how they determine "creditworthiness." And as banks' confidence in lending has been shaky these days, so are the finance arms of the tech companies. They have either tightened their lending standards or vow to closely monitor the U.S. economic situation to see whether they should be even more conservative.
On the other hand, with the overall volume of IT deals down, vendors can't afford to be stringent during the selling process. "Vendors are falling over backward to make a deal," says Jane Dobrow, a research vice president at Gartner who follows Oracle and SAP.
Still, tech companies are holding back on publicizing their willingness to make concessions on new purchases. "A lot of activity vendors do in response [to the downturn] would be below the radar," say Jim Shepherd, senior vice president at AMR Research.
Rather, they are offering the zero-percent financing deals to get customers in the door, hoping that customers will second-guess themselves about their decisions to put off major IT projects, analysts say. "It gives the Microsoft partner or SAP sales rep a reason to go to a prospect again, to restart a deal," according to Shepherd.
Microsoft, for example, is promoting the zero-percent rate for new customers of its Dynamics ERP and CRM systems whose purchases total between $20,000 and $1 million. The deal must be made before March 20, 2009. Brian Madison, Microsoft Financing's general manager, says he can't specify numbers on how many clients have been granted the low rate since the offer was made in mid-November. He told CFO.com the "lending approval rates have been in line with, or better than, industry norms."
The Dynamics line is mainly aimed at midsize customers, the group that appears the most willing to buy brand-new software packages to overhaul their information-gathering and streamline their systems. As they move out of the small-cap stage, medium-size companies are expected to be able to receive electronic orders and keep archived data online, and be able to handle multiple currencies, analysts say.
To be sure, most large U.S. companies already have ERP and CRM systems running, further adding to the buyer's market that has been going on for some time in the tech sector, notes Dobrow.
The decline in sales puts the few companies willing to invest in major IT projects the ability to negotiate for heavier discounts and convince vendors that they should break up bundled products into individual pieces — an unheard-of allowance when enterprise packages had their heyday during the tech bubble.
However, tech buyers shouldn't be lulled into thinking that they'll automatically have the upper hand. Jeff Muscarella, a partner at consultancy NPI, which helps companies negotiate tech deals, says IT vendors have prepped their sales teams to be aggressive during the downturn. "Sellers are going to be really careful in how and where they make concessions, and there are going to be more loopholes," he says.