Financing your ERP implementation

Most of us have been there and done it. Either surfed the web or wandered through the high street looking for the most attractive finance option when considering our next car or PC purchase. And it’s much the same when it comes to manufacturing firms financing their enterprise software projects - except the options available and the buying process itself is more complicated. A typical ERP implementation can be very complex: a number of hardware manufacturers and software vendors are often involved, plus systems integrators and service providers. So typically you’re not just dealing with one supplier here. Though firms can choose to deal with each vendor separately, many are now being attracted to the easier option - purchase it all through a single finance company. And it does make sense. You end up with a much happier finance director who only has one monthly invoice to deal with and simplified budgeting. And the current tough economic climate also has a bearing. It means many firms are now choosing to defer their large upfront IT payments over the longer term. Paul Garman, client executive industrial sector at IBM Global Services, sells IBM hardware, software and services into the European automotive sector: “In the past, firms have often viewed IT as a cost rather than a benefit. Over the last couple of years though manufacturers have become more sophisticated. The Board is now saying, ‘Help us match expenditure with ROI on this project.’“ And he adds that many of IBM’s financing arrangements (secured through its fully-owned subsidiary, IBM Global Financing) with clients now have some level of ‘shared risk’ built in. “We’re also not fussy whose software, hardware or services are involved - we’ll fund any IT project, large or small,” he continues. “We’re currently winning business even as the market’s contracting.” But IBM isn’t the only vendor that can offer finance deals. Garman admits that IBM frequently comes up against the likes of Compaq, GE Capital and SAP when funding these types of projects. And speaking for the enterprise (ERP) software mid-market, SSI’s marketing director Neville Merritt comments: “We use the specialist finance firms like CCL and Syscap. They’re middlemen - they find people prepared to fund your purchase over three or five years. Every software vendor will have a couple of financing firms up its sleeve. “But the trend now is for manufacturers to go for the ‘payment holiday’ option. They buy the system now and pay nothing for an agreed period. It’s really handy if a firm’s half way through its financial year when starting a new project. It can still show a profit in that year if it defers the payments.” And he adds that roughly 20% of SSI’s contracts are cash deals, the rest require some sort of financing arrangement first. “Some of our customers use the traditional bank or finance company. Trouble is most of them [banks] just don’t understand or recognise the benefit of software - they’re not geared up to sell these sorts of finance packages.” IT outsourcing trends? He also believes there’s a trend towards IT outsourcing in the mid-market. “We’re finding more clients are going for hosting and managed services these days. It’s not the ASP model, but they just don’t want the burden of finding and keeping hold of skilled IT staff.” IBM’s Garman disagrees: “We don’t see any significant uptake in firms opting for the ASP model. Clients have an interest in it as a talking point, but they’ve taken no action as yet. The jury’s still out.” There may be another carrot for outsourcing your IT. As well as spreading payments over the expected life of the hardware and software, and avoiding committing cash to rapidly depreciating assets, there’s a tax incentive too: monthly lease payments can be deducted as trading expenses on your balance sheet.