Despite the recession firms still need to invest in IT,
but gaining finance is harder than ever. In the first part of an
exclusive round-up, Joe O’Halloran reports from a roundtable debate
hosted by Computer Weekly and Lloyds TSB Corporate Markets
investigating the key financial issues affecting the technology
industry.
Few businesses have been immune from the effects of the economic
downturn. It has increased substantially the operational pressures
on companies, through changes in budget, business methodologies and
the places in which firms must trade just to stay in business, let
alone flourish.
Cuts may be essential, but firms still need to invest in
critical areas to remain viable. IT is one such area, and even
though IT departments are being charged with doing more with fewer
resources, there is a fine balancing act that firms must perform to
survive.
Investing in appropriate IT and services can bring about greater
productivity, efficiency and flexibility. Getting it right creates
opportunities not only for companies themselves, but for their
suppliers and, most importantly, their customers.
But how do you go about ensuring you have the capital funding to
keep the business running? What is the best way to manage the
liquidity of the business while finding resources for key elements
such as outsourcing? Basically, what steps should your firm be
taking to make sure that it can make investments not just to ensure
short-term survival, but to take advantage of opportunities that
the economic environment presents, such as expansion, acquisition
and cheaper deals on IT services?
Macro-economic factors
First of all, we need to understand how the current economic
climate is affecting the investment industry.
Manu Choudhary, associate director at Lloyds TSB Financial Markets,
says the forecast from the bank’s economist is for cautious
optimism. “We are now into the third month of this equity market
rally, and a recent run of better than expected economic data and
more resilient confidence numbers have meant that financial markets
have shifted away from worrying about how bad the economic downturn
is going to be, to looking for when the recovery will start.
“This is a big shift and explains why equity markets have
bounced back and why long-term bond yields have risen. Some key
commodity prices and currencies are also reflecting this
change.”
But is this rally based on sound fundamentals?
“Looking at the market dynamics of March this year, it seems
that, for a moment, everyone thought the worst was about to happen.
Thankfully, it did not materialise, and we saw a relief rally in
the equity markets which, in conjunction with quantitative easing,
has helped to instil confidence. As such we are seeing that there
is a little bit of a rally in risk.”
Even though the value of sterling has collapsed during the past
12 months, for John Paterson, CEO and founder of Really Simple
Systems, the present market offers opportunities in terms of
revenues. “The positive side of the exchange rate moving is that UK
exporters are much more competitive to overseas marketplaces. So
for companies like ours, which have revenues in US dollars and
euros, we get more money,” he says.
However, Choudhary believes the US dollar is being sold too
aggressively too soon. “The US dollar is well placed to strengthen
against its main trading counterparts over the next six to 18
months, primarily reflecting the prospect of a swifter return to
economic growth in the US.”
Availability of finance
So what does this
mean for UK firms looking to obtain finance for investments in IT?
How easy is it to get new funding?
Keith McLagan, lead relationship director for Lloyds TSB
Corporate Markets, says, “The freezing up of wholesale credit
markets is beginning to improve because of the billions pumped into
the economy. But banks are still trying to make sure their business
models work where they have historically lent long against
short-term deposits and borrowed the difference in the wholesale
markets. It is unlikely that, going forward, a bank will want to be
too dependent on the wholesale markets – Northern Rock taught us
all the dangers of that business model.
“Against that background, along with the general economics of a
recession, lots of companies understand that they need to reduce
their leverage. That is important for companies that are
refinancing or looking for credit when it comes to how comfortable
banks will be with what is being requested. Carefully considered
business plans by management at reasonable leverage levels against
good visibility of income will still be successful in obtaining the
finance required.
“Another point is the cost of credit which has been widely
reported. The real cost is no more than it was 12 months ago, due
to the fall in interest rates. But anyone refinancing at the moment
will have seen that margins have increased due to the banks’ needs
to cover their increased cost of capital caused by the freezing of
the wholesale markets.”
The right business
Lloyds TSB says it has
the right money for the right business, but what constitutes “the
right business”?
McLagan explains, “In the IT sector, as with all sectors, this
means management having a clear strategy for what they are trying
to do with their business and being able to execute that strategy.
That is management both at CEO level and across the whole board. If
anyone were to go into their bank at the moment they would have to
make sure that the historic numbers are available and the
management numbers are absolutely up to date, fully understood and
acted upon accordingly.
“Eighteen months ago it would have been easier to have plans
that were less well defined because of the amount of liquidity that
was available. Today, the world has changed and we are looking at
much lower leveraged businesses that we are prepared to lend to,
while challenging and discussing their strategies along with issues
such as deliverability.
“Ideally, if they can show experience within the company, they
might get a better hearing from their bank. A few more grey hairs
in boardroom can help.”
Predictability of revenues is another key element in gaining
finance, says Martin Leuw, group CEO at IRIS Software and Services.
“We sell software to SMEs on a rental basis and so we have the
benefit of providing software to our customers in a very
cost-effective way because they are paying over a long period. In
terms of raising finance, it helps because we can show predictable
high levels of regular income which underpin the business. This can
be key in swinging the deal.”
McLagan agrees, and outlines other key factors that he will be
looking for. “The ideal mix from a banking perspective is where you
have good visibility of income coupled with predictability in the
business model and where the software can be described as
business-critical for customers.”
One thing that all the delegates were in agreement with was that
companies should not change their business model to attract
investment. All agree that the business model has to address the
needs of customers, not bankers, who in any case will be looking
for evidence of customer focus in the firms they invest in.
Support from suppliers
The roundtable delegates who supply software are keen to help
customers justify investment in IT and help them gain investment
from banks.
Toby Davidson, director of professional services, EMEA at
NetSuite relates his new way of working. “We have to justify the
investment to customers. Our ERP systems are business-critical
applications and the message around funding is stronger, but we are
seeing that the process of achieving funding [for end-users] is
much longer and the pool of lenders to companies is smaller.
“We have reached the point where we work closely with lenders
and in effect take our potential customers to lenders where
previously we would have left that to end customers to use whatever
method they chose.”
Similarly, Paterson describes how his software engages in this
practice. “We deal with [users] who are finding it very difficult
to roll over existing [investment] facilities and are being offered
deals that are extremely unattractive. My advice is that in the
same way that banks are being brutal to you – both in terms of
reducing facilities and opening up the margins and upping fees –
you have to be the same with the banks.
“You just cannot rely on the local branch that you used to know
and had a personal relationship with. You have to shop around and
find one that likes your business.”
Asset financing
Hilary Weatherstone, director of technology at Lloyds TSB Asset
Finance, offers some suggestions as to what those seeking
investment in IT should do to become a suitable candidate for
credit and, in particular, asset financing.
"First of all, the smart companies, of all sizes, speak to their
bank early on. They have all the right information with them, they
are straight with their bankers and they get real about what their
business is like.
“From a borrower’s perspective, if they go to a bank, they should
be thinking ‘what are all the different things that this bank can
do for me, and therefore what type of business should I be putting
to the bank?’ This allows both parties to look at ways of building
a mutually beneficial relationship.
“This relationship aspect of banking is key. Understanding the
sector makes a huge difference: it saves time and makes sure that
you have much more sensible discussions. Find a champion who you
can trust. Share your strategy and your business plan with them,
and talk to the bank’s product specialists, who can find ways to
support your growth. You have to think longer about the long term
and it is a good idea to have two or three banks providing what you
need to give additional flexibility and breadth of financing.”
New lines of finance
Some delegates are finding that their traditional lines of finance
are drying up. Speaking as someone who looked to finance houses
when he set up a new datacentre, Martin Batterberry CFO, UK &
Ireland at Bull, advises against relying solely on existing
financial suppliers to carry on investing. You may have to break
new ground in gaining finance, and to do this a sound plan is
everything, otherwise you may have to draw upon cash reserves –
something he cautions against.
“Our group is cash rich, but some of the cash goes to other
places, so we [have to find finance] and the business case needs to
stack up. We had a pool of leasing organisations to use and one of
them had the attitude that we were maxed out and any new lending
would cost more. Our business case has to be stacked around the
long term, and even if one bank wasn’t able to renew, other banks
listened to our message and saw that the business case stacked
up.
“Rather than draw on company cash reserves, we took revenues
over a longer period, and the balance sheet reflects that.”
The recession has also cut down the timescale in which customers
expect IT to deliver a return, and this makes the decision making,
and hence investment, process even more critical.
That said, the general consensus was that bankers and suppliers
are seeing resilience in IT as it can be used to adapt end-users’
business models to cope with today’s exceptional economic
circumstances.