Gaining strategic technology platforms through financing

At the end of 2012, Quocirca carried out research for BNP Paribas Leasing Solutions into the perceptions around IT and communications financing amongst UK small and medium businesses (SMBs). For the research, SMBS are defined as organisations having revenues of between £5m and £50m per annum.  The results show that there are marked differences in buying habits within these SMBs – and that there is a lack of strategic thinking that could impact their capabilities to compete in the market. 

The research indicates that although the value added reseller is the most used strategic channel for the strategic buying IT and communications equipment, there is also a lot of tactical buying of equipment directly from the web.  Although this happens particularly at the smaller end of the market, where the buying decision was mainly down to the owner/manager, it is still seen amongst the larger organisations where there was a dedicated purchasing function in place.   

This tends to indicate “reactive” buying, where equipment is sourced as and when required, for example where a piece of equipment breaks or where a new project requires new hardware.  However, by buying reactively, the underlying platform can become less strategic – standardisation and homogeneity can be reduced, while asset lifecycles are difficult to monitor and maintain as no real controls are in place.

It also militates against the way that modern IT is going – virtualisation and cloud computing work best where there is a more standardised and lifecycle managed set of equipment underpinning them.

However, for an SMB, putting in place this sort of rigour may be difficult.  Consider and organisation that has a total IT budget per year of, say, £500,000 – this falls someway along the middle of the range of SMBs that are covered in the research. According to standard metrics, between 60 and 70% of this will be spent on maintaining the existing platform – what is known as “keeping the lights on”.  This will leave, at the low end, £150,000 for new IT investments.

This is not a lot when it comes to trying to implement a new technology platform – and many SMBs find themselves in the position of wanting to carry out more strategic projects, but cannot as the required money is not within their grasp.

However, the use of structured financing could help SMBs make far more of their available money by aggregating planned spend over three years into a single pool of resource that can be used as needed.  Taking the same example as above, that £500,000 IT budget could be aggregated over a three year agreement to give £1,500,000 – and through a suitable finance agreement, all that money can be made available as of day one to the SMB for use against IT spend.

Obviously, the SMB will still need to plan for keeping the lights on over the three year period.  However, it should be able to put in place better processes around purchasing ITC equipment; it may be able to negotiate better deals on pricing; a more standardised and modern platform should lead to savings in managing the platform and in its energy usage.

Assuming that making changes to how ITC is purchased and managed drives down the keep the lights on costs to 60%, then £600,000 is now available for ITC project investment – an increase that could make all the difference between an SMB managing by struggling along and reacting to ITC events and an SMB that is more optimally supported by its ITC platform and is better suited to compete in today’s market conditions.

ITC financing can make a massive difference to organisations that are looking to gain better control over future spend and also in controlling its ITC platforms.  The key is to make sure that the partner chosen to provide the financing agreement has a track record in this kind of work – banks will often require a legal financial hold against business assets, which could include the business premises and other assets, whereas a good ITC finance organisation will only have a hold against the equipment purchased through the agreement.

Quocirca has written a report on the subject that is freely downloadable here.

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