Finance deal fills revenue GAAP

When a company that has always operated with multinationals and top-tier
organisations as its clients wants to find a way of selling to the small-to
medium-sized enterprise market it faces some tough challenges.

By definition it has to rethink its go-to-market strategy completely. It is
all right incurring a high cost of sales and going for a long sales cycle when
you are focusing on big ticket sales to big corporations.

But if selling to SMEs is going to be profitable, the cost of sale has to
come down, the sales cycle has to shorten dramatically and sales volumes have to
rise sharply. This is not easy if your product is both inherently complex and
expensive.

The challenge of complexity can be addressed by careful packaging and by
hiding undue complexity from smaller organisations. The cost element can be
addressed in two ways. First, you can transform the sales model to make it more
appropriate to the SME market, by working through distributors or channel
partners, which absorb the cost of sale in return for a share in the profit.

You need to make it easier for SMEs to finance their purchase of a scaled-down
big ticket product. In a sense, you give the SME the money up front to buy the
product, then claw it back from them, with interest, over an acceptable time
frame.
Double the risk

There are some problems facing any company that tries to finance this kind of
project off its own resources. First, it has to accept two kinds of risk. In
addition to the performance risk, which is a normal part of selling a product,
it also has to take on a double counter-party risk. If the client goes bust, it
loses the sale value and the finance it has provided to the client.

Another problem, as far as US GAAP is concerned, is that if you provide
finance to your own clients, you can’t recognise all the sales revenue on day
one. You have to stagger the revenue recognition across the life of the loan.
This means that if your sales strategy is successful and you sell a lot of
product to SMEs, the scale of your debt ramps up hugely, while your revenues
don’t and you get a mismatch that can damage your own credit standing.

Taking this into account, SAP, the German software giant, has hidden a lot of
the complexity in its product by producing standard best practice SME
implementations for each market sector. This has got it into the arena, by
giving it something to sell to SMEs.

It has also managed to solve the financing issue, by partnering with Siemens
Financial Services, which has a long track record of financing SME sales.

Half the risk

As Joachim Diers, international programme manager responsible for Siemens’
international SAP programme, explains, Siemens and SAP have carved up the risk
between themselves.

Siemens is happy to take on the financial risk in each sale, while SAP takes
on the performance risk. Moreover, because Siemens is a third-party provider of
finance, US GAAP allows SAP to recognise the revenues when they are booked.

The clever bit in the deal is that SAP and Siemens have addressed the issue of
all the add-on costs that go to make up the total cost of sales of a software
implementation.

As Diers explains, typically, consultancy costs will be between £1.50 and £3
for every pound of software sales. Then there are the change management costs
associated with training staff, and annual product maintenance costs. Siemens is
prepared to roll everything up together and to finance the entire package of
costs for SMEs.

It will even defer payment, if the SME wants, until the system has gone live.
This means that the SME gets a full pay-as-you-benefit deal, and with SAP
underwriting the performance risk they know that they can, in theory at least,
dump the deal in SAP’s lap if the software doesn’t perform to expectations.

SAP and Siemens announced at technology trade show CeBIT 2006 that customers in
13 countries had requested more than e60m worth of funding in the first 150 days
of the project.

As a result, SAP said it was extending the programme to five new markets,
Denmark, Estonia, Finland, Norway and Sweden. “Although in the global context of
SAP sales, e60m is a drop in the ocean, it is a very exciting indicator of the
scale of the market out there,” said Diers.