Strategy & Operations » Procurement » Filling the as-a-service funding gap

There was a time when all IT came in a box and investing in technology meant large up-front capital payments for hardware and software. So, financing was a fairly straightforward process.

But the business environment is increasingly moving towards an ‘as-a-service’ economy, with the subscription model becoming the preferred means of funding IT investment. Customers want to be able to keep pace with their technology investment in a more flexible, cost-efficient and transparent way, ensuring optimal ROI for their businesses.

Combine this shift with the current challenging economy and market conditions, with fluctuating exchange rates and uncertain future interest rates, and it is easy to see why resellers and their customers are facing uncertain times when it comes to funding investments in technology solutions. The fundamental dilemma is how do you marry a customer paying monthly with everyone else in the supply chain wanting to recognise it as a cash sale?

One answer is a subscription-based funding model, which differs from traditional financing in a number of ways. For example, the funding covers any amount of hardware, software, maintenance and services, with no restrictions or minimum percentage required of each component.

It may be necessary for businesses to fund services and support only, without the need to include hardware, software or consumables. The funding solution can be tailored to the individual business needs of each customer.

This means that the customer gets the true benefits of the as-a-service model, by spreading the cost of investment over time, including the ability to defer or structure payments.

Unlike a leasing contract, which implies a direct interface between the three parties involved, the customer, the leasing company and the supplier, the subscription model focuses on the supplier-customer relationship.

The funding relationship and related contractuals are moved into the background, where it does not compete for the customer’s limited bandwidth.  Rather than having a tripartite lease, the direct managed service contract is between the supplier and their customer.

Then in parallel you’ve got a purchase agreement between the supplier and their funding company, that converts the income stream from their customer into a cash sum for them.

The solution consists of two contractually independent arrangements that simplify the funding procedure and improve efficiency for the customer.

It’s transformational, because organisations don’t need a big cash outlay that commits them long-term to one technology solution. They can keep their options open and be ready to react fast to the constantly changing business and technology environment by  paying a standing charge for the infrastructure and then using the ‘pay as you use’ utilities approach.

Mitigating risk

In a climate of increasing uncertainty and a challenging market environment, the as-a-service funding model helps to mitigate exchange rate and interest rate risk and avoid potential short-term price increases.

Once the funding solution has been structured, the repayment profile is locked for the duration of the as-a-service term, so there is no future currency exchange or interest rate risk after day one. But as always, any offer of a structured as-a-service solution is subject to credit assessment, documentation and pricing approval.

While the way technology is being delivered is changing, the importance of financing still remains at the top of the list for CTOs and CFOs. This subscription-based approach is innovative and over time, we see it replacing leasing as a funding vehicle.

The challenge for businesses, suppliers and the channel is the same. They have to migrate away from what they have been doing over the last 30 to 40 years when it comes to transacting IT solutions to reflect the way the IT world is changing.