The movement towards subscription-based models is fuelling the need for a different approach to IT investment
There was a time when the channel shipped IT products in boxes - and investing in technology meant large, up-front capital payments for hardware and software. This meant that financing was fairly straightforward. You either bought equipment outright or entered into a leasing or rental agreement.
There are always those who prefer to pay by cash. They like to own the asset and not be tied into longer-term agreements. And for some, leasing is perceived as a confusing and complicated world that’s best to avoid.
But for many, leasing offers several advantages – including not having to pay the full cost up-front and having access to higher spec equipment, which might be too expensive to buy outright. Furthermore, the leasing company can often secure a better deal on price and the customer can accurately forecast cash flow and budget for the future.
The business environment is increasingly moving towards an ‘as a service’ economy, however, with the subscription model becoming the preferred means of funding IT investment. Resellers and their customers want to be able to keep pace with technology investments in a more flexible, cost-efficient and transparent way, ensuring optimal return on investment (ROI) for their businesses.
Combine this shift with the current challenging economic and market conditions, with fluctuating exchange rates and uncertain interest rates, and it’s easy to see why resellers and their customers face uncertainty when it comes to investing in tech. The fundamental dilemma is how to combine a customer wishing to pay monthly with everyone else in the supply chain preferring a cash sale?
The mechanics of investment
One answer is to adopt innovative subscription-based funding models, which differ from traditional financing in a number of key ways. For example, one of the restrictions of traditional leasing is it’s very hardware-focused and not easy to include software and services or finance software on its own.
In contrast, ‘as a service’ funding bundles everything together and can include any amount of hardware, software, maintenance, and services, with no restrictions or minimum percentage required of each component. It may also be necessary for businesses to fund services and support only, without the need to include hardware, software or consumables, for instance. It can even be tailored to the specific business needs of each reseller or end-user, meaning everyone can benefit through this added sense of flexibility, as well as by spreading the cost of investment over time.
Unlike a leasing contract, which requires 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 shifted 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 customers.
Then in parallel, there’s a purchase agreement between the supplier and their funding company that converts the income stream from their customer into a cash sum for them. Revenue for the transaction can also be accelerated to the point of contract. The mechanism essentially consists of two contractually-independent arrangements that simplify the funding procedure and improve efficiency for the customer.
The shifting sands of funding models
It’s transformational because organisations don’t require a big cash outlay that commits them long-term to one product or service. Businesses can keep their options open and be ready to react to the changing business and technology environments by paying a standing charge for the infrastructure, and then using the ‘pay as you use’ utilities approach.
In a climate of increasing macro uncertainty and a challenging market, the as a service funding model helps resellers mitigate both exchange and interest rate risk, plus 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 system is subject to credit assessment, documentation and pricing approval.
While the way vendors and resellers deliver technology is changing, the importance of financing still remains at the top of the list for any business. It is clear that IT purchasing decisions are being made at a senior level as IT managers work more closely with the well-informed C-suite, who have a greater understanding of the issues and options around IT financing and consumption.
This subscription-based approach is innovative, and over time we’ll see it replace the traditional leasing as the funding vehicle of choice. The challenge for businesses, suppliers and the channel is the same. They will look to migrate away from what they have been doing over the last 30 to 40 years, reflecting the way the IT world is changing.
As published in Channelpro, 2 October 2019