Services Financing Eases Startup Costs

Opinion: Payment plans can ease the blow of upfront costs.

You want to outsource because you dont want to deal with the huge initial expense of building your own IT staff and infrastructure. And yet, even outsourcing has its startup costs. If youre not careful, you could still get stuck with a hefty upfront bill. Enter services financing. Its a way to tie your payments to the actual benefits you expect to receive from your large outsourced IT projects.

Paul Foulkes is vice president of project financing for IBMs Global Financing Division, the IBM unit that handles financing for servers, software, PCs and services for both IBM and non-IBM equipment. Services financing is but one piece of Foulkes portfolio, but one of increasing significance as the demand for services outstrips that for equipment at the company.

"If youre putting in a hotel reservation system for a large client, theres a significant upfront expense. Until they get the system running, the benefits dont kick in," said Foulkes.

Payback for different projects occurs according to different patterns. Some paybacks could come in the shape of the proverbial hockey stick—flat at first and then heading up sharply. If a customer is interested in a pattern that matches whatever schedule it expects the payback to follow, IBM is willing to listen, Foulkes said.

"It could be a straight line—say, 28 equal payments. But sometimes the client wants a payment profile that matches the payback. Youve got to see each customer individually," Foulkes said.

In one example, IBM Project Financing and IBM Business Consulting Services created a loan package that lets the Bekins moving company obtain advances as needed. Bekins is rolling out a wireless route optimization service, known as STARS (Service Tracking Automated and Routing System), which lets drivers use handheld computers to pinpoint delivery locations, find the shortest routes and capture information at the point of delivery. The project would not deliver returns immediately, so Bekins obtained a $4.2 million line of credit with IBM Project Financing that it is using over a 48-month period, which began last August. "It enabled us to do the project and to correlate the spend along with the benefits," said Bekins CIO Randy Valentino.

Hewlett-Packard is also breaking new ground in tying customer outlay to payback. Irv Rothman, president and CEO of HP Financial Services, said his units financing made HPs landmark outsourcing contract with Procter & Gamble a reality. "We were the financial architect of the deal," Rothman said. He said HPFS purchased $100 million of P&G IT assets and leased them to HP Services, and HP Services, in turn, is paid by P&G. "We did it in 24 countries simultaneously when the deal went into effect," he said.

In another example, HPFS underwrote a deal for HP Services to develop a new drivers license system for the Polish government. The deal, signed last year, lets the government pay HP on a per-transaction basis. "Every time they issue a drivers license, they pay us something," Rothman said.

Rothman also cited a $318 million deal signed with The Toronto-Dominion Bank last year to build a new ATM network across Canada that will include periodic upgrades. "They wanted to have the costs and assets match," he said. "We allowed them to variable-ize the cost and the service. Were charging them on a per-click basis."

HP has $14 billion in cash, and, Rothman said, a good use for that hoard is in bankrolling outsourcing deals.

Out and about

CSC signed with general dynamics to extend its IT outsourcing agreement for 7.25 years, worth an estimated $1.63 billion. In addition, CSC announced $546.1 million worth of federal government business signed since Jan. 1—the companys fourth fiscal quarter. The bulk of the business—$462 million—was signed by Department of Defense agencies.

EDS said it inked a $300 million extension of its information and communications technology outsourcing contract with the Australian Taxation Office until June 2008. The original deal was signed in 1999 and, at the time, was thought to be the largest deal ever signed by an Australian government agency.

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