Market downturn has become a boring subject after its repeated use in every other context. But alas, its impact has been so prominent that it becomes inevitable for us to look at things ‘in the shadow of downturn’. And there is no better time than now to analyze a topic such as ‘vendor financing’ and whether it actually helps channel partners in making sustained business in a market condition that is marked by a dropping economy.

The abiding credit crunch is clearly forcing many organizations to adjourn or discard their IT purchases. Even if they are buying, they are trying to scale down their purchase. Although options such as leasing, financing, and prolonged credit periods are not new to the channel community, they were largely depending on their suppliers and banks for the same. But unfortunately, many distributors and sub-distributors have now squeezed their credit limits and credit periods.

Many private sector banks and NBFCs have changed their credit behavior, and as a result, customers, particularly the SMBs, are unable to make upfront payments. Srivas RM, Director of Bangalore-based Towers Infotech, says, “Our customers, especially in the SMB sector, were receiving financing from private sector banks. But now, banks have stopped this scheme as they are primarily looking at funding very big deals. There is definitely lack of resources for SMBs.” While the pool of accessible credit is shrinking gradually, vendors are sitting on large cash reserves and using it to underwrite their customer deals. There are a few major vendors — Cisco, IBM, HP and EMC— who offer such schemes to their customers through their financing arms.

While a number of other vendors do extend credit periods for their customers, these cannot be considered as full-fledged financing schemes. In the last few months, vendors claim that they are talking more aggressively about their financing offers and have increased their focus towards small and mid-sized companies who are feeling the heat of recession. Some vendors have also introduced funding schemes with zero-percent interest. Earlier, most vendors were only interested in offering finance to big enterprise deals. Cisco, for example, offers zero percent Progress Payment Program that allows customers to defer payments up to 120 days without interest.

HP is reportedly offering funding for deals of as small as Rs 1 Lakh. Even IBM says it’s looking at funding deals starting from 4.5 lakh. Under EMC’s 0-0-12 Program, customer has to pay only 10 percent of the equipment cost upfront. There is no payment obligation for the next 12 months. At the end of it, the customer can make the payment of balance amount as a ‘bullet repayment’ or ‘equated installments’ over the next 24 months.

Why Vendor Financing?
There are many more financing sources available to channel partners, but partners believe that funding from a vendor can add a lot of value to the overall offering. As a result, the partner community has great expectations from various vendor financing programs. Vendor financing programs has umpteen benefits. Naresh Desai, Director of OnTrack Solutions, says, “Vendor funding has helped us close sales many times when customers faced credit issues. Besides, it has also helped us enhance the value of many deals.” Rajiv Gupta, Managing Director of Teckinfo Solutions, agrees, “Vendor financing definitely eases out customer acquisition as most customers do not pay upfront.” In an extremely competitive market, where a single customer would get ten different quotes from various SIs for a single solution, vendor financing would definitely appeal to the customer.

Besides, such programs come up with competitive interest rates, vis-à-vis the schemes offered by distributors and banks. However, partners perceive that customers do not really fret too much about interest rates because all they want is credible resource for credits. Hence, interest rates are not the ‘interesting’ part of vendor financing schemes as far as the customers are concerned. Most importantly, a well-designed finance scheme would offer a customer the advantages of managed services as he will be able to pay for his purchases out of his operating budgets rather than his capital budgets. Cisco quotes an IDC report that says that the cautious finance officers will use financing and leasing to shift IT spending from their capital to operational expenditure budgets, and forecasts the global market for such products could reach $125.8 billion in 2011. “As an OEM, we believe our offerings will be incomplete without the financing part. Besides, we want to be known as business enablers rather than being just a box-pusher,” says Gautam Munish, Vice President, Cisco Capital India.

Time is Money
While vendor financing appears very attractive, they largely remain only on paper, forcing systems integrators and value-added resellers to rely on their old sources. Partners are disappointed that many such programs do not provide the expected benefits. There are many hitches to avail funding from a vendor and most of these hiccups remain unresolved even when partners badly need a helping hand. Most of these schemes have extremely complicated procedures right from procurement to the closing of a deal.

Another major issue is the lack of spontaneity from the vendor. Let’s analyze why a tier-1 systems integrator had to let go by a couple of deals. Customers didn’t have the budget to pay upfront. Systems integrator went back to his principal for some financing options, but the response was cold. A disappointed systems integrator finally unhanded the customers. Considering that the SI is one of the exclusive partners for the vendor, we can imagine the nature of responses received by the rest of the partners. Subbaram Gowra, Managing Partner, Gowra Bits & Bytes, says, “The vendor we deal with is not proactive at all when it comes to funding our deals. They took a long time to get back to us and the customer could not wait for so long.” And he is not alone. Many partners in the tier-1 and tier-2 cities have had to relinquish deals because of lack of financing options.

Vasudevan Subramanian, Managing Director of New Wave Computing says, “Our vendor’s scheme is definitely not the quickest and as a result, it does not help us in any way.” Vendors, however claim these are exceptional cases and they try to be as quick as possible to respond to every request they get from their partners and customers. But most of the partners ChannelWorld spoke to were of the opinion that vendors need to be more proactive and prompt to their partners’ queries. K. Subrahmanya, Director of Bangalore-based CDSPL is happy that one of his principals, Cisco, gives him a very quick response, but at the same time he gets extremely slow responses from another vendor for his financial queries. “They ‘throw attitude’. People we deal with at this vendor’s end are not proactive at all,” protests Subrahmanya.

Knotty Schemes
Partners, who are lucky enough to get timely response from vendors, face issues with complex procedures of certain vendor financing schemes. Partners have found that not only does the paper work between the vendor and the customer take enormous time, but also their suppliers — the distributors and sub-distributors— are not ready to wait till the partner receives the disbursement. “Besides being less proactive, one of my principal’s schemes involves long processes,” adds Subrahmanya of CDSPL. Subramanian of New Wave Computing says the various methods involved in vendor financing programs literally give him nightmares. “There is huge amount of documentation required and this puts the partner under tremendous pressure.

Besides, it is usually very difficult to release money on time from the customer, causing cash flow burdens on the partner,” he adds. He recalls how a small error in documentation once created a huge confusion and the documents went back and forth between the vendor and the customer, resulting in an unexpected seven-month long delay. While the customer gained as he got the products without paying even a rupee, the partner went through a lot of trauma. This could be an exceptional incident, but in most cases, partners get stuck between their suppliers at one end and the customer at the other. Partners also say that customers who actually need money are not benefiting from vendor financing programs. Though vendors are actively talking about funding for small businesses and smaller deals, partners strongly feel that such offers largely remain only on paper.

Another set of people who do not benefit from vendor financing schemes are start-ups. Anantharam VV, Director of Bangalore- based Webcome Information Technology had to say no to a couple of start-up customers. “If the vendor insists on last three or four years’ balance sheets, how would a start-up gain funding?” he asks. The major reason for the unavailability of funding for certain companies are strict criteria by which a vendor approves financing. While vendors definitely need to look at the ability of the customer to pay back the loan (after all, no vendor would want to be the ‘banks of US’) they also need to have different mechanism by which an SMB or a start-up company can avail funding. Subramanian of New Wave Computing reaffirms that a large part of the SMBs in India are ignored by vendors due to their strict due-diligences and unwillingness to take any risk. Certain partners hesitate to work with vendors for providing financial support to customers for other reasons.

Ravi Putta, Owner of Alliance Prosys, makes it very clear, “Instead of depending on our vendors, we underwrite our customers’ projects ourselves. There are two reasons for this decision. One is the entire complexity of availing the loan. Second and most importantly, the vendor comes and takes the entire control of the business deal, forcing us to take a back seat as an irrelevant third party. We don’t like vendors coming and interfering in our relationships with the client.” Because of all these reasons, a lot of partners have started looking at alternative ways to support their customers. Some partners let go of certain deals, but would try to extend credit periods to regular customers and big value deals. On the other hand, a lot partners are looking at third-party funding sources.

Low Awareness, Less Success

Low Awareness, Less Success

While complexity and lengthy procedures are part of every other scheme, the biggest problem with regard to vendor financing programs is less awareness among partners about the availability and procedures of such schemes. A tier 1 systems integrator, of substantial size was not aware that vendors offer funding directly to customers. “As far as I know, all such Financing happens only through distributors. The tie up with the distributors and afterwards the systems integrators deal only with the distributor,” says a partner. While it’s obvious that vendors would not talk about their finance offerings to all their channel partners, a key tier 1 channel partner is expected to have some knowledge about his vendor’s schemes. This partner’s words precisely conclude the low level of education in the partner community.

Munish of Cisco disagrees with this. “We are conducting training programs and are focusing on creating a mass awareness in our partner community.” But one must also take into consideration that fact that even Cisco has started such training programs only a couple of months back. Siva Hota, Global Financing Country Executive, IBM India, adds, “IGF in India has recently expanded its channel and marketing team that is currently working on creating awareness for channel partners on IGF offerings.” EMC’s GFS division started operations in the country a year back and claims focusing on creating awareness.

Praveen Sahai, Head-Marketing & Corporate Affairs, EMC India & SAARC, says, “In the last 12 months, we have educated our sales teams and partner managers of the various options that can be used to maximize ROI on our gear to the customer. This has become a good tool for the sales teams as it helps the customers to move from capex to opex purchase model. We have started getting a lot of traction now and we see this growing more in the future.”

Need of the Hour
If designed, implemented and communicated properly, vendor financing clearly is the best option for both channel partner as well as customers, especially in the current market downturn. Even partners believe vendor financing is a great idea and they would want to see more activity in this space in the coming days. They express their grief and also put forward a few suggestions, which they believe, would help their vendors further enhance their financing schemes.

“The basic criteria or deciding factors, for the approval of the funding itself is very tough. Thus rather than looking at the size or age of a company, it’s important for us to consider a customer’s interest and seriousness towards that particular IT purchase. Therefore, the vendor needs to find out why the customer is investing on IT currently and whether he would purchase more in the future,” says Ananatharam of Webcome.

Another major hiccup to be resolved is the dilemma a partner would go through if there is a delay in disbursement from the customer. This lot of partners find it extremely difficult to convince their suppliers about the delay in payment. While distributors are a major part of this chain, vendors, to certain extend, fail to involve them in the whole process. As a result, an systems integrator and a distributor or a sub-distributor, work as disconnected entities, failing to understand each others’ concerns. It’s in fact the vendor’s responsibility to play the role of a facilitator between the systems integrator and the distributor to ensure that the SI is not helplessly stuck. “Once the approval is sanctioned by the vendor to release the loan to a customer, the vendor should also be able to convince the distributor that his money would come from the vendor,” says Gupta of Teckinfo Solutions.

Subramanian of New Wave Computing feels that the vendors fail to present their financing schemes as a part of their overall offer. “Financing schemes are in fact one of the most attractive offering a vendor can come out with while pitching a deal. But unfortunately, they are not able to translate the overall value proposition of such schemes to the customer. They have to ‘package’ it well and push it further,” he adds. Partners also say that vendors are unable to integrate their finance offerings as part of the entire solution a customer would deploy. As a result, customers would always consider vendor financing like any other financing option. One reason for this is the vendors’ unwillingness to support deals where competing brands are involved. A typical IT implementation today would definitely involve multiple brands which could be of competing vendors.

Majority of the channel partners have today moved to a ‘solution-centric’ approach in which they integrate multiple brands to design a perfect ‘solution’ for the customer. The channel partners also urge the need for the smooth fulfillment of such schemes by avoiding unnecessary complexities and tangled procedures. Educating the partners is another key step that the vendors need to take as most vendors’ ‘channel training’ schemes still has not crossed their internal sales team. To cut the long story short, there is a long road to travel before vendor financing would actually become the most attractive offering and the best value-add for both the channel partner as well as the customer.