IBM's project financing attracting SMBs

Program seen as reducing risk for customers

IBM's project financing service is proving popular not only among enterprises but also with the small to midsize business (SMB) sector, according to a Big Blue executive. The service provides a customer with complete financial backing from IBM for an entire IT project from the design phase to system deployment.

About one-third of IBM's project financing business is currently with SMBs and the business is growing, according to Paul Foulkes, IBM's vice president, worldwide project financing with IBM Global Financing. In some countries, IBM's financing deals are predominantly with SMBs, notably in France, Italy and Canada, he said.

Foulkes did note that a customer IBM might define as an SMB for the purposes of its financing might be a much larger entity when seen as an entire company. While very large, older companies already have highly sophisticated business models in place, a younger company with $1 billion in revenue might not have those systems well established and so would benefit from project financing, according to John McArthur, group vice president and general manager with IDC's information infrastructure division.

With any project financing deal, customers want two things -- to lock in the amount of money the project will cost, while retaining some flexibility on achieving project milestones, IBM's Foulkes said. A milestone is an agreed-upon point in the project when some goal has been met, for instance, getting a specified number of users up and running on a new application. In that example, IBM would build some "wiggle room" into the milestone so that if, say only $800,000 was needed of a planned $1 million, the customer could still sign off on having reached that stage, he explained.

Having milestones established throughout the course of a project really helps keep the development on track, for both the users and their IT suppliers, according to Foulkes. "[The milestones] introduce a little more certainty and add a lot more discipline," he said. "It's a way of very formally and legally saying [to the customer], 'Are you happy?'" Once a customer has formally signed off on a milestone, they then need to pay IBM the agreed amount in relation to that achievement so Big Blue can in turn pay the IT suppliers.

"There's an old phrase -- approved but not funded," said IDC's McArthur. "It's hard to get approval for IT projects. Project financing allows the match of payments to future benefits."

He described the IBM service as a "brilliant approach," not only reducing the risks inherent in high-tech projects for customers, but also a way of providing substantial competitive advantage for IBM. If Big Blue introduces the concept of project financing at an early stage when a customer is considering an IT project, IBM's "traditional [financing] competition might not even be invited to the table," McArthur said. "It's a totally different way to sell. It's paying for benefits, not a new CRM system."

IBM is also likely to be pitching a project financing deal to a different audience, a company's chief financial officer (CFO), not the IT director, McArthur said. "IBM needs to make sure that their people calling on the CFO speak their language," he said. "It's a very different conversation, all about risk management."

Should a customer decide midway through a project that it wants to call a halt to the whole thing, IBM will immediately terminate its funding, Foulkes said. The customer can then walk away from the deal, only having paid what they've seen value for as measured by the agreed-upon milestones. That flexibility is likely to give customers more confidence and make it easier to get IT projects approved, according to IDC's McArthur. "If you're able to go to the CFO and say, 'By the way, you don't have to pay a nickel if you don't see a benefit.' They'll say, 'Yeah, I'll take the risk,'" he said. The only risk the customer will take on board is in allocating staff to the project, he added.

One of the inhibitors to chief executive officers taking on project financing deals for their companies is a sizeable cost benefit mismatch between the cost of the project and the time it may take for an organization to reap any financial benefit from the project, IBM's Foulkes said. "It may take years to see any payback," particularly in relation to CRM (customer relationship management) or ERP (enterprise resource planning) projects and government initiatives such as e-passports and electronic tolls for road systems, he added.

SMBs can often make very quick decisions on IT projects, Foulkes said. It's a factor of both their size and that they're often backed by private equity, which can also move rapidly to shore up its investments.

RoadChef's speedy drive to project financing

A number of SMBs are looking to completely transform their business operations with an IT project, like U.K. motorway services operator RoadChef Motorways Ltd., which earlier this year signed a project financing contract worth around US$40 million with IBM.

RoadChef has 20 sites in the U.K., some of which offer accommodation along with cafes, fast-food restaurants and shops. Installing new management last year, RoadChef's owner, Nikko Principal Investments Inc. , was keen for the organization to improve its performance and expand its 24 percent share of the motorway services market. Nikko wanted to make RoadChef more cost-efficient by outsourcing noncustomer facing activities like finance and administration and revamping the company's IT infrastructure.

RoadChef worked closely with Accenture Ltd. to research the scope of the project and put together a request for proposal. Accenture, IBM, LogicaCMG PLC and Capgemini SA were among the bidders for the project. Despite Accenture's initial involvement with the project, the company didn't win the bid. "They pushed the financing problem back to the owners," IBM's Foulkes said. RoadChef preferred IBM's structured approach with the locked-in financing and the milestones, he explained. "They said it wasn't the cheapest form of financing, but they got value out of it," Foulkes added.

The request for proposal was issued in October 2004, RoadChef chose IBM the following month, and the companies signed the contract in January of this year. The project has been under way since February and should be up and running by the end of October, according to Foulkes. "It was very, very fast for a business transformation deal," he said. "RoadChef put a lot of pressure on time scales."

Under the terms of the deal, RoadChef's finance and administration operations are being outsourced to Bangalore, India. Bills will be sent to a post office box, read digitally into a computer and then transferred to India to be processed, Foulkes said. For its new IT infrastructure, RoadChef is taking on financial software from Sage Group PLC and retail applications from Anker PLC running on IBM eServers, desktop PCs and cash tills and linked together with Big Blue's networking services.

RoadChef and IBM have been implementing the new systems on a site-by-site basis, with three sites up and running already, Foulkes said.

IBM's deal with RoadChef involves 35 agreed-upon milestones. Two milestones have been missed, and so the money earmarked for signing off on those stages sat in RoadChef's bank account earning interest until IBM resolved the issues to RoadChef's satisfaction, according to Foulkes.

Project financing around the world

What all companies considering project financing press IBM for is examples of organizations that have done similar projects in their particular industry. "It doesn't matter so much where in the world," Foulkes said. Big Blue hopes to build a branded reputation as a provider of project financing with plenty of user case studies, he added.

Over a year ago, Mark Loughridge, IBM's then general manager of Global Financing, just before he became company CFO, met with Foulkes. Loughridge asked him to find ways to communicate more effectively to customers what the company's trying to do with project financing and encourage the establishment of a dedicated project financing team within IBM.

So far, Foulkes has built up a 24-person strong team, taking people with a variety of expertise in financing, sales and consulting. He was particularly keen to hire individuals who've seen large IT projects through to execution, he said. Four members of his team focus on Asia -- two based in Australia and two based in Japan -- 10 concentrate on the Americas and another 10 home in on Europe.

While IBM Global Financing's 1,000 salespeople can deal with most of the $1 million to $5 million financing deals, each member of Foulkes' group handles the more expensive and complicated arrangements, typically three or four projects at a time.

"We will grow the team, add more people and get a bedrock of success that resonates [with customers and analysts]," he said. IBM is expanding the project financing businesses worldwide. The company recently signed a business license to provide the project financing service in South Korea and is setting up public sector deals in the Czech Republic, Hungary, Poland and Slovakia, Foulkes said.

IBM is looking at both China and the Russian Federation, though to provide project financing in both areas is a complex operation requiring business licenses and potentially working with local agents and third parties who really know the markets, according to Foulkes.

Project financing isn't an approach that will appeal to all customers, Foulkes said. "Sometimes, it won't make sense, we'll be selective about who we work with," he added.