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."