IBM To HP: Our Financing Beats Your Financing
"While 'zero-percent' has a lot of buzz, if you have to return it, is it really zero percent?" said Dan Ransdell, general manager of client financing worldwide, IBM global financing.
"We think this is a very effective way for people to manage their capital spending," countered Brian Burch, director of SMB marketing in HP's Personal Solutions Group.
While the IBM-HP exchange may sound like little more than competitive sniping, financing for customers is a critical issue for solution providers trying to close deals in these tough economic times. Customers are trying to spread out payments and conserve cash, Ransdell said in an interview, and they are looking for the best financing terms to do that.
Financing from vendors has also become more important as other credit programs used by solution providers to finance their customers' IT purchases are disappearing. Last week, a Channelweb.com story uncovered how several channel financing programs for VARs, including IBM's Flexible Credit program, are closing or making their terms stricter because of the recession.
Just as a consumer can get "more car" by leasing rather than buying, IT managers can get more computing capacity by leasing, said Calvin Braunstein, CEO and executive director of research at the Robert Frances Group IT research firm.
From the customer perspective, "I preserve money and I can make my money go further by leasing," he said. Another advantage, Braunstein added, is that lease payments go on the books as an operating expense rather than a capital expenditure, leaving more capacity to borrow for other needs.
Late last month, HP launched a zero-percent financing promotion through its HP Financial Services subsidiary called "HP Total Financing," covering a broad array of the company's products and services for SMBs. The zero-percent financing applied to a 12-month purchasing plan and a 36-month leasing plan. The lease offer includes an option to purchase the product at fair market value at the end of the lease term.
HP's Burch said the company developed the two plans after conducting significant market research. He said most leasing plans build interest charges into the monthly fees. "That's been zeroed out. In essence, we're renting the product with no interest."
IBM's Ransdell said there's no disagreement over the need for more financing options in today's economy. "We've seen an increased demand for leasing and financing," he said. But he said the devil is in the details -- or, more specifically, a deal's terms and conditions -- when it comes to figuring out what's best for solution providers and customers.
Under HP's 36-month lease arrangement, the purchase price is broken up into 36 payments. At the end of the lease, the customer returns the product to HP. But Ransdell said used equipment generally has a residual value of 15 to 20 percent. (Braunstein at Robert Frances Group puts it in the range of 10 to 15 percent.) Ransdell said that means customers are actually paying around 115 percent in total for an HP product.
"Unless you own it at the end of the 36 months, it's not really zero percent because you have to give it back," Ransdell argues.
Not surprisingly, the IBM financing executive thinks his company offers a better deal. The company offers a 36-month leasing plan with what the company calls "ongoing low rates." But it adds several options for customers when the lease is up. As with the HP plan, customers can simply return the product. IBM customers also have the option to continue leasing at the monthly rate they were paying all along, Ransdell said. Or they can renegotiate a lease extension based on the product's fair market value. Or they can purchase the product at fair market value.
IBM writes the projected fair market value into its leases. Ransdell said IBM has a pretty accurate view of that value because it manufactures its own products and that helps when calculating residual value.
Given all that, Ransdell said the total cost of leasing is lower with IBM than under the HP plan. Braunstein, while calling the HP plan "a reasonable deal," agreed: "IBM's deal does offer something better."
But Burch dissents. "I don't agree with that notion. We're allowing three years' use of a product with no interest."
IBM doesn't offer a formal equivalent of HP's zero-financing, 12-month purchasing plan, according to Ransdell. "We don't see a market need for that." But he also acknowledges that's "more of a true zero-financing offering" because customers own the product at the end of the contract.
Burch, however, said early response from customers to the 12-month purchasing plan has been very positive. "In our research before the launch, it was crystal clear that was a game-changer," he said. "It's proving to be extremely attractive."
