Service Charge: How Recurring Revenue Models Are Changing The Channel Financing Game

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Paul Bay, president of Ingram Micro North America, said that he has seen a lot of banks having a tough time dealing with the difference in recurring revenue. The problem, he said, is that banks often see the financing conversation based on the numbers, not necessarily on the technology and business itself. Bay said distributors and vendors with a financing arm often have a better understanding than the banks, which might be further removed from the channel conversation.

"They don't know the end user that they're extending it to necessarily, which are the resellers or partners," Bay said. "As far as the technology goes, we're out having that conversation of how do you migrate to a hybrid solution. A bank would never know what that means. All they see is more of a black-or-white conversation."

IBM Global Financing's Ransdell said he has seen a lot of customers turning to the IBM financing program because they understand the recurring revenue model and how much retired equipment is worth. In fact, the company's understanding and rates for financing are so good that their biggest customers are actually banks themselves looking to move to the cloud and refresh technology, Ransdell said.

"That’s not the bank's specialty area, but it is mine," Ransdell said. "I think that gives us a competitive advantage and we are here to help customers in the IT space."

On the bright side, some solution providers said that the need for financing isn't as great when using a recurring revenue model, especially if they are building it around the cloud. Some said they've even been able to avoid financing institutions altogether by using their own cash reserves to move into the market in more manageable steps.  

They have that option because many of the businesses turning to focus on recurring revenue usually aren't starting from scratch. Instead, they are usually evolving from a more traditional reseller model to take on services and cloud capabilities.

Robert Anderson, principal and founder of New York-based ingenuIT, said the cloud provides a low barrier to entry for that transformation because  it's a pay-as-you-go model, instead of having to invest a lot up front on infrastructure.

"You can do those things that you want to do without this huge capital investment," Anderson said. "I think up to a certain point with critical mass that would be a better approach anyway."

Most of the traditional VAR companies making the switch to managed services are not building from the ground up, at least that he has seen, Anderson said. Instead, they are transforming their existing reseller business into a recurring revenue model.

"As far as from the channel, so to speak, you'll see folks transform into that," Anderson said. "In fact, it's an ongoing battle to transform."

The self-financing model is especially appealing as the investment costs start to add up, Kyle Cebull, chief marketing officer at Fort Myers, Fla.-based Entech US, said. He estimated that financing can cause investments to end up costing six, seven or even eight times more than financing through the company's cash reserves. For that reason, he said that his company has self-funded all of its service offerings to save money on its expansion.

"The numbers they give you are not amazing. It's not like it's a no-brainer. For most cases you're paying a lot more [with financing]," Cebull said. "It's really not an ideal scenario."

However, Quest's Burke said that, while tapping third parties might be a good way for solution providers to dip their toes into the market, ultimately they will have to make some serious investments into their services if they want to fully embrace the managed services and cloud model.

NEXT: Outlook On Financing Market

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