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Mortgaging Your Future for IT

By Larry Dignan  |  Posted 2005-12-06 Print this article Print

Loans for technology projects sound intriguing—but there may be cons.

You take out loans for homes, home improvements and automobiles. Should you take one out for a technology project?

To Ken Barker, director of information technology at CB Richard Ellis Management Services, a division of El Segundo, Calif.-based real estate operating company CB Richard Ellis, the answer is yes if it means you'll be able to complete the project without funding hiccups. "Even if you have a good business case for a project, it can get hung up on the cash outlay," Barker says. "The CFO is satisfied because he can get more control of the cash outlay. It's a cash flow issue."

While leasing hardware is a common occurrence, financing projects such as an SAP implementation is still nascent and IBM is the primary player. Project financing consists of a credit line that will cover the costs of an implementation up front. The payment schedule is tied to project milestones or returns, and the loan term is usually three to five years.

It works like this: A company takes out a loan, spreads out the payments and wins over its chief financial officer by making the cash outlay more predictable. No figures are available on the number of project financings. The pros: predictable expenses tied to project milestones. The cons: paying an interest rate and having the same company—in most cases, IBM—financing and implementing a project.

Barker used IBM's Global Financing and Global Services units to start a PeopleSoft implementation in August 2004, scheduled to launch in January 2005. Barker's unit consolidated four separate JD Edwards applications to one PeopleSoft application managing general ledger, accounts payable and receivable, real estate management and procurement, accessible through a portal. Moving to a single system would keep employees from navigating multiple systems, but the move had a $2.5 million price tag.

For Barker, the financing meant he had his funding locked up, and his bosses liked the fact that a five-year payment schedule wouldn't start until March 2005 when early returns were expected. Interest rates were described as "competitive."

IBM's role in project financing stems from its long history of

leasing its hardware and software, so it's a natural extension into services because it helps Big Blue close deals for smaller and mid-sized customers, according to Cal Braunstein, an analyst with the Robert Frances Group.

Do project loans make sense for every company? No, but it's worth a look. Here are three things to consider:

  • Where does the company want to make cash outlays? While spending a few million dollars on an enterprise resource planning project might be a good move over the long run, a company may need to hire more workers or build up its factories. To bean counters, the system may only be palatable if the cash outlay is spaced over five years.
  • Are you willing to pay interest that could cut into your returns? When financing a project, your returns may be diminished a bit by the interest rate you'll pay. For instance, a 15% return on investment could yield 10% after interest. Project financing should be weighed by a company's internal rate of return, or what you could do with your funds if you weren't blowing dough on consultants, hardware and software.
  • Do you want financing and services from one vendor? Some customers may squirm at the idea of getting funding and services from the same supplier, since IBM offers financing only to its services customers. Paul Foulkes, IBM's vice president of project financing, says concerns are minimized by tying funding to key performance metrics. If the CFO isn't happy with the returns and milestones aren't certified, payment isn't approved. "Payment will not happen until the goals are met," Foulkes says.

    According to IDC analyst Bill Roch, project financing could become on par with funding a new car purchase. "I bought a Ford Explorer and used Ford Motor Credit to finance it," he says. "Is there a conflict there? Could be, but it's small enough to where the benefits outweigh the concerns."

    Like buying a car, the funding possibilities are endless. Project financing should be an arrow in your quiver.

    Larry Dignan is business editor of baseline magazine. He can be reached at larry_dignan@ziffdavis.com.

    Business Editor
    Larry formerly served as the East Coast news editor and Finance Editor at CNET News.com. Prior to that, he was editor of Ziff Davis Inter@ctive Investor, which was, according to Barron's, a Top-10 financial site in the late 1990s. Larry has covered the technology and financial services industry since 1995, publishing articles in WallStreetWeek.com, Inter@ctive Week, The New York Times, and Financial Planning magazine. He's a graduate of the Columbia School of Journalism.
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