Afinety Inc. reorganized its business around Microsoft Financing. The
experiences of this Los Angeles-based consultancy and of several other
partner companies make the expanding Microsoft offering worth a hard look
from other Microsoft partners.
"It's the best thing that they've ever done. It has absolutely revolutionized
our business," enthuses Doug Hafford, vice president of Afinety,
a Gold Certified Partner that sells complete networks to small professional
services firms, especially law firms.
The idea behind Microsoft Financing is similar to those of the credit
arms of major automakers such as Ford or General Motors, which can offer
customers sweeter loan deals than banks to help dealers sell cars. It's
also distinct from leasing, because customers own the merchandise outright
at the end of the financing term, without having to worry about a balloon
payment or a product return.
Despite being around for several years, Microsoft Financing has a low
profile, especially outside the Microsoft Business Solutions community
where it got its start. Under the program, Microsoft uses its substantial
pile of cash to finance customer purchases of hardware, software and partner
services at interest rates competitive to banks loans. Finance terms generally
range from 24 to 60 months. Deals must include some Microsoft software,
but they may involve as little as one license. Meanwhile, the financing
for partner services is unavailable elsewhere in the industry, Microsoft
and its partners say.
Although the program is in use by only a few thousand of Microsoft's
600,000 partners, the company is aggressively investing in the program.
Microsoft hopes to loan twice as much money in the next year (the current
portfolio is just under $500 million), while expanding from about 11 markets
worldwide to 20. Meanwhile, the company recently cut the minimum deal
size eligible for finance from $10,000 to $3,000, making the program an
important option for partners who serve even the smallest of SMBs. At
the same time, Microsoft Financing is improving upon the speed with which
it can facilitate larger deals. The company recently raised the maximum
deal size eligible for instant online credit approval from $100,000 to
Afinety has reorganized its business model and its sales pitch around
Microsoft Financing. When talking to customers, "we lead with [Microsoft
Financing]. It's on our quote," Hafford says. Afinety's solution
usually involves taking over maintenance of the network through monitoring
and patching and may be as simple as standardizing some equipment or as
complicated as replacing the entire network, including both servers and
PCs. The proposal to the customer, however, abstracts the technical aspects
beneath a purely business discussion of the business goals that the company
needs to achieve with the network, Hafford says. By encouraging financing
through Microsoft, Afinety gets paid in full up front, but the customer
has a predictable and reasonable IT bill.
To qualify for Microsoft Financing, a partner must:
- Be at least a Registered Member of the Microsoft
- Have at least one Microsoft license in the end customer's
- Subject the customer to the standard loan approval
"We can go in and say, Mr. Small Business, you need to spend $75,000.
But when you say $2,500 a month, or $100 a user, that's not so bad,"
Hafford says. "We can use the financing to promote this sort of model.
Is it worth $100 per user per month to solve your IT? Of course it is."
Hafford doesn't have hard numbers, but he estimates Afinety's business
has increased by 10 percent to 25 percent from emphasizing Microsoft Financing.
One of the main advantages can be measured in cash flow, an issue that
bedevils almost all SMBs. "We have 10 times more money in the bank.
It's ridiculous. We never worry about cash," Hafford says.
Other partners share his enthusiasm for the cash flow bonanza enabled
by financing. "We're paid when the loan gets signed and sealed. As
a result, we don't have to track accounts receivable, we don't have to
go back to the customer for collections. It's an enormous benefit,"
says Judy Thomas, vice president of business development for the TM Group
Inc., a Gold Certified Partner in Farmington Hills, Mich.
For Bryan Stuart, vice president of corporate development and CFO at
Junction Solutions LLC, a Lincolnshire, Ill.-based Gold Certified Partner,
financing means flexibility. "If you have nine months of implementation
services and those fees are paid up front, it allows you to hire a little
sooner," he says. "Instead of waiting for that next deal to
happen, you can do it now." Junction Solutions has gone from a dozen
people at the end of 2003 to about 130 today, partly on the financial
strength of doing business through Microsoft Financing.
Larger deals also result. According to Microsoft's analysis of internal
sales data, to take one example, Microsoft Dynamics AX (formerly Axapta)
deals are 80 percent larger when financed and discounting is less. "We
can't state unequivocally that because they're financed, they're larger,
but financed deals are [generally] larger," says Brian D. Madison,
general manager of Microsoft Financing. Hafford provides anecdotal confirmation
of Madison's trend: "We are able to do more business, larger deals,
with our clients for the network."
Thomas describes a recent deal with a national personal-services company
that had been struggling to afford some add-on components in addition
to the TM Group's services. "They had a $50,000 budget to pay out
of pocket," Thomas says. The add-ons would have pushed the total
to about $150,000, which the company couldn't afford. "By using financing,
they were spending less than $50,000 [a year]." Ultimately the customer
got a solution to move its business forward, and the TM Group got all
its money up front from Microsoft. It's not the only time a TM Group deal
has doubled or tripled because Microsoft Financing was available, Thomas
Stuart, of Junction Solutions, which develops and sells Dynamics AX-based
ERP solutions for retail, food and beverage processing, says deals done
through Microsoft Financing involve less haggling and close faster. "The
whole notion of nickel-and-diming during the sales cycle is gone,"
he says, comparing the process to an automotive purchase. "If you're
buying a car, you're going to negotiate as much as you can. If you're
leasing, all you're concerned about is what you're paying monthly."
Junction Solutions sells to larger customers, with annual sales of about
$50 million to $1 billion, but even there, the initial lump payment often
gives prospective clients pause. "For most of our customers, it's
hard to swallow writing that first check for $500,000 or $1 million,"
he says. Financing the deal with regular payments over two to five years
takes the sting out.
Microsoft has played with the financing mix to come up with attractive
packages. In July, the company launched its "6/50" promotion.
Customers pay $50 per month for six months, then pay the balance in even
monthly installments over the following 36 months. "The fact that
they come up with these creative products is important," Stuart says
of those deals.
raised the maximum deal size eligible for instant online credit
approval from $100,000 to $250,000.
There's only one downside to Microsoft Financing for customers, according
to Thomas: interest. Rates are generally comparable to what banks charge.
Even those rates are sometimes negotiable. While banks and leasing companies
don't particularly care whether partners close a particular deal with
a customer, Microsoft has a vested interest in every transaction. All
three partners quoted in this article reported instances where Microsoft
made exceptions on terms to close important sales. "They really come
to the plate," Thomas says. "On a couple of occasions, where
the interest rate was too high, but the deal was big enough to warrant
it, they lowered the rate."
Microsoft began the Microsoft Financing program in 2002. The brainchild
of then-treasurer and now corporate vice president and CFO Brent Callinicos,
the idea was to use some of Microsoft's tens of millions of dollars in
cash on hand to finance deals. "Our primary role is to drive more
sales," Madison explains. "We use the financing as a sales tool-as
a closing tool."
The program started inside Microsoft Business Solutions, now Dynamics,
and expanded into nine countries. "Part of our discovery was that
Microsoft is a lot more effective when we message across our entire platform,
not just MBS," Madison says. In 2004, the company extended the program
to the Enterprise Partner Group. Then in July 2005, Microsoft Financing
was extended to the company's Small and Midmarket Solutions and Partners
(SMS&P) group, allowing the program to reach all of Microsoft's distribution
network aside from OEM sales.
Microsoft has aggressive plans to increase the number of financed deals
because executives are hearing about impressive results: faster deal closes,
incrementally larger deals, lower discounts. When you aim to nearly double
your business each year, you usually run out of headroom fairly quickly.
But Microsoft believes there's still plenty of space for financing to
grow. "We've sized the market opportunity at $50-billion-plus globally
per year for new software and services," Madison says. "The
hardware market is larger. That being the case, if we were to hit 10 percent
penetration, that would be $5 billion right there." Madison calls
10 percent a conservative figure compared to other industries where financing
179 + Microsoft Financing = Customer Opportunity
You may know the Internal Revenue Code's Section 179
as the tax loophole that lets some businesses write
off the purchase of luxury SUVs. But Section 179 isn't
just for Hummers anymore. Congress clamped down on the
SUV loophole in October 2004, but the rest of Section
179, designed to stimulate business spending with an
up-front tax break, remains in force and has even improved
with age. Some partners have discovered that combining
Section 179 with Microsoft Financing can give customers
another reason to do a deal.
Asked if many partners are taking advantage of Section
179, Microsoft's Brian Madison jokes, "The smarter
Most business property that is useful for a few years
is accounted for as depreciating over time. For tax
purposes, a portion of the cost can be deducted each
year. What Section 179 does is allow a business to receive
all those tax benefits in the first year. In 2003, the
one-year write-off limit was quadrupled from $25,000
to $100,000. Indexed for inflation, that amount is now
One other important change came through in 2003. The
IRS added off-the-shelf software to a list of property
eligible under Section 179, joining another relevant
category for Microsoft partners -- machinery and equipment.
The changes will last at least through 2009.
Microsoft periodically puts together messaging for
partners about taking advantage of Section 179. "You
ought to be having conversations [about this with your
customers]," Madison says. "We started coming
up with creative payment solutions to work around [Section
179], as well. A customer can acquire, but not start
paying until the fiscal year." In other words,
they can get the tax benefits one year and begin payments
One Gold Certified Partner putting Section 179 to good
use is Afinety Inc. "A really good thing about
[Microsoft Financing] is it qualifies for Section 179,"
says Afinety's Doug Hafford.
"You can buy a network in December. Let's say
it costs you $100,000. You don't start making payments
for several months. You get to write off $100,000 against
your income. The client can actually use tax savings
to pay for the entire first year of ownership for their
computer system," Hafford explains. "We typically
go with three-year financing. The typical corporate
tax rate is 34 percent. You take that and you figure,
of the $100,000 you're going to pay a third of it each
year. Your tax savings almost identically match your
first year's payments."
In fact, Hafford says, some customers opt for two-stage
deals, with part closing in Q4 of one year and the rest
closing in Q1 of the following year. The arrangement
allows for up to $200,000 of a project to come under
Section 179. -- S.B.
Right now, the program's growth is being driven by financing in the United
States, although the company is seeding markets worldwide. "The United
States is a bit more of a mature market for us, so it's on a real hockey-stick
[growth pattern] right now. The other markets usually take two to three
years to develop," Madison says. In the short term, executives expect
strong growth in the United States, he says. "Longer term is when
the other markets that we'll be adding will start to kick in. Ultimately,
financing originations will pretty much mirror Microsoft's new business."
Meanwhile, there's a lot of room in the program for new partners to come
aboard. While Madison wouldn't specify how many partner companies take
advantage of Microsoft Financing, he did provide a range: between 1,000
and 3,000. The addressable universe of partners who actually resell Microsoft
products in some capacity is probably somewhere between 200,000 to 300,000,
he says. In any case, Microsoft's goal is customer-focused. "We want
to see a financing offer for every customer," Madison says.
In addition to the extra money, Microsoft is ramping up the financing
department, which currently includes about 50 employees and is increasing
fast. That fact actually raises a concern. Partners currently engaged
with the program cite the can-do attitude and flexibility of Microsoft
employees as a huge factor in the program's value. Can Microsoft maintain
that ethos amid rapid growth?
Right now, the program's growth is being
driven by financing in the United States, although the company
is seeding markets worldwide.
Madison believes it can. "It's one of my big concerns, that we would
lose that level of interface. If anything, with the scaling up of the
business, we've actually gotten better," he says. He acknowledges
that with a relatively small team, Microsoft Financing has been able to
handpick employees. He knows the job falls to him to set standards at
his level that everybody adheres to as the staff gets larger.
Partners using the program have reason to hope the quality of people
in the Microsoft financing department stays high.
"The best client relationships we have are on those loans,"
says Thomas, of the TM Group. "There's no calling over a $40 invoice.
There's no arguing over an hour of time. It just goes into the loan payment
and they're happy. It improves the working relationship between us, the
customer and Microsoft."