The Other Shoe Drops on Microsoft Financing

One of the standard pieces of advice in helping partners weather this deep recession, from Redmond Channel Partner magazine and from around the industry, has been to encourage the channel to take advantage of vendor financing programs. Microsoft Financing had been among the most generous and attractive of those programs.

In dispensing this bit of wisdom, we've been sensitive to the fact that like credit card terms, the rules could change at any moment or the company backing Microsoft could make its credit requirements much tighter.

Well, the other shoe has dropped on Microsoft Financing. On May 20, Microsoft changed the terms of its financing program to require that 35 percent of any Microsoft-financed deal be for Microsoft software.

One of the main attractions of the program had been that with even a modest amount of Microsoft software, a partner could guide a customer to Microsoft Financing to fund a full deal that also included hardware, other software and partner services. One of the benefits of the approach, which Microsoft regularly extolled, was that bringing financing into the deal often made the deal much larger. When customers found they could pay for solutions out of operational expenditures rather than out of capital budgets, they'd often make larger commitments for solutions that could do everything the customer needed rather than most of it.

I asked Microsoft about the reasons behind the new 35 percent requirement, which Microsoft characterizes as a "policy clarification."

"This policy clarification of including Microsoft content in all financed originations may impact some customers, but in the aggregate, this will have little impact on the majority of the customers we serve. Microsoft Financing uses prudent business lending standards with terms and procedures that serve our shareholders and customers," a Microsoft spokesperson said in an e-mail statement.

In response to a request for a ballpark estimate of how many deals this would impact, Microsoft implied that far fewer than 10 percent of deals fail to meet the new bar. "Today over 90 percent of purchases done through Microsoft Financing include more than 50 percent Microsoft content," according to the spokesperson's statement.

One partner who regularly falls into that less than 35 percent category is Karl Palachuk, who called attention to the policy change in a post on his blog last week.

Palachuk, an SMB consultant and author, wrote that the change is a "deal killer" and said Microsoft has "responded to the credit crunch by destroying their own financing program."

Palachuk's blog includes the details of a recent, and typical, order, where the Microsoft end was about 20 percent.

I've got to say that at this point, I don't really see where the change helps Microsoft that much. Whether a deal includes 20 percent Microsoft software or 50 percent, a customer's creditworthiness determines the likelihood that a loan is going to be paid back. The amount of Microsoft software in the deal would have no relation to whether it's going to be paid back or not.

To me, this looks like a case of a Pyrrhic Victory for bean counters inside Microsoft who want to be able to point out how they're doing something to help cut costs. It's a false win because, if Microsoft's previous statements are to be believed, introducing financing actually leads to customers buying more products -- including more Microsoft products.

The loss to Microsoft will probably be too small for the company to notice. It's probably going to bring the most pain to those small partners who most needed the lifeline this program provided.

Is this change affecting you or changing the way you look at Microsoft Financing? Let me know at [email protected].

Posted by Scott Bekker on June 02, 2009