Decision Support Analysis It's Time to Spend That Budget Money

Analysis of News Events
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A few years back, when IBM was financially and spiritually on the ropes, the company launched an advertising campaign that told existing and potential customers that there was no better time to buy from IBM. The campaign was successful, inasmuch as any advertising can be, in that it got a positive message out there about IBM.

As I write this, we are in the second half of 1999, and many companies have locked down their IT budgets and are allowing spending only for Y2K-related projects. The effect of these budget freezes on the major enterprise resource planning (ERP) software vendors has been dramatic and problematic. Many are seeing software license sales drop by 30 to 50 percent compared to last year—after having convinced Wall Street that such a slowdown would not happen. A few companies are making their numbers by jacking up fees for customizing and supporting their applications; in most cases, this has not been enough to offset license revenue declines. These application software vendors appear to be sitting on the sidelines, waiting for license sales to resume at their 25 to 30 percent growth rate in 2000, but the fact is that many are absolutely starving for license sales to keep their businesses operating and to pay their employees.

However, the one thing they don’t want to do is give potential customers the impression that they are hungry because that gives those customers negotiating leverage. Well, let me tell you. You have that leverage until the end of the year and maybe even into early 2000, and you would be foolish not to use it to the maximum advantage. There will never be a better time to buy application software than the last quarter of 1999. No one is saying that you have to install the software this year or even before next summer. But AS/400 shops could save themselves big bucks in the long run if they force vendors to compete aggressively against each other now.

So far, hardware vendors like IBM haven’t seen a big slowdown in sales resulting from Y2K budget crunches. (The AS/400 business was down 11 percent from 1998 for the first half of 1999, but that is probably not a Y2K problem.) Still, IBM is offering payment deferral plans to midrange customers just in case sales start drying up. The deal that will probably interest AS/400 customers the most was announced on August 4. The Millennium Bridge Deferral program offers midrange customers in the United States and Canada free payment deferrals for up to 150 days when they lease or finance a new AS/400 or RS/6000 server, any of IBM’s point-of-sale gear, or equipment from its Networking Hardware, Printing Systems, and Storage Systems divisions. Several different driving forces are

behind this deal. For one thing, IBM knows that many midrange shops simply don’t have the budget money left in 1999 to buy any new equipment, especially given the fact that many AS/400 shops bought excess processing and storage capacity in 1997 and 1998 to undertake their Y2K projects. And those that do have budget money left are hesitant to spend it on anything other than Y2K projects, for very sound political and economic reasons. No CIO or MIS manager wants to have to go back to his president or the proprietor to ask for more money to cover an emergency Y2K project after having spent lots of money on new equipment.

IBM is also interested in converting as many AS/400 shipments as possible into leased or financed machines. This allows IBM to book sales, yet spread its revenues out over three to five years. IBM doesn’t rent AS/400s anymore, at least not officially, but these kinds of leasing deals come to the same in the end.

Perhaps most significantly for IBM, which knows overall sales could dip in the fourth quarter, the Millennium Bridge deal gives IBM a chance to presell the first quarter and at least know ahead of time where it stands. The first quarter is not usually stellar, and this time around, IBM wants to limit the decline in sales as much as possible. Chris Whelan, director of customer financing for the Americas at IBM Global Financing, says that companies are starting to shift their budgeting from the traditional fourth quarter blitz that we have known for 20 years. These days, says Whelan, companies spend a big part of their budgets in the first half of the year, and when they want to implement a new project in the second half of the year—as a lot of companies do with e-business now—they don’t have the money. The Millennium Bridge Deferral program allows AS/400 customers who are keen on installing the latest kit for e-business modernization to start doing it now, rather than later, without impacting their 1999 budgets. IBM’s Global Financing arm is such a huge operation it is almost like a bank, and it is able to get the best interest rates in the world. So it doesn’t cost IBM much to be generous by giving customers free payment deferrals. Millennium Bridge Deferral leases and financing are available from IBM or Business Partners, depending on who you deal with. You can get more information on the program by emailing to This email address is being protected from spambots. You need JavaScript enabled to view it..

The one thing that AS/400 customers can’t buy under this program is IBM’s new Shark Enterprise Storage Servers, which were announced in late July. (For details on the Sharks, see “Midrange Insights: IBM Neglects the AS/400 with SAN Strategy,” MC, September 1999.) As part of the Shark announcement, IBM’s Storage Systems division and Global Financing put together a special worldwide financing payment deferral plan that gives customers who finance Shark arrays 110 days of deferred payments, which can stretch the budget until March 30, 2000.