“Financing software means you have to finance the trends; you have to provide finance models for where you think the industry is going,” says Christian Bernhard, head of new relationship development at GE Capital and a specialist in ICT vendor finance.

Christian Bernhard

Bernhard believes the market for software finance is currently in a “transitional phase” defined by several nascent trends, and says the current model for the sector will change quickly as these trends become universal.

While asset finance companies have arguably been funding software for as long as they have been involved in IT assets, at the moment the market for software finance is relatively small within European leasing.

“In EMEA, less than 5% of all software licenses purchased by enterprises are financed,” says Jochem Verhoeven, global key account manager for software financing with BNP Paribas Leasing Solutions.

“The reason for this low penetration,” he adds, “may be the relative lack of awareness among customers and software producers of the advantages of software financing until recently.

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“The myth that the financing, and leasing in particular, of software is complex and may have a negative influence on the producer’s revenue recognition – not to mention producing legal obstacles in the licensing chain – is still alive,” Verhoeven says.

At present, Bernhard says, software finance providers largely sell standalone software leases for business-critical enterprise resource planning systems (ERPs) for example word processing, spreadsheet and accounting systems. This, he says, is key to the sector’s potential from a risk perspective because the end user is unlikely to fail to pay for a business-critical resource.

That could all be about change, however.

Bernhard identifies three significant developments in software usage, as well as subsequent changes to the requirements and expectations from businesses, which he believes will make the current state of affairs short-lived.

Software, says Bernhard, will play a greater role in the management of huge volumes of data. It will be developed to manage communication between multiple hardware devices used by employees across global industries, and finally, the concept of software as a service (SaaS) – the much-vaunted cloud – will grow to become the norm.

“The message is,” says Bernhard, “software in the future will go above and beyond what we know it can do right now.”

What’s more, he says, finance will play a central role in bringing on these fundamental changes.

The requirements of data management and inter-device communication are, says Bernhard, linked together and part of the unstoppable march of technology.

“The time when you might have two laptops and they wouldn’t speak to each other is over,” he says.

Add to that the fact that today two mobile devices are sold for every one desktop PC, a ratio which Bernhard believes will only grow more weighted toward mobile technology, and there is a definite need for software to make cohesive work on multiple machines feasible.

“Today everybody has a mobile, a laptop, a PC and a tablet and everyone can use them for work purposes,” says Bernhard, echoing what Artti Aurasmaa of pioneering asset lifecycle management firm 3-Step IT calls the ‘consumerisation’ of business IT. 

“Consequent from the sheer number of mobile devices there is a requirement to manage the interaction between these tools – and that must be done by software.”

On top of that need, the proliferation of mobile devices for work generates a huge amount of data, all of which has to be managed and monitored by software systems.

“I’d say there is a clear correlation between the number of devices out there being used and producing something and the software requirement needed to manage the output,” says Bernhard.

GE Capital believes the potential application for this kind of development is significant across several industries and sectors and Bernhard gives the example of healthcare to illustrate its application.

He says that in the healthcare industry – where a huge amount of complex data needs to be accessible to several classes of healthcare professionals – doctors and nurses could soon access the necessary data on the ward floor with a tablet computer and access it again on an office desktop PC. The opportunity for data management and inter-device software here is plain.

Software Investment GE Captial

Companies in the healthcare sector, he reasons, will need that software – meaning it will become the business critical element of their ICT package, and thus presenting a need for finance.

To further elucidate, Bernhard hypothesises a large telecoms deal which is 60% hardware and 40% software: “If, after three years, the company expands and hires more employees who work from home using their own mobile devices, it is further software finance they will need – not hardware,” he says.

“The explosion in devices has an affect on software finance,” he concludes.

The third major development in software is one which has been on the horizon for some time and one which Bernhard says is set to grow significantly this year: the cloud.

The global SaaS market is expected to become a $22.1bn (€17.5bn) market in the next three years, GE predicts.

SaaS, the concept of users paying for software on a pay-per-usage basis and accessing it remotely through the web, is not new. However, with long-predicted levels of growth now coming to fruition, the ICT leasing sector needs to make sure its penetration into the new market develops too, says Bernhard.

Financing SaaS, as opposed to pure software, requires a different approach to vendor relationships, however.

“When you talk about financing SaaS you also need to talk about service providers [rather than the software producers] because in SaaS the asset is not with the end user but with the service provider.

Jochem Verhoeven

“We need, therefore, to shift the way we have operated so far (through a vendor and then customer) to work together with the vendor so they can offer this service to the customer,” says Bernhard.

Bernhard makes the comparison between this vendor model and leasing a fleet of vehicles to a rental company, but highlights the key difference: in fleet leasing there is a physical asset but in SaaS the asset is intangible, and a service.

“We have software as a service – four words – and just a few years ago, two of them would have made every leasing company very nervous. That has changed,” says Bernhard.

The most significant changes, he says, are in understanding risk position.

The risk on financing SaaS software, as with most assets and lessees, depends on the credit profile of the holder of the asset – in this case, the service provider. In addition, with SaaS, the lessor must consider not just the service provider but their relationship with the end user.

“It makes it more complex because you still have to understand who is the customer of my customer and what kind of contracts will they have. Could they all stop paying?”

Regardless of the added complexity involved in risk considerations, given that the cloud management software market will grow 60% this year after growing 90% in 2011 and more than 100% in 2010, GE Capital feels it cannot ignore the opportunity to get involved.

GE Capital’s history as a vendor finance company is an advantage in this regard, suggests Bernhard, because it has prior relationships with most of the service providers it will deal with as SaaS customers.

Bernhard also predicts the trend towards a service model is a significant opportunity for software producers, or original equipment manufacturers (OEMs), as the organisation of sales channels will change.

“An OEM has two sales channel options, either direct for very large accounts or indirect for what OEMs calls mid-market”, says Bernhard.

Currently, with “classic” software leasing, OEMs have more success through direct sales because they have still a direct influence on the sales process, while indirect resellers remain removed and will generally sell products as they wish.

“Going indirect has other benefits but I’d say there is a higher success rate in finance terms in the direct space than in the indirect space,” adds Bernhard.

The IT vendor specialist believes this pattern will change with SaaS because it will not be the OEMs themselves who deliver the product but the indirect service providers.

“With SaaS someone has to deliver the service and that is not something, typically, the OEM does. As such, the end-product service will be offered by the company in the direct channel they work with and they will be a position where they need to offer something to their customers,” therefore generating more finance sales, says Bernhard.

This shift has a secondary benefit for software leasing penetration too, as the income in SaaS tends not to be a fixed upfront payment but payment per use. This means reseller intermediaries are unlikely to have the cash flow to buy whole software packages from OEMs, and will likely turn to leasing providers for finance, says Bernhard.

To pull back from the future, however, there is still a significant market for financing standard ERP operating systems to be exploited in Europe, a market which Bernhard believes will remain “the backbone” of software leasing in the future.

For BNP Paribas Leasing Solutions’ Verhoeven, software finance is a core part of his bank’s IT business arm Technology Solutions (TS) and he is positive about the potential for the leasing penetration to grow because it is a sales driver for software OEMs.

BNP Paribas Leasing Solutions has offered a finance package on software since the 1980s, says Verhoeven, and TS is currently active in small, medium and large-ticket markets in Europe and through the lessor’s subsidiaries in India and the US, as well as through vendor agreements with a majority of the top 10 global software producers.

Over that period, and particularly over the last five years, Verhoeven says more and more end-users and software producers have become aware of the benefits of financing their software.

“For the software producer, financing is a tool which can significantly reduce the DSO [days of sales outstanding] to add more products to the purchase order and reduce the level of discount. For the customer, financing helps to optimise IT needs in relation to annual budgets,” he says.

However, like Bernhard, who says software finance will see an increase in penetration as customers, lessors and producers get better educated, Verhoeven says the potential for growth relies on the financing being involved in the software sales process from the outset and being viewed as a sale aid.

So before lessors turn to the cloud for future revenue there is still much to be gained from the current software market so long as potential lessees know the value of finance.