Power Tools 1993 November

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1. Financing Is a "Hot Button" in the Executive Suite A New Approach Senior managers who will be decision makers for multi-million dollar corporate systems have a different perspective than MIS directors. Both are concerned with reducing expenses and increasing the return on IT strategies, but CEO/CFOs will have little interest in technical benchmarks and a very real interest in whether the vendor can perform as a business partner. This requires a fundamental change in HP's selling strategy. Rather than using financing to close business, HP's financing capabilities need to be asserted from beginning to end. If it isn't, prospects will assume in the back of their minds that a shift to HP will disrupt the customized financial arrangements they have spent years developing for their big systems and a major barrier will remain in your way. The Datacenter Is a Cost Center The corporate datacenter is generally a very significant part of the overhead costs of any enterprise. This cost is part of the General and Administrative (G&A) account of an enterprise's income statement. As manager of a highly visible cost center, the CIO (VP of MIS) normally reports directly to the CFO (Chief Financial Officer) or VP of Finance. It is the CFO's job to minimize the costs of running the enterprise and to reduce the assets required. So a high-end solution must be "sold" to the CFO. What this means to you... As part of your presentation, you need to relate your solution to the CEO/CFO's financial focus. The CIO will be relieved to see that you can cover this ground with senior management. Selling with a Financial Focus Of course, you'll begin with the benefits of moving to an HP solution, but a discussion of how HP addresses the financial issues of the decision is essential. It demonstrates HP's position as a strategic partner. This discussion will never follow a single formula. By understanding why CEO/CFOs depend upon financing and how they use it, you will be prepared to create a presentation that matches your prospect's needs. Don't hesitate to involve your Sales Finance rep for help. The CEO/CFO's Perspective The most significant factor to remember about CEO/CFOs is that financial -- rather than technical -- performance is their focus. Their stockholders measure them by their success in driving the organization as a business. Therefore, they are managing a highly visible cost center like the datacenter to the financial statement. And they have become well-educated in how financing can help them manage their costs. Keep in mind that IBM and other vendors have been using financing for years to create a very secure cocoon for them. While you may have an impressive price/performance story to tell, there are strong financial reasons for not disrupting their existing plan. Here are some primary issues your prospect is considering when you propose a new alternative for the datacenter: Issue #1: Leasing as a Debt Instrument Leasing datacenter systems is one of the least onerous ways for a corporation to borrow. Because the lease is a form of debt that is backed by a tangible asset (the computer), CFOs can get a lower rate than is charged for other debt instruments, such as unsecured revolving lines of credit. And lessors only put limited restrictions on what the corporation may do with the computer, not covenants on how the business must be run to avoid default on the debt. CFOs therefore have a strong interest in leasing programs as part of their debt management strategy. Issue #2: The Ability to Smooth Financial Operations Enterprise revenues and costs fluctuate quarterly. But CFOs are chartered to avoid any surprises or large swings in earnings. Their CEO puts a premium on consistency and rewards managers that have consistent positive performance. So, in proposing a major investment, your strongest approach is to propose a strategy for smoothing the financial impact. Especially when it is remembered that many prospects will want to run a new system in parallel to the current equipment (to ensure success). Financing offers a way to ease this impact through "stepped" and/or deferred payments. Stepped payments are scheduled to start low and are then graduated, once the new acquisition is "paying its way." Experienced managers also know that when earnings are unexpectedly good the enterprise may want to upgrade their solution or add peripherals and/or satellite systems. Your prospects need to know that these activities can be accomplished by HP and quarterly earnings can be kept smooth. Through a full-powered HP Financing program. Issue #3: Financial Flexibility As a Strategy for Growth While an HP high-end system is not a mainframe, many datacenter executives will expect to manage it the same way they would a traditional mainframe. This means that they would start with as small a core system as possible and make a major upgrade to it every year. For example, IBM taught them to install an ES/9000 system in Year 1 then, in Year 2, they would add disk drive banks to handle all the strain put on the system by DB2 in Year 3, an extra 128 MB of main memory would be added Year 4 would require a CPU upgrade and Year 5 would include the installation of a new version of the operating system (not a trivial task in the mainframe world). This is the "annuity" strategy IBM uses to encourage its customers to invest more every year. Of course, HP Financing gives you a tool for presenting a flexible financing program that adopts this upgrade strategy. Your customer may begin by leasing a high-end corporate system and several smaller distributed systems that are networked to the HP corporate system, and as more distributed systems are added, they can simply be added to an HP lease. This makes the acquisition process much easier for both the customer and you. While datacenter managers know that IBM will do this through their history of working with IBM, they often do not know that HP provides this flexibility. You need to inform them of this capability at the outset of the sales process. And be advised that traditional mainframe leases only allow add-ons and upgrades to the leased mainframe. HP leases have added flexibility. Be sure to clarify that HP includes the ability to add new systems and independent software to a lease in a typical distributed environment. Issue #4: Strengthening the Balance Sheet Consider, too, that while the enterprise has full use of a leased system(s), the asset value of the multi-million dollar datacenter may not be on the balance sheet, because the enterprise does not own the system. This is called commonly "off-balance sheet financing." And often the only place the liability of owing money on the datacenter appears in a note at the end of the financial statement which lists total minimum lease payments by year for the next five (5) years. With this asset off the balance sheet, the corporation's return on assets (ROA), a major financial indicator of performance, will be higher. The corporation has eliminated a significant asset (its multi-million dollar datacenter equipment) from the asset portion of the ROA formula. The bottom line here is that the corporation's financial returns will look much better by moving as many assets as possible, including mainframe-priced computers, off the balance sheet. HP Financing offers leases that can qualify for this accounting treatment. Your Sales Finance rep will help you with this recommendation. This issue becomes more complex when evaluating whether to "bundle in" software, implementation, and maintenance services. Depending upon the enterprise's financial position, the CFO may wish to have the whole package leased, or may wish to pay for the services outright and expense them when incurred. By examining an enterprise's balance sheet and income statement, your Sales Finance rep can advise you what your prospect is most likely to be interested in doing. If, for instance, the enterprise is highly profitable and has a high tax rate, they are most likely going to want to write off as many items associated with the high-end implementation as possible -- and as quickly as possible. Therefore, they may only want to lease the hardware. Issue #5: Adapting to Budget Cycles One of the most frustrating aspects of selling a large solution is to work up the ladder ... and then have your proposal rejected by the CFO or CIO, who states that an acquisition can't be considered because it will disrupt the current fiscal year's IT budget. CFOs will attempt to block any unanticipated hits to their operational budget plans, even if the proposed return on an investment meets all the enterprise's capital return rates. They have often staked years in developing their complex plans and this is closer to their interests than "experimenting with the datacenter." This frustration is avoided by indicating up front how HP's financing payments can be deferred until the next fiscal year. Your prospect can install now and not receive an invoice for six months.* Issue #6: Assumptions about IBM vs. HP One of the most important ways in which CFOs measure IS management is by the monthly cost of operating the datacenter. IBM and other mainframe vendors have spent years developing their marketing strategies to adapt to this monthly structure. IBM offers leases for the hardware, monthly license charges for software, and of course, monthly maintenance charges. And accounts carefully track their monthly staffing and overhead costs to run their datacenter systems. When you are proposing an HP alternative to a datacenter manager, he/she will often be more interested in the monthly cost than the list price. A veteran IT manager may hypothesize: HP may have a lower list price than, say, an ES/9000, but this does not mean that the monthly cost will be lower. If IBM Credit Corp (ICC) can charge a lower interest rate than HP Financing (after all, IBM should be able to obtain capital at one of the lowest rates in the world) and/or the ES/9000 will have a higher projected residual value 3-5 years out (a very real probability), then the IBM ES/9000 could have a lower monthly charge. This is unlikely but your prospect will be looking for "gotchas". Your Sales Finance rep can cover this concern by converting the quote into a monthly payment that can be compared to your prospect's current costs. Be sure to include IBM's monthly software, maintenance facility and personnel charges in this comparison. * Subject to credit approval. How to Use Financing Phasing In a High-End Solution Tampering with established strategies will make corporate managers nervous. IT managers will want time to fully implement an HP high-end systems and if they are intending to replace current mainframe applications with HP systems, they will likely want to run the older mainframe and the new HP system in parallel, until they are satisfied that the new system works. Also, in the first years of HP's entry into high-end products, few systems may be sold to mainframe datacenters as stand-alone systems. At the very least, the installation will require new applications software (some of it custom-written) and data conversion services. More typically, HP will be considered for a senior system with multiple distributed/junior/satellite (the customer will pick the right adjective) systems connected to it as part of an enterprise network. The key point is that HP can provide the flexibility to match payments to your customer's implementation plan. Through "step payments," for example, expenses can be gradually ramped up as your customer ramps up production applications. By the time the account is paying full monthly payments, the system can be "paying its own way." Overcoming the Depreciation Issue Corporate executives abhor one fact above all others about technology. They object to assuming large costs for assets that may become very dated over a few short years. Mainframe systems offer a better picture for them, on this level. When they compare mid-range and mainframe systems, they look at the rates of aging and remember that the IRS allows the same taxable depreciation life for both -- regardless of real technological depreciation. For die-hard mainframe supporters, this is a reason to stay put: the asset value lasts longer. Of course, by leasing with HP, this issue goes away. There is no reason to care how rapidly the equipment depreciates because HP owns it. Staying on top of the performance curve remains the focus. When a Mainframe Lease Is Less Expensive When a prospect says it has no interest in HP's high-end because the mainframe lease cost is minimal or the mainframe is already paid off, remember that the software licensing and mainframe maintenance will more than justify the switch. The point here is to do a comprehensive systems-to-systems cost comparison on a monthly operating cost basis. If you cannot get the prospect to agree to doing a comprehensive cost comparison, you should at least suggest that the prospect compare HP's monthly financing charge versus the mainframe's monthly software licensing charges alone. You win big-time here and it will have an impact on the senior financial managers of the enterprise. Handling the Rate Question HP's rate will not always be the lowest. HP will always be competitive but, when IBM and independent lessors want a customer's business badly enough, they may undercut our interest rates or simply project a higher residual value during the lease period. Again, the key is to focus attention upon the total monthly payment. When the whole package is added together, HP will inevitably have lower costs/month than a mainframe solution. Generally, HP's flexibility will be more important to prospects than a modest difference in rate. The ability to structure payments and the expense of paying penalty fees for upgrading and adding on, for example, can change the actual rate of an independent lessor. (See Hertz example below.) 2. When to Discuss Financing While HP Financing is taken for granted by many HP sales reps, it is often unknown to datacenter managers. In contrast, IBM Credit Corporation and independent mainframe lessors such as Comdisco are well known. Hence, IT executives perceive financial flexibility is a given in mainframe marketing. When, therefore, is the most advantageous time for HP reps to present financing as a layer of the HP solution? ASAP It should be clear from the previous discussion that financing is not a secondary element of a corporate manager's concerns. It is a cornerstone of a strategic partnership. Therefore, HP's highly competitive financing program should be briefly introduced in your initial meetings with senior executives. These executives may never ask about HP's financing capabilities because they may incorrectly assume that as a "printer, calculator, and small business computer" company, HP does not have a comprehensive financing arm. But when you explain that HP has capabilities that are comparable to IBM Credit Corp, you create an important new level of comfort. One important way to indicate HP's integrated technical and financial solution is to include a monthly payment cost whenever you discuss a cost. For example, present a high-end solution worth $5 million as costing $100,200 per month. Often Until you know an account extremely well or until you know who all the participants are that influence the decision-making process, HP's financial services should be introduced early and often. For example, senior mainframe bigots understand how leases can lock their mainframes into their datacenters. They will use their current lease as justification for not even bothering to evaluate HP's proposal. By briefly describing HP Financing's "roll-over" capability as part of your overview presentation, this objection (which they will never state to you) can be neutralized up front. Remember, too, that capital appropriation requests are generally prepared by the most junior staff members for review by their seniors. They also need to know about your financing options. A simple tip: Industry consultants suggest that until you are absolutely sure who is involved in the acquisition decision and what their roles really are, you need to take the time to describe HP Financing in any meeting as part of the sales process and have your HP Sales Finance rep meet with anyone who has an interest in the HP Financing options available. 3. How Financing Neutralizes What the Mainframe Bigots Say Behind Closed Doors Aberdeen Group has identified some key objections that are being raised by mainframe die-hards. Even if the following points aren't voiced in your customer meetings, you will want to probe and address them up front, so they don't get in your way. "We're already locked into our mainframe lease." This is the argument most often used. Big Blue die-hards, especially, will assure themselves and their management that applications cannot be moved over to HP until the mainframe lease is due for renewal. And, at the same time, they will upgrade the mainframe every year to meet new capacity requirements. When it is time for the lease to expire, these mainframe proponents will then insist that it is less expensive to renew the lease (after all, the mainframe has been upgraded and the application meets the enterprise's needs) than to transfer to HP. In some cases, HP Financing can help you overturn this argument with "roll-over financing." By helping to fund outstanding liabilities under the existing mainframe lease and rolling them into new HP lease, HP effectively unlocks the enterprise from its mainframe lease. It need not upgrade the mainframe and can begin the migration to HP systems without incurring a financial penalty. (Their monthly maintenance is eliminated and their hardware is returned to the vendor or bought out and sold on the open market.) Of course, this approach also makes a strong statement about HP's strategic commitment to high-end customers. "Forget HP, let's just add used mainframes for more processing power." There is a vigorous market for used mainframes in the U.S. Many smaller companies have had a strategy of buying the most power they can for $1 million on the used market every 3-5 years. Now, larger enterprises are also buying used mainframes as an alternative to cut costs without rewriting their applications on midrange systems. The advantage is that their current software will run unchanged on these used systems. The disadvantage is that even if the mainframe price is insignificant, the software licensing and maintenance charges are not. In many used mainframe installations, the total monthly hardware charges are less than 20% for the system and 80% plus for the software licenses and maintenance. Mainframe advocates will ask HP to bid a new high-end system against a used IBM mainframe. You will lose if you follow this agenda: the used mainframe will provide better price/performance simply because the price will be so low. Your best strategy is to compare total monthly charges, including the hardware lease (HP will be higher), software (HP will be significantly lower), and maintenance (HP will be immensely lower). If the numbers are run accurately, the total should show HP to be much lower than the used mainframe. "HP's system will be worth ten cents on the dollar in three years." Mainframe advocates consistently bash traditional midrange systems for losing their value so rapidly. After all, the computer is a very large asset and the more rapidly an asset depreciates, the less worthwhile it is to own. Even if it is on a lease, the perception remains that a mainframe is somehow more valuable. Of course, the reason midrange computer values drop more rapidly than mainframes is that midrange systems are improving performance and price/performance by approximately 35% per year. And suppliers such as HP will revamp their entire product line every eighteen months. IBM mainframe price/performance is only improving at 10% per year new processors with faster clock speeds are introduced approximately every eighteen months, and the product line is significantly upgraded with new generations of processors only once every five years. The appropriate response here is that (1) HP hopes to drop residual values even faster in the future by improving technology for customers, but (2), customers of HP Financing have no depreciation risk. By leasing their systems, customers shift the risk of falling values back to HP. "Comdisco and the other independent lessors provide competition to IBM - HP has none." Many IT executives have learned that they can cut a better deal with the manufacturer on pricing through the competition and added services provided by independent lessors. The HP marketplace does not have the same number of independent lessors that the $10 billion mainframe market does. So they say this is further reason to stay put. The truth is HP does have competition from Comdisco, Bell Atlantic, and other well-known lessors. In fact, Comdisco and other independent lessors are specifically targeting HP systems to diversify their IBM-based portfolio with "quality collateral." As a result, HP Financing has to monitor its competition carefully. The leasing marketplace is highly competitive at all levels. The rate for a less expensive system will always be somewhat higher than the rate for a mainframe, but when the focus is upon the monthly payment, including operating systems, maintenance, etc., which is the actual cost to the lessee, HP's offering is superior. 4. A "One-Minute Sale" To position HP as a strategic partner, here is a brief outline for presenting HP's financial services to your customers: Point #1 -- HP Financing's purpose is simple: To provide flexible alternatives for acquiring HP products. Point #2 -- HP addresses the financial needs of high-end customers. 1. Phasing in an HP solution so you can run in parallel without full parallel expenses, 2. Financing with the manufacturer to ensure smooth implementation, and 3. Fitting the acquisition to your financial plans and revenue stream. Point #3 -- How does HP's financial flexibility cover the needs of high-end decision makers? o "Stepped payments" to phase in an HP solution. o "Deferred payments" to accommodate funding cycles. o "Roll-over financing" to exit old non-HP lease. o "Bundled financing" to include non-HP software, etc. o "Off-balance sheet financing" to minimize impact and o Easy upgrading/adding-on to smooth future growth. Point #4 -- HP Financing has the size, scope, and experience to meet your needs? o The largest lessor of HP products in the world. o Providing financial services since 1972. o Over $1 billion in assets leased. o Using HP's low cost of funds to offer competitive rates. o Worldwide organization --- "global leases" can be tailored for multinational customers. o Remarketing organization to help you dispose of equipment. Point #5 -- You work directly with HP's financial consultants. o HP Financing reps are located around the globe to tailor a plan that will achieve your best use of funds. 5. How HP Financing Compares The following table was prepared by a leading industry consultant: ______________________________________________________________________ Rates Flexibility Added Value ______________________________________________________________________ HP Low Good Good ICC Lowest Poor Good Comdisco Low Good Good GECC High Poor Poor AT&T Low Good Good ______________________________________________________________________ Appendix A Closer Look at HP Financing I. HP Financing Plans High-end customers will be interested in two categories of financing plans. HP Financing offers both: Lease/Rental Plan This plan can be contracted as either a lease or a rental. Generally this plan is for customers who expect to return their equipment at the end of term. Other than length of term, this plan is identical whether requested as a lease or a rental (rental terms run from 12 - 36 months). At the end of term, customers have the option to: renew, purchase or return the equipment. This plan can be tailored to provide "off-balance sheet financing." 12 - 60 month terms Installment Plan This plan allows the cost of acquiring the equipment to be spread over time (like a loan). Title passes at the start of the contract.12-60 month terms Qualified software and complementary non-HP hardware can be bundled into either plan. II. Why Flexibility Is Often More Important Than Rate ... While HP's rates are competitive, to experienced lessees a lease rate is usually a lower priority than flexibility for many customers. Flexibility can be a more significant savings than a low rate because flexible terms, payment structures, upgrade/add-on conditions, etc. allow customers to respond to changing economic and competitive pressures. Hertz Example The Situation Hertz Corporation needed to consolidate their European and U.S. computer processing into a worldwide datacenter in Oklahoma City (U.S.). Hertz had five 960s and five 955s on lease with HP Financing. To consolidate, Hertz proposed to upgrade five 960s and one 955 to 980s and to "let out" four 955s of their leases in the U.K. Hertz had budgeted sufficient funds to cover payments for the four 955s and the "let outs" from the U.K. leases, but they had no funds for the 980 upgrades. HP's Solution To manage this shortfall, HP Financing reduced payments on the CPUs to be upgraded, and on peripherals that would run on the 980s... by moving the current equipment on 22 different leases to one new 48-month lease. By also putting the new 980 upgrades on a 48-month lease, the payment stream was stretched out sufficiently to accommodate the budget. In short, HP provided flexibility to re-structure the payment stream so that critical upgrades could be incorporated into an extended payment period. III. Compensation for HP Sales Reps HP Sales Reps receive full (100%) commission and quota for financed transactions. See your manager to learn how and when this commission is paid. Remember, too, that leasing allows you to sell twice. When your customer comes to the end of the lease term, you have an immediate entree to discuss an upgrade. One sale can mean many, once a contract is in place. IV. Sales Finance Organization Sales Finance Reps Sales Finance reps carry quota and are located in sales offices throughout the world. Worldwide Directory Office Sales Finance Rep Telnet United States Burlington Peter Eichling 221-5150 Cheri Wenzel 221-5078 Stamford Chris Van Collie 325-5659 Piscataway Chris Carroll 562-6153 Valley Forge Avonte Cunningham 666-2046 Rockville Vicki Zagaria 258-2316 Rochester Rob DiLuglio 264-4031 Atlanta Liz Olinde 980-7694 Cassandra Hollis 980-7113 Greensboro Steve Green 668-1708 Ft. Lauderdale Frank Deriso 938-2247 Dallas Mark Grant 830-8908 Houston Patricia Raymond 439-5441 Yelba Saettone 439-5380 Las Colinas Janette Kirbie 830-8779 Rolling Meadows Cynthia Massey 255-2622 Naperville Jim Thelen 357-2233 Dayton Cindy Johnson 433-0288 Indianapolis Joe Hunkler 844-0764 St. Paul Bruce Kline 641-9772 Novi David Barnes 349-2349 Cleveland Jean Cotugno 243-0242 St. Louis Ron Duncan 542-1526 Phoenix Doug Cassell 273-8048 Fullerton Mark Martin 758-5648 Bellevue Catherine Moore 644-3345 Engelwood Robert Vila 649-5493 Santa Clara Hobey Landreth 988-7462 Manchester Bob Kirtley 337-8230 Calabasas Anne Weidenweber 880-3475 Pleasanton Greg Leong 460-1597 Foster City Scott Sanders 378-8442 United Kingdom Manchester Paul Atherton 495.5192 Nicky Bishell 495.5193 Bracknell Joanne Dodsworth 36.1631 Dudley Feather 36.1633 Nicki Nonini 36.1632 Germany Hamburg Peter Beecken 638.08.363 Ingo Kraus 638.08.267 Ratingen Ulrich Breer 494.203 Bad Homburg Emilie Reubelt 16.1103 Beobligen Martin Probst 14.6404 Munich Ralf-Christian Kramer 614.12.236 France Villepente Agnes Charles 4591.6817 Champerret Lyon Bruno Lenormand 7229.3240 Les Ulis Nadine Marande 6982.6197 Evry Pascal Poupon 6991.8088 Les Ulis 6982.6509 Italy Rome Alessandro Iacono 548.3234 Milan Paolo Magni 921.991 European Multicountry Region Amsterdam Erik De Heus 547.6911 Edward Van-Der Jagt Hans Ruck Ids Sigbrandig Stockholm Kjell Linstrom 750.2000 Goteburg Jan Larsed 89.1000 Madrid Jose-Luis Parga 637.0011 Barcelona Joan Duarri 401.9100 Wieden Clemens Neese 312.111 Brussels Michel Moens 761.3111 Copenhagen Jan Olsen 81.721 Oslo Espen Ludvigsen 246.090 Vienna Suzanne Busch 222.500 ECE/USSR (Vienna) Kees-Jan Bus 222.500 Australia Melbourne Ian Williams Hong Kong Hong Kong Christina Yuen 848-7777 Republic of China Hong Kong Paul Lin 848-7777 Singapore Singapore Tian Chong Ng 520-6360 Associated files: none Financing for the High End Sales Guide