Should your Service Provider also be your Bank?

Each week TPI’s Financial Analysis Services Group will be “blogging about the bottom line.”  The group’s first guest blog comes from Tim Langley-Hawthorne, Director at TPI.

IT asset management is generally a pain. Most clients I’ve worked with struggle to do a good job at this basic task.  When considering IT outsourcing, the natural temptation for clients is to get out of the IT asset business, and have the service provider take over asset management and ownership responsibilities.

But the objective to clean house and transfer IT asset ownership to the service provider may be in conflict with the company desire to achieve ongoing financial savings from outsourcing.

Service providers are not banks. Simple economics suggests service providers are unlikely to finance IT assets cheaper than a financial institution. Their effective cost of funds charged for IT assets often resemble those of a “lender of last resort.” But a few service providers have close relationships with financial subsidiaries under the same corporate umbrella or external financial institutions, and desirable options may be available.

When considering IT asset strategies, companies sometimes ask the service provider to buy the existing IT assets and provide a one-time cash infusion to the company.  Caution also needs to be exercised here. Not only will a financial write-down be required for sold assets, but the company will also pay a healthy premium to cover the service providers’ capital costs.

But other factors influence IT asset ownership strategy, including the potential impact on provider service delivery, asset criticality to a company’s core business, service provider purchasing power, and upside or downside risk averseness for future asset price and performance improvements.

Given these circumstances, which I will elaborate on in the future, does it make sense for a service provider to also be a bank?