Tag Archives: Atlanta

Kabbage: Line-of-credit product can boost channel margins

Kabbage Inc., a fintech company based in Atlanta, is bringing its style of digital disruption to the IT channel.

The company’s newly launched channel venture lets partners offer their small-business customers a Kabbage line of credit. The company said its financing product, which provides small businesses with lines of credit up to $250,000, boosts partner margins and provides a recurring revenue stream. Fintechs such as Kabbage are challenging traditional financial services firms.

Kabbage provides upfront commissions to partners that include the offering as part of a customer sale. The line of credit may be used to finance any product or service the channel partner provides. Beyond the initial transaction, however, the small business may continue to use Kabbage financing for any business need.

Partners receive recurring revenue based on a customer’s continuing use of the line of credit. Kabbage pays partners every time a customer uses the line of credit for the lifetime of the customer.

Noel Hillman, head of sales at KabbageNoel Hillman

Initially, Kabbage has primarily targeted telecommunications and unified communications agents and master agents with the financing product. Noel Hillman, head of sales at Kabbage, said the telecom orientation stems from his experience as a channel executive with a collaboration vendor. But he noted the Kabbage approach to small-business financing can also work with other types of resellers and managed services providers.

“What every company is really looking for is a new distribution channel,” Hillman said. “The IT channel was a good fit for Kabbage.”

Kabbage line of credit: Business, channel benefits

Hillman said the financing product helps channel-partner customers, noting that every small business “faces working capital issues day in and day out.” For partners, Kabbage’s commission structure provides incentives to offer Kabbage financing as part of their regular sales cycle.

The commissions add margin to a deal, and the potential for additional margin stems from the customer’s ability to purchase products and services through the Kabbage line of credit that they would not have otherwise.

The IT channel was a good fit for Kabbage.
Noel Hillmanhead of sales at Kabbage

The financing can help partners improve services margins, in particular. Hillman said small businesses’ typical financing options usually don’t cover services and apply only to certain products. This situation compels the channel partner to compromise on services in order to make the deal. But the ability to apply the Kabbage line of credit to services, as well as products, keeps margins intact.

“We can allow that agent to keep the margin and offer more services to the end customers,” Hillman said.

In the IT channel, distributors have traditionally played a financing role. Hillman said Kabbage can provide an alternative to distributor financing, but can also supplement what distributors offer.

“We can enhance that financing … if [agents] want to offer more services,” he said.

In addition to small-business customers, channel partners can also obtain a Kabbage line of credit. Partners may need funds to support a business model transition or a new line of business.

Qualifying for credit

Small-business customers can qualify for Kabbage financing in about seven minutes, according to Hillman. The company uses integrations with Intuit’s QuickBooks accounting software and other financial applications to obtain a small business’s revenue and transaction data. The data is then loaded in Kabbage’s underwriting algorithm to determine the amount of credit for which the small business qualifies.

As of December 2017, the company had extended more than $4 billion in financing to small businesses.

“Our qualification process is extremely data-driven versus the old-school banking method,” Hillman said.

However, the finer points of financing arrangements will be left to Kabbage and not the channel partner.

“The way we set it up, we are handling the more difficult financial conversations that go along with the product,” Hillman explained, noting that agents can focus on the other products and services they offer customers.

On-premises pricing pushes Atlanta to Oracle ERP Cloud

The city of Atlanta is moving to Oracle’s full cloud for human resources, procurement and finance. To help win the deal, the city released eyebrow-raising cost estimates that show the city has little choice but to move to Oracle’s ERP/HCM Cloud platform.

Atlanta is a longtime Oracle user. Its last big ERP upgrade was around 2007. This time, it was planning on a hybrid cloud adoption, keeping some systems on premises and others in Oracle ERP Cloud. The city didn’t believe all of the Oracle ERP Cloud offerings were on par with the on-premises systems, hence the hybrid approach. This view changed as the planning progressed.

For Oracle, getting customers to migrate to its cloud platform is a top priority. But the financial incentives behind these deals are rarely disclosed, at least until Atlanta offered a glimpse at some of the cost estimates.

The Atlanta City Council finance committee was shown a series of slides that sketched out the financial case for a full cloud approach. Officials were told that the 10-year total cost of ownership difference between Oracle’s E-Business Suite (EBS)/HCM Cloud and Oracle’s full ERP/HCM Cloud was $26 million. That’s how much more the city would spend over a 10-year period if it went with a hybrid approach.

Oracle’s licensing terms between the two platforms were starkly different. Under the hybrid approach, the annual licensing would see a “4% increase per year for EBS/HCM Cloud hybrid (until year 10) vs. 0% increase until year 5” for the ERP Cloud. That full ERP Cloud saw a one-time 3% increase in year six over the 10-year agreement.

Analysts and consultants who have seen the slides say there’s not enough information to tell, exactly, how these estimates were calculated. However, the differences in licensing costs between hybrid, on-premises and full cloud ERP delivers a clear message.

“I assumed that this was Oracle’s way of financially motivating the decision they wanted,” said Marc Tanowitz, a managing director at Pace Harmon, a management consultancy that advises firms making similar decisions.

The Atlanta mayor’s office declined to make an official available for an interview or to answer written questions. A spokeswoman said the city would not comment. In addition, Oracle said it couldn’t discuss a specific customer agreement.

At the start of this project, Oracle’s HCM Cloud was described by Atlanta officials as mature and ready for full cloud deployment. The city initially concluded that there were functionality gaps in the finance system, and it intended to keep Oracle’s R12 financials on premises. That changed.

“Over the last six to eight months, Oracle has released new functionality to where we feel like those gaps will be addressed,” said John Gaffney, the city’s deputy chief financial officer, according to a video — discussion at the Oct. 25 meeting begins at about 2:17 in the video — of a recent city council finance meeting. That meant recommending a full cloud option.

Atlanta City Council members at the meeting didn’t probe the licensing difference. Gaffney, in presenting the savings, told them that “you’ve got lower costs that are primarily driven by your subscription cost being lower. You also don’t have to pay any hosting fees.”

Tanowitz said there were some things about Atlanta’s Oracle ERP Cloud project that were clear; the apparent 10-year agreement with Atlanta, for instance. Vendors have generally been seeking longer terms.

“That piece of it didn’t surprise us,” he said.

The first-year implementation cost for hybrid and full Oracle ERP Cloud were roughly equal, at about $19 million. That figure also wasn’t surprising to Tanowitz because there is a cost to migration. But Tanowitz said he struggles to understand why the on-premises deployment is escalating in cost faster than the full Oracle ERP Cloud deployment.

“If you think about the cloud cost, what are you paying for in a cloud subscription? You’re paying for some intellectual property and you’re paying for some hosting,” said Tanowitz. “That’s what’s under that number, if you peel it apart.”

“Why would an environment that I’m hosting on my own — presumably with the EBS deal — be going up at this rate?” he asked.

There has been a long-standing debate in IT about whether on premises is less costly than full cloud approaches. Frank Scavo, president of Computer Economics, a research firm, said the decision on these approaches can go either way.

“If the data center is underutilized, adding another application may not add much cost,” he said. “But if I need to build a new data center or add significant capacity, it will be much more costly. There is no right answer.”