Blue Light Special

It was just a matter of time before businesses started to respond to the financial meltdown with some creativity, and as usual, the biggest advantages will go to the early movers. I have been noodling on several convergent ideas recently, and they seem to be taking shape in the marketplace, but in some quarters where you might not expect innovation or creativity.

Exhibit one is the return of layaway in retail. People of a certain age and background, myself included, can remember perhaps only vaguely the concept of buying something at a retail store and leaving it there while you paid for it over a few months. Layaway was replaced first by store credit cards and then by general-purpose credit cards — more on that momentarily.

Back in the day, most people got paid weekly and in cash, and it was pretty common practice to march down main street with cash in hand to pay various bills. I can remember my mom trundling us downtown for errands like this to pay electricity (she still called it the “light bill”), phone and the mortgage, which was held at the corner bank. There were various and sundry other stops too, which often included the local retailer who was holding something special.

Finance by Any Other Name

In the wake of too many supposed adults pretending that real money was the Monopoly variety, we find ourselves again tapping into this source of financing by other means. Last month, Kmart reintroduced layaway to its stores just in time for the holiday shopping season. Target and Wal-Mart said they have no plans to follow suit, but I wonder which chain will have the best numbers in what is shaping up as a tough season.

Layaway, or as I like to call it, “finance by other means,” is a perfectly reasonable response to tight credit, and it offers vendors and customers several advantages. For customers, there is the obvious: the ability to make a purchase that would otherwise not be possible assuming the credit cards are maxed or you just want to avoid debt, a good idea these days.

For vendors though, the advantages are more numerous. For instance, self-financing might be more profitable in the long run, and it certainly keeps the cash flowing — perhaps trickling — when it could easily stop altogether. Most importantly to me, though, is this: When credit cards began to replace layaway, customers discovered their credit was good anywhere, and the bonds between vendor and customer that were once strengthened by layaway evaporated. Vendors of all stripes have searched a long time for something as effective at building customer loyalty, and they have come up short.

Managing the Process

A version of finance by other means took root in the technology markets about 10 years ago. It was spawned by the idea that you could purchase software — and the infrastructure that backs it up — by the month rather than through a massive license.

In good times, on-demand (aka “SaaS” — Software as a Service) vendors touted their ease of use, ubiquitous access and simplicity of installation as their drawing cards, but I am betting the sector will be all over the low-cost aspect too very shortly. On-demand is not the only option, though, especially in technology. A case in point: Last week, Microsoft announced a zero percent financing offer to customers making purchases of Microsoft Dynamics application suites. There are some conditions, but it’s a pretty good and creative offer, and who would have expected Microsoft to do something like this? Makes perfect sense, though, so hats off to Microsoft.

Now here’s the real issue. Vendor financing or financing by other means is a reality. Early movers are already taking steps to bring this new/old service to market, but what are they going to use to manage this business process?

The Need That Technology Left Behind

When my mom took us down to Main Street to pay our bills, there were file folders and journals everywhere you went. Putting five dollars on the retailer’s account? Very good, let me look that up! It was a completely paper-based process — and here’s the important part — the process was given up long enough ago that there is no automation available to support it.

I smell opportunity here. Interestingly, even if you are in the on-demand business, even you might be using billing and payment processing technology that is not ideal for you. Billing systems built for conventional business may not offer the flexibility to enable payment over time.

When Zuora was launched earlier this year, its focus was specifically on the SaaS vendor. The company has done pretty well expanding rapidly and attracting attention from would-be customers, partners and analysts like me. However, my point is that there is nothing Zuora-like that addresses the broader emerging market for billing and payment systems that support the new-again business process of vendor financing.

Here’s a bigger question: Is this a front office or back office application? You can make a case for both, and at some point it might not matter, and in the end, it probably doesn’t matter. Isn’t it interesting, though, how the recent adversity in financial markets has caused vendors to adjust? It is just a matter of time before the software industry begins to respond.