Handicapping The Credit Crunch: Outsourcers Yeah, Startups Nay

An inability to finance tech gear could see more businesses turning to outsourcing, while startups may have a tough time getting off the ground.
The nation's credit squeeze could prove to be a boon for outsourcers, but it might also have a chilling effect on tech startups, according to analysts.

Most big IT vendors, and their financing partners, are still willing to extend terms to commercial buyers. But they are scrutinizing customers more carefully than ever, and those without solid credit or a long track record may find themselves out of luck, or servers.

"Companies that are on the edge of the lending criteria may have difficulty," Yankee Group senior VP Ashvin Vellody said in an interview Friday.

As a result, an increasing number of companies may outsource their computing requirements. Under such an arrangement, third parties, such as EDS, Computer Sciences Corp., or India's Wipro, handle the bulk of their customers' tech needs. Businesses that go that route therefore do not need to buy as many expensive servers and storage devices. They can also cut down on networking gear.

"Outsourcing could benefit in the current environment," said Vellody.

CSC said sales increased to a record $4.44 billion in its most recent quarter, up 16% over the previous year. EDS, which is now owned by Hewlett-Packard, in July reported a 16% earnings increase. For the quarter ended June 30, Wipro -- which specializes in low-cost offshore outsourcing -- said revenue climbed a whopping 43% to $1.39 billion.

Another scenario that could prove popular is one in which businesses sell their computing assets to a vendor like IBM, and then lease them back. "It increases cash for the business and cash flow for the vendor," said Rodney Nelsestuen, a research director at TowerGroup. IBM earlier this week said that third-quarter earnings per share increased 22% year over year, while sales were up 5%.

By contrast, the credit crunch appears to be taking its toll on tech startups. U.S. venture funding has fallen off to less than $1 billion per month from more than $1.5 billion per month prior to May, according to

To boot, startups that do manage to get off the ground could have trouble procuring the equipment they need to sustain growth. "It's going to be a challenge for small companies that are growing fast and need to double their infrastructure," said Nelsestuen. "It's going to be hard for them to borrow."

So just how picky are tech vendors in terms of who they extend credit to? And what rates are they offering? The subject is apparently so sensitive that none of the major IT companies will talk about it. Officials at IBM, Hewlett-Packard, and Microsoft declined to comment for this story. Representatives for Dell and Lenovo did not return calls.

On its Web site, IBM says it's still lending, but does not spell out terms. "Beat the credit crunch," IBM's site says. "While your competitors sit back and wait out the tight credit market, you can leverage IBM Global Financing's world-class financing expertise not only to support current operations, but to expand your business as well."

IBM Global Financing's asset base is nearly $38 billion.