We recently discussed how the “Ultimate Game,” a study in behavioural psychology, might help to explain why there tends to be less initial animosity between carriers and open-source OSS vendors compared with proprietary / paid vendors.
And like the rest of the buyer/seller chasm series, we also discussed the three main reasons for the lengthy “match-making dance” between buyers (carriers) and sellers (OSS vendors) that delays starting an OSS project, being:
Today’s article looks at how a common technique in the world of Mergers & Acquisitions (M&A), known as vendor financing, could be a way to help reduce the size of the chasm.
At PAOSS, we often help on M&A projects – from tech due diligence to market analysis to a whole other type of buyer/seller match-making – where the buyer is an investor and the seller could be an OSS vendor or even a telco with a significant OSS/BSS asset.
But more recently, we’ve been getting involved in M&A discussions from a different perspective – as a potential acquirer of companies rather than just aiding an M&A event occurring between others. [Note that we’re not looking to buy OSS or BSS companies, but to grow the PAOSS consulting, IP and media footprint whilst still remaining OSS/BSS vendor neutral].
Being on this side of the M&A equation has made us think more deeply about innovating funding models such as vendor financing. It’s also helped us to consider the part that vendor financing could play in helping to initiate win-win projects for carriers and OSS vendors.
Let’s first start with a quick description about what vendor financing is and then we’ll get into how it might fit into the OSS world.
Vendor financing is an innovative approach that reduces the financial barriers to entry for buyers while fostering long-term, performance-based partnerships between buyers and sellers.
As indicated above, one of the biggest contributors to the OSS buyer/seller chasm is risk / fear. This is tightly coupled to the fact that OSS transformation projects tend to be complex, take a long time to implement and consume significant resources (human and financial). It almost always takes significant courage for buyers to commit to a new OSS project. But what if that cost / risk / fear hurdle could be significantly diminished? That’s the concept behind the buyer/seller chasm series.
In the case of vendor financing, instead of requiring significant upfront capital, buyers pay a minimal initial cost, with the remaining balance deferred over a set period. Payments are often tied to key milestones our outcomes, such as the completion of deployment, operational go-live, or the achievement of agreed-upon operational KPIs. This structure not only alleviates financial strain for buyers but also aligns payments with the realisation of value, ensuring buyers pay only for solutions that meet their operational goals. Vendors are often also willing to offer more attractive financing terms than external sources.
A hallmark of vendor financing in this context is its flexibility. Contracts can include outcome-based adjustments, offering reduced rates for vendors who exceed SLA targets or imposing penalties for delays. Buyers retain the right to exit or renegotiate terms if vendors fail to deliver on expectations, which mitigates concerns about vendor lock-in and builds trust in the relationship. This flexibility encourages vendors to maintain high-quality standards while demonstrating confidence in their ability to deliver value, which further reassures buyers.
For buyers, particularly from the CFO’s / sponsor’s perspective, vendor financing provides immediate financial relief by lowering upfront costs (ie the financial chasm). This allows organisations to preserve capital for other strategic initiatives while still pursuing critical OSS/BSS modernisations. Payments spread over time or tied to performance milestones improve cash flow management and ensure expenses align with realised operational benefits. The structured financing model also reduces the financial risk of underperforming solutions, with vendors sharing responsibility for delivering measurable outcomes. Whilst I don’t profess to be an accountant, I understand that the ability to classify payments as operating expenses can improve financial ratios and tax efficiency, making the approach even more attractive.
From the CEO’s perspective, vendor financing accelerates the adoption of vital digital transformation initiatives (ie reducing the width of the chasm), enabling organisations to implement automation, enhance customer experience, or optimise network operations without waiting for full budget allocations. The vendor’s willingness to offer financing signals confidence in their ability to deliver results, alleviating concerns about project failure (ie the trust chasm). This model fosters organisational agility, allowing buyers to adapt financing terms to changing needs, make faster decisions, and avoid delays caused by lengthy approval processes. So long as the threat of vendor lock-in is minimised, the collaborative nature of financing strengthens long-term vendor relationships, encouraging continuous innovation and mutual growth.
This is at odds with the flawed purchasing model that is typically used today and puts buyers and sellers at loggerheads right from project commencement.
For sellers, vendor financing drives faster deal closures by lowering barriers to entry (ie reducing the size of the chasm), particularly for cost-sensitive or risk-averse buyers. This approach increases deal volume, expands market reach, and differentiates the vendor from competitors by demonstrating a commitment to the buyer’s success (ie the trust chasm). From the CFO’s perspective, financing agreements create predictable trailing revenue streams and improve cash flow management, especially when leveraging third-party financing or structured milestone payments. These agreements also enhance financial metrics like annual recurring revenue (ARR) and customer lifetime value (CLTV), strengthening the vendor’s valuation.
The vendor organisation potentially benefits from stronger customer loyalty, as financing aligns the vendor’s success with buyer outcomes, fostering trust and long-term partnerships. Happy buyers are more likely to provide referrals and repeat business, further solidifying the vendor’s market presence. Financing also enables sellers to penetrate emerging or cost-sensitive markets more effectively, onboarding buyers who might have otherwise deferred their OSS/BSS investments.
Ultimately, vendor financing creates a theoretical win-win collaboration by aligning buyer and seller goals. Both parties are incentivised to prioritise quality and performance, and the financing structure provides compelling cost-benefit analyses that support stronger business cases for internal stakeholders. By reducing financial risk and fostering trust, vendor financing ensures sustainable, mutually beneficial relationships in the OSS/BSS ecosystem.
While vendor financing offers numerous benefits, we’re not suggesting it’s a panacea for all buyer/seller chasm issues. It also introduces risks and challenges that both buyers and sellers must carefully manage.
For buyers, one significant risk lies in over-reliance on vendor-provided financing, which can obscure the total cost of ownership (TCO) or lead to unforeseen back-ended financial strain if milestones or outcomes are not met. If financing terms are poorly structured, buyers may face escalating costs over time, particularly if performance-linked adjustments are not well-defined. Additionally, buyers may struggle to maintain leverage during the agreement if the vendor’s solution becomes deeply embedded in their operations, increasing the risk of implicit vendor lock-in despite the initial intent of contractual flexibility.
For sellers, vendor financing requires careful management of cash flow and working capital. Deferred payments can strain resources, especially for smaller vendors, unless they leverage third-party financing or have robust financial reserves. The model also ties revenue to the buyer’s performance, meaning delays or failures in achieving agreed milestones—whether due to buyer-side issues, external factors, or shortcomings in the solution—can impact the vendor’s income and profitability. Furthermore, financing agreements inherently involve credit risk, as there is always the possibility that a buyer may default on payments due to financial instability or operational disruptions.
From a broader perspective, both parties may face challenges in defining and measuring performance milestones, which can lead to disputes or misaligned expectations. Vendors must also balance the competitive advantage of offering financing with the potential for setting unsustainable precedents in their market. Ensuring transparency, thorough contract design, and contingency planning is crucial to mitigating these risks while maximising the benefits of vendor financing.
In summary, this article is a thought experiment. There are significant benefits and challenges of using the vendor financing model. Significant pros and cons. There are likely many reasons for why it’s not commonplace in OSS transformation contracts today. Do you notice that those reasons still seem to come back to risk / fear and trust issues.
What are your thoughts? Have you heard of this type of model being applied before?
Has it worked? Has it not?
Why do you think it can or can’t work?
What other models have you seen used to overcome the flawed procurement model that often creates adversaries from buyers and sellers before an OSS transformation has even really commenced?
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