Doug Woodburn looks into the riddle of why financing and leasing is not more popular in the channel
Click here to view the full PDF version of this Special Report, which has been commissioned by GE Capital
If there's one person whose money advice everyone should take seriously, it's the late oil baron John Paul Getty, a man so intent on protecting his billions that he reportedly had a payphone installed in his mansion for guests.
But the IT industry appears to be shunning at least one pearl of wisdom Getty dispensed.
"Buy that which appreciates, lease that which depreciates," he once advised.
While many businesses lease cars, office equipment and other items which lose value, the concept has failed to catch on fully
when it comes to IT.
The latest figures from the UK Financing and Leasing Association (FLA) suggest that, if anything, use of leasing is falling in the IT sector, with the penetration rate thought to be as low as five per cent. The rise of cloud threatens to weaken its toehold still further as end users spend less and less on the tin associated with traditional leasing deals.
This is despite the obvious benefits leasing can offer (see bottom), particularly during a rebounding economy when companies should be holding on to their cash and ploughing it into growing their core business.
It was against this backdrop that GE Capital and CRN brought together nine leading UK resellers and systems integrators to discuss how finance and leasing can evolve to be at the heart of what the channel offers. Representatives from MTI, DTP Group, Axial Systems, Servium, Portal, Nuvenn, Complete I.T., Comms21 and FOS.net all attended.
GE Capital was there to gather honest feedback rather than to preach and is using the event to hone its offering for resellers over the coming months.
"The reason we did the roundtable was to understand why leasing doesn't work in the channel," said Andy Lewis, marketing leader at GE Capital Equipment Finance, following the event.
"When you look at the latest statistics, IT leasing penetration is reducing. Leasing is becoming less relevant as the volume of tin decreases - the problem is getting bigger."
GE Capital's recent European SME Capex Barometer found that the UK has the strongest level of investment confidence across the large western European economies. According to the study, which quizzed 2,292 firms in seven European countries in January and February, UK SMBs will plough ￡22.8bn into technology over the following 12 months, a 59 per cent spike year on year.
However, 50 per cent are raiding their own cash reserves to fund these IT purchases. Leasing was the preferred method of external financing for 34 per cent of respondents, with bank loans picked
by 26 per cent.
But while the FLA claims the UK IT equipment finance market shrank 10 per cent in value to ￡408m in the three months to July 2014, year on year, Lewis said market conditions are ripe for leasing to finally take hold.
"As we come out of the recession, companies are beginning to generate free cashflow but they want to invest it in growing their business and becoming more successful," he explained. "Leasing enables them to secure capital investment but as a monthly rental, as opposed to taking it from working capital, which they need to invest in their core business."
But as Lewis himself acknowledged, the leasing industry must evolve if the IT suppliers that serve end users are to lead with leasing in the sales cycle.
Rightly or wrongly, leasing is still seen by many resellers as something that adds an unnecessary layer of complexity to the sale. As a CRN survey conducted in the aftermath of the event suggests (see box at bottom), when leasing is offered, it is often as an afterthought.
"In our space, leasing is an add-on; it's not integral to the solution," Colin Blumenthal, managing director of Complete I.T., said during the roundtable discussion.
"The challenge for leasing companies is to make themselves an integral part of our solution."
Those present quickly zoned in on how leasing firms can support their own growing capex requirements as they move into cloud computing provision. Many had questions about how GE Capital could help them compete with the elastic consumption models offered by public cloud giants such as Amazon Web Services
(AWS) and Google.
Ian Parslow, senior vice president of sales at MTI (pictured), said 40 per cent of his firm's business went through leasing due to the large-ticket items it sells.
"But that's just a way of doing business," Parslow said. "What I'm looking for is a creative offering, something that is net-new to take to the market, as opposed to something that is going to bring a sale in earlier."
Parslow added: "With AWS or Dropbox, it's just so easy. As suppliers to customers, that's what we need to bring them: flexibility, agility and the ability to ramp up for customer needs."
John Vickers, a divisional sales manager at DTP, agreed: "It has to be simple, because AWS is: With AWS, it's a case of ‘I want some storage space, I want this much and I want it for this length of time'."
Move with the times
End users now instinctively want to pay for IT on a monthly basis, based on their consumption, said Pete West, financial director at Portal, and leasing firms need to adjust accordingly, perhaps by building solutions that draw not only on equipment financing, but also invoice financing.
"It's a lovely thing for the customer but the problem it gives you [GE Capital] and us around this table is we now have to go out and buy some hardware and storage to implement this system for them," West said.
"It's a very different world now and we all need to be moving with it. The leasing companies need to look at how they're going to finance the providers of those solutions."
Chris Squires, account manager at FOS.net, added: "It would be very helpful if we could just have a leasing vehicle that purely did service.
Several new terms were bandied around on the day, including "finance as a service" and "agile financing". Could firms such as
GE Capital even link arms with resellers to provide some sort of credit card that end users could use to purchase IT on demand, as they are used to doing with AWS, delegates wondered.
"It could actually look like a leased credit card that the financial director has in their wallet when they want to take five more laptops," suggested Andrew Skipsey, managing director at Comms21.
Mike Simmonds, managing director at Axial Systems (pictured), agreed that leasing would enjoy more uptake if it were made simpler and easier to consume.
Meanwhile, Paul Barlow, managing director of Servium, said resellers could benefit from the security that firms such as GE Capital could offer, particularly in the wake of 2e2's collapse last year.
"Sometimes resellers' balance sheets aren't that strong because they are busy investing in growth," explained Barlow.
"Security is a big issue for the people making purchasing decisions. They're not worried about Amazon going bust. [GE Capital's] balance sheet isn't too bad. Putting that behind a reseller and giving them that guarantee as part of your package would be useful."
Richard Archer, managing director of Nuvenn, said finance providers should start acting more like vendors in the services they offer. "[Cisco and Microsoft] don't just provide product and a credit line, they provide training and implementation and being a Cisco Gold partner means you can stick a badge on your door which gives you credibility as a reseller," Archer said.
More incentives for reseller sales reps would also be welcome, Skipsey added. "Getting the salesperson's head into selling leasing is one of the biggest barriers you have," Skipsey opined. "When I first started selling phones in 1988, the firm did a great incentive that got my head into leasing and all the tax advantages, and I was almost selling leasing more than the phone systems themselves, just to get that case of whisky."
Keep it simple
Speaking to CRN after the event, Lewis said GE Capital is already acting on the feedback gathered from the discussion. The leasing industry must prove it is relevant and adaptable, he said.
"When you put it all together, leasing is compelling but the onus is on the finance industry to pulse and understand the changes in both technology and the market," he said. "Leasing has traditionally focused on hardware and tin but now as the market is changing to be more about solutions, the leasing industry needs to start changing its risk profile, its operational environment and its go-to-market to reflect this."
Jeff Jones, IT and telecoms sales leader at GE Capital, said the answer also lies in offering increased simplicity.
"In terms of leasing penetration and the amount of available hardware that's sold on a lease, within the IT sector it is about five per cent, which is very low, compared with telephony which is at 50 per cent and office equipment, which is 95 per cent," he said.
"And the challenge there is that the IT sector tends to sell more on cash and the average asset value tends to be a lot smaller. So the key to increasing leasing penetration in the IT sector is to make things really simple for the customer."
Lewis concluded: "We've taken on board that leasing needs to change and are committed to revisiting our product suite in the future."
Few resellers using leasing strategically
A CRN survey suggests resellers by and large use leasing sparingly, if at all, and do not normally lead with it in the sales cycle.
■ Some 42 of the 69 resellers we quizzed (61 per cent) said they offer leasing in the sales process but relatively few professed to using it regularly or strategically.
■ Of those offering leasing, 58 per cent said it is used by less than 10 per cent of their client base, with only 26 per cent saying it is used by more than 20 per cent of their client base. What's more, the leasing penetration of those customers tended to be low - less than 10 per cent in almost half of cases.
■ Meanwhile, less than a fifth of resellers who do use leasing said they always lead with it in the sales cycle.
■ The most common reason for not using leasing was that clients prefer other finance options, which was selected by 59 per cent of respondents. Some 33 per cent said clients aren't receptive to leasing upfront, while 30 per cent said the leasing solution is not fit for purpose. Fifteen per cent felt the lack of leasing collateral was an issue.
The case for leasing: Six of the best
If you've never considered leasing, here are half a dozen reasons that might change your mind:
■ Snag juicier deals
Potential projects, particularly those of an ambitious nature, often stall when the CFO concludes there's not enough money in the biscuit tin. Using leasing can allow the customer to acquire a bigger and better solution, that's future-proofed, because they are no longer constrained by cashflow considerations. Lewis said leasing deals can potentially boost the ultimate deal size. "If end uses are getting more successful over time, a fixed rental will cost them much less as the solution builds," he pointed out.
■ Keep your customers on the bleeding edge
Traditional IT refreshes funded from capex budgets can leave customers saddled with expensive kit that rapidly becomes obsolete. "Through leasing, you can constantly upgrade the equipment," explained Lewis.
■ Boost margin and cashflow
By allowing customers to spread payments, using leasing means resellers won't need to offer as many upfront discounts to win the deal. They can secure the cashflow on day one, with the credit risk borne by the leasing company. "Using a leasing company, you can access a one-stop payment shop to allow you to focus on your core business," Lewis said.
■ Let your customers concentrate on growth
As the economy bounces back, end users are looking to update their IT infrastructure again but in a way that won't drain cashflow. "Leasing enables the end user to invest in their growth plans as opposed to taking money from their capex workflow," Lewis explained.
■ Develop stickier relationships
Using leasing can boost repeat sales and upgrade opportunities with clients, according to Lewis. "It enables you to support your customers more effectively," he explained, adding that customers also gain the benefit of paying more flexibly, potentially based on their usage.
■ Diversify your funding base
End users need other sources of funding outside the banking environment. "With the banks retrenching, end users are looking to secure sources of finance from alternative credit lines," Lewis said.
Click here to view the full PDF version of this Special Report, which has been commissioned by GE Capital