Resellers must exploit the SME opportunity. They must add value with services. These are among the more familiar of vendor rallying cries but, in truth, no phrases do more to leave the channel frustrated and confused.
With the SME, it seems the reseller has to work twice as hard to make less margin on a smaller deal, while adding value through services is a distant dream for many dealers. Little wonder then, that so many in the channel shrink at the mere mention of the the service centric model or the prospect of addressing SMEs.
Ironically, it's a proven concept - leasing - that could now prove to be the channel's great hope in the fight to enhance these elusive areas of revenue. Organisations with limited cash flow struggle with massive capital investment of IT procurement. For such operations, leasing is always a very attractive option.
Leasing and rental agreements are more popular than ever before. In a period when leasing has taken a downturn in other industries, it seems to be flying high in IT. According to figures from the Finance and Leasing Association (FLA), the value of the UK leasing market for computers is due to hit £18bn next year - representing a 30 per cent increase in just four years.
Parry Mitchell, chairman of Systems Capital Group, believes this boom can be attributed to the very SMEs whose business the channel is trying to win. "SMEs have realised that leasing can help them address some of their most pressing management issues. It helps cash flow, acts as a fresh line of credit, and reduces the cost of asset management.
"Beyond that, leasing is quite simply a good fit with SMEs. Unlike most banks, leasing organisations rarely ask for additional security and the transaction is easy to arrange."
As a result, leasing and similar financial bodies now represent genuine opportunities for the channel. "Resellers are becoming clued-up about the benefits of leasing and are passing the message onto their customers," says Mitchell.
"The key factor for SMEs at the point of sale is that leasing means they can have the technology they need, when they need it. Usually, that means now," he adds.
Newbridge Networks and Data Connectivity have just struck a deal to provide Newbridge equipment to Data Connectivity customers via a leasing agreement. Scott Dobson, product manager at Newbridge, believes such financial packages are not only useful for resellers, but necessary.
"These days, it's difficult to win business on the back of a straight technology sell, particularly in the more commoditised markets - the same goes for selling on price," he says.
"What resellers need is something different than the next person - true differentiation. The ability to give customers an easier route to technology provides that. Look at Gateway, for example. It's really making waves with its deal that allows users to upgrade their machine in the course of a buying agreement," Dobson says.
He adds: "Resellers must realise that it's all about trying to make a technology more financially viable, and therefore more attractive to the customer."
But the landscape in the leasing market is changing. The technology leasing market in particular, is undergoing a radical evolution, according to Peter Millard, IT finance divisional manager at Schroder Leasing. He says: "In the past, many leasing companies simply provided Vars with the material to work with and then let them get on with it. As a result, the Var was generally forced to know the technology inside out, and act as a financial consultant.
"That situation is changing as more recent, flexible leasing instruments arrive on the market. The Var can now simply make a referral to a leasing company and outsource the financial part of the deal altogether.
"Doing it this way ensures that less logistical demand is placed on resellers, and they can concentrate on what they know best - the technology," he adds.
Millard explains how outsourcing finance is proving particularly attractive for off-the-page resellers. "When selling off-the-page, there's constant pressure to make that next sales call. Going through the rigmarole of the finance deal over the phone, as well as trying to make the technology sell, can take a long time. With this product, as soon as the reseller has closed the sale it can pass the case on for us to complete."
Schroder Leasing says it has this so finely tuned that it has almost evolved into a purchase order-based arrangement.
Apart from the opportunity to develop long-term customer relationships, the modern leasing deal also offers dealers some very attractive financial incentives. Adam Coupe, marketing manager at Schroder Leasing, states that some leasing companies offer extra percentage points in commission on certain deals - meaning that dealers can make as much as five per cent extra margin above their bottom line from vendors or distribution.
In one such deal from Schroder, the purchasing price of a laptop was £699, for which the customer paid £4.99 a week, over the period of the agreement. But Schroder based its calculations on payments of £4.74 per week, passing the extra 25p per payment margin onto the dealer, up front.
This gave the dealer an extra £35 in otherwise unattainable profit.
Yet another option for dealers is to finance customer orders through leasing brokers or intermediaries. Essentially, the process is the same, the only difference being that instead of dealing direct with the underwriter or lender, the intermediary searches for the credit and puts the deal together on their behalf.
Jeremy Hall, managing director of leasing intermediary Wyse Leasing, says both approaches - direct and intermediary - have their advantages.
The rough rule of thumb to remember is that a broker will usually be able to procure a higher level of financing, but often from a wide range of lenders.
If a customer applies to a leasing company for £100,000, the deal may well be approved - but possibly for a figure less than half the amount.
The broker, on the other hand, may be able to find finance for the full amount of the deal, but it may be from several different sources and the terms may not be as favourable to the borrower.
Although leasing remains by far the most popular form of technology financing, some companies are taking a different approach - what is almost a return to the business model of the early 90s.
British Telecom, for example, recently unveiled a technology rental scheme whereby the customer doesn't actually own any of the kit. Instead, the user rents the use of space, the OS and application, on a server farm owned and held inhouse by the telecoms giant. According to Dave Hill, business services division manager at BT, there are several key advantages to this system. He says: "We did a lot of research and found that while SMEs would like access to particular technologies, often this isn't possible, due to the initial capital cost of equipment, and because of the ongoing cost of ownership."
For a per user monthly consideration, the BT scheme gives the organisation access to its applications - without the associated staff, logistical and technical overheads - saving money on the hardware and software, and on the cost of human and technical support.
Hill claims this gives resellers a unique product. "Rented applications are the way the market is moving. By utilising this kind of rental-based scheme, users can have access to the leading edge technologies while incurring only a fraction of the normal costs."
He adds: "This is particularly relevant in light of the fact that so many companies are struggling to hold onto technical staff, and those that they retain are becoming more expensive by the day. This type of scheme has a lot to offer as there is no human resources overheads."
Another key factor in the rented application market is that there is a greatly reduced onsite implementation time, says Hill. "With enterprise applications such as SAP, implementation can often be as much as seven times the cost of the software itself. This is due to the time and expertise required to get the system installed and active.
"But when software is held off-site, the implementation time for the customer is cut drastically because the software is already up and running," he adds.
Simple onsite hardware rental is also an increasingly popular option - particularly where short-term or specialist requirements are needed.
Mike Bannon, managing director of Micro Lease, claims the rental of hardware is a business that is growing fast.
"One of the main reasons customers need to switch to renting their hardware is the changing depreciation model. It's faster than it has ever been, and that makes buying any technology a potentially costly business," he says.
"Renting the technology over a fixed period of time gives the customer all the flexibility, and technical and logistical support of the leasing model, but because they don't own the kit, they're not left holding the baby in terms of obsolescence. One phone call is all it takes to have the very latest kit swapped for the old."
Bannon explains there are very specific sets of circumstances when renting is, and isn't, the most viable and cost effective option. "Renting is appropriate when customers know exactly what their technological needs are going to be and when, and for short to medium-term requirements.
"So if the customer wants a PC for a six-month project that requires specialist configuration or software, renting is a good idea.
But if the requirement is for a PC that's going to sit on the desktop for two or three years using standard software, then buying or leasing is a better option. We always urge customers to buy whenever appropriate," he adds.
According to Dobson, in addition to the growing number of rental arrangements, the industry is also going to see more deals such as the one it agreed with Heller Global Finance to promote its Newbridge packages. In this case, the customer's investment is protected by the leasing company guaranteeing the residual value of the equipment - giving the Var an even greater USP.
He says: "It's very similar to many of the deals available for cars.
The company pays a proportion of the cost of the kit monthly over the term of the agreement - usually three or five years. At the end of the agreement, it has several options: it can pay the balance owing, return the kit or upgrade the existing equipment by undertaking a completely fresh financial deal that re-finances what it owes from the original contract."
But unlike other schemes, the finance house underwrites what the basic value of the kit will be at the end of the agreement. Therefore, in the event that the equipment is worth less than the outstanding balance, the user doesn't lose out. The leasing company guarantees that the residual value will be equal to, or greater than, the amount outstanding.
Better still, the faster the company pays off the balance, the higher the residual value is likely to be.
But inevitably, any kind of financing deal - whether it's leasing, rental or otherwise - will carry with it some element of risk and no matter how small, resellers need to be aware of the potential pitfalls. Millard believes they should always look to partner with members of the FLA, and if repeat business is a priority, then it's also wise to partner with a mainline funder. In this sense, being able to use a name such as Schroder in conjunction with its own business can often add real credibility to the sale.
Dobson also warns resellers to exercise caution and not to jump into bed with the first finance house that springs to mind. This is not only due to the risks involved, but also because it's important to choose a package that's right for them and their customers.
He says: "Technology finance products are ten-a-penny out there and they are becoming more popular. If the package being offered is no different than anyone else's then where's the differentiation? Unless the package is competitive and offers something different then there is no real benefit to either the reseller or the customer."
Dobson insists the key to a good leasing or rental package lies in the relationship between the finance house and the vendor. "It's a very important selling point. Having a finance package is one thing, but going to a user with a deal that has been given the backing of the vendor adds credibility to the sale."
With product life cycles and prices as volatile as ever, risk is also a factor for the finance house, which must also underwrite the residual value and protect itself against other potential problems such as bad debt. An element of this extra cost to the finance house will inevitably be passed on to the user as part of the overall cost of the deal. Dobson says Vars that choose to use leasing as part of their service portfolio need to fully familiarise themselves with the structure of the individual contract before signing up their customers.
Jeremy Hall agrees, saying it's important to shop around. "There are about 1,800 leasing companies in the UK. They all claim to be the best.
Probably as many as 70 per cent of these companies are one or two-man bands - some really are very good, but resellers must be careful. As with any other kind of supplier, it's important to pick and choose their leasing partners carefully - as they have the potential to affect their customer relationships.
"At least two or three options need to be looked at before making any kind of choice," he adds.
There are companies that are less than scrupulous in their dealings and the channel must be aware of the dangers of conducting business with such organisations. "By and large the industry regulates itself honestly and effectively.
"But there are always those that slip through the net. For example, some have told customers that their £100 per month premium will actually cost £105, the extra £5 being classified as insurance. Such instances are very unethical and Dobson warns that resellers should be wary of such clauses.
"Despite the potential pitfalls, leasing and similar financial arrangements, seem to have their benefits for both the reseller and the user. But is the growth in such deals a natural progression or a necessary one?
Dobson reaffirms his earlier argument. "Those in the channel who want to go on competing purely on technology or price are welcome to try, but it's going to get more difficult to do that. It's more important than ever before to differentiate, and finance deals give resellers a relatively straightforward way of doing so."
In this context and in light of the sector's continuing growth, it seems that leasing and similar financial deals are inevitably set to become a bigger and more important part of the Var portfolio. Dobson says it's inescapable, because in the end - vendor mantras notwithstanding - how many re-sellers can afford not to explore every avenue of potential margin? Not very many.
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