The dilemma that some businesses face is how to counteract the risk of depleting their cash reserves to fund capital purchases when the economy is still fragile. Businesses have become increasingly cautious since the financial crisis of 2007-8, and want to keep cash reserves and not deplete their working capital.
Using cash to purchase long-term, depreciating assets means it is unavailable to fund company growth or support the day-to-day running of the business. Bank lending has been tight since 2008 and, unsurprisingly, very few organisations - fewer than three per cent - opt for bank finance to fund their IT investments.
Historically, refresh cycles have been around three years, but today they can take five years or even longer, especially if cash is used to acquire the IT equipment. A senior executive we met recently showed us his nine-year-old laptop, which took 15 minutes to boot. Cash purchases often result in equipment being kept well beyond its optimal life.
Fortunately, most of the C-level decision makers appreciate that, without regular updates, an ageing IT estate will severely hamper their business's productivity.
VARs can sometimes use advances in technology to tempt their customers to refresh their IT estates. For example, Microsoft is soon to discontinue support for the XP operating system, and yet an estimated 40 per cent of businesses are still using equipment that is incapable of supporting a newer OS.
This type of panic purchase can put real pressure on a business's financial resources. Leasing enables businesses to spread the payment for equipment over its lifetime. A leasing arrangement may cost more in absolute terms than a cash purchase, but this must be balanced against the cost of maintaining an ageing IT infrastructure and reduced productivity as a consequence of using slow IT. There is also the benefit of retaining working capital within the business.
Leasing accounts for a minority of IT purchases. But if this kind of financing gives a business the best of both worlds - to hold on to its cash and to fund new IT equipment - why don't more businesses take advantage of it?
The answer may simply be lack of awareness. Our research has shown that IT teams have a better understanding of leasing than their financial colleagues. However, in the majority of cases, it is the finance team that has the final say on how the purchase is funded.
VARs should think about three simple steps when helping their customers decide how to fund their IT acquisitions: first, educate sales teams on financing options; second, engage customers' finance and IT teams in joint discussions about the options available to them for financing the purchase; and last, remember that deals financed through leasing require an upfront discussion about the length of the refresh cycle.
A benefit of leasing that is highly attractive to VARs, in that it drives a regular IT refresh cycle because the terms of the lease arrangement define the equipment life cycle up front.
In a commercial environment governed by caution, the whole industry would benefit from more end-user awareness and a better understanding of the benefits of alternative forms of finance to fund IT investments.
Jon Davies is founder of 3 Step IT
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