LEASING - Please lease me

PCs are set to be hauled into the leasing sector by companies shifting focus away from the traditional market and exploiting the opportunities presented by moving into untested waters.

Next time you call on your favourite corporate customer, take a quickg focus away from the traditional market and exploiting the opportunities presented by moving into untested waters. look around their head office. See those much-maligned copiers cowering in a corner? They're almost certainly leased. Look at the fax machines, the franking machines and the vending machines - chances are they're leased too.

So why is it, then, that the majority of PCs and networks are still bought for cash? It's not as if leasing isn't present in the data centre - a sizeable proportion of the world's big iron belongs to IBM's leasing subsidiaries and specialist IT lessor/brokers such as Comdisco.

It's hard to find a satisfactory explanation for the paucity of leasing activity in the PC market. Some argue it's mostly down to education - salespeople not understanding what they're selling and customers not understanding what they're buying. Others argue that low-value, short-life products such as PCs are not natural prospects for conventional leasing. Whatever the reason, the mood of the market has certainly changed in the past 12 to 18 months. The result? Heightened activity in the leasing market as the big players search for that elusive edge over the competition.

Back in April last year, and all within a few days of one another, the US operations of Dell, Compaq and IBM all unveiled initiatives in PC leasing.

Dell announced it had teamed up with Newcourt Credit, an acquisitive Canadian financial services company, to form Dell Financial Services. Compaq started a partnership with Dana Commercial Credit to target the SME sector, and IBM announced a services, software and financing package called SystemCare, which changed into SystemXtra five months later.

Things are building up on this side of the pond too. Compaq Capital has recently announced a partnership with Leasetec in Europe and Asia, while Newcourt Credit has bought Lloyds Bowmaker Business Technology Finance from Lloyds TSB in the UK. IBM has begun to push Quick Lease, a product described by Ken Comrie, small business marketing manager at IBM's SMB division, as 'designed for quick and simple low-value transactions with SMEs'.

In many ways, it's not surprising that leasing is starting to take off in the PC market. The pre-eminence of the network, the inevitable drift back to centralised controls and the anxiety of watching helplessly as cost of ownership studies demonstrate how expensive the PC has become, all contribute towards the new-found enthusiasm. But what's in it for the reseller?

Copiers have been leased for the past 20 year or so, and according to Gary Sharp, UK leasing manager at copier dealer Danka, the main drive for it is customer retention: 'We want to keep our customers, for ongoing revenue streams and for churn or upgrade opportunities. Leasing helps lock them in.'

It's not just retention. In the right hands, a quarterly rental figure of about #1,000 can be easier to sell than a one-off lump sum of #10,000.

This isn't just simple psychology, it's also that lease rental payments often come out of operating expenditure budgets that can usually conceal the deal from the unforgiving capital expenditure radar screen. As a rule, capital expenditure is more rigorously vetted than operating expenses from a departmental cost centre.

Winning and keeping customers is just one side of the equation. The other benefits are financial. First, most leasing companies will pay within a few days of receiving a contract signed by the user, an invoice from the reseller and confirmation that the kit has been installed. At the same time, the leasing company becomes responsible for the credit risk, minimising bad debt provisions. Second, there is often the possibility of some commission, maybe one or two per cent of the value of the deal.

In thin margin business, that's quite a worthwhile addition.

Of course, users see the advantage of leasing in quite a different light.

At GE Capital Equipment Finance, users list five main benefits of leasing.

One, spreading payments over a period of years conserves a user's precious working capital. Two, leasing is an incremental form of financing that does not have to impinge on existing credit facilities and suchlike. Three, users can get the equipment they need immediately, in the knowledge that upgrades and exchanges can often be woven into the agreement over time.

Four, because rental payments are fixed in advance, users are able to insulate themselves from interest rate hikes. Five, lease rental payments are usually treated more favourably by the Inland Revenue than the cash purchase alternative.

As leasing is increasingly attractive to users and offers additional marketing and financial benefits to the channel, who should you approach as a prospective leasing partner? There are four types of lessor to choose from, all of which will show an interest in the business, although they understand that companies are unlikely to be loyal to just one partner.

Promiscuity is an accepted part of the game.

Sales-aid lessors tend to concentrate on small ticket transactions where the value of a single deal rarely goes beyond #50,000. The biggest players in this part of the market are GE Capital Equipment Finance, a new GE Capital division not directly connected with GE CITS, Europe's biggest PC dealer; Lombard Business Equipment Leasing (LBEL), part of NatWest Bank; Newcourt Credit of Canada, a relatively new name in the UK and the recent acquirer of Bowmaker's BTF and AT&T Capital; and Schroder Leasing, part of the eponymous investment bank.

Middle ticket lessors tend to be far more hands-on, structuring complex deals and often negotiating with users. There are several players in this area, but perhaps the best known in the world of IT are Dresdner Kleinwort Benson, ECS, Leasing Solutions International and Leasetec.

Captives are few and far between; probably the best known is IBM's Financial Services Limited (FSL), the company's legal name. In the recent past, the practice was more colloquially known as Customer Financing, although these days, in typically modest fashion, it prefers to be known as Global Financing.

Other captives include Hewlett Packard Finance and Xerox Finance. There are also quasi-captives, an in-house leasing company that is partially or fully owned by an independent lessor. Dell's Financial Services offshoot falls into this category, as do StorageTek's and Cisco's leasing arms, both owned and run by Leasetec.

Brokers come in all shapes and sizes, but the largest in IT are probably Systems House and Wyse Leasing. Brokers are often funded by the mainstream leasing companies. LBEL and First National Leasing, part of Abbey National, both get more than a third of their business from brokers.

Technically, there are clear differences between types of lease partners, but in practice they all work in similar ways, which makes choosing very difficult. Mark Picken, sales director at LBEL says: 'Over the past few years, we've tracked the needs of our resellers by sponsoring an annual research study with NOP. While certain needs come and go in terms of importance, the top three have remained consistent - the rate card, the speed of approving the deal and paying on deals.'

The rate card is a fairly unstable measure because it can vary over time and depends on the size and nature of the deal. There's usually very little to choose between the standard rates offered by the top players, but occasionally there are particularly good deals to be had.

Speed of response is also difficult to compare, as most of the mainstream lessors operate in very similar ways. Picken says credit clearance typically takes just two and a half hours. Peter Gane, marketing director at GE Capital, says: 'It takes about four hours for sub-#20,000 deals, and a little longer for bigger deals.'

Payment terms don't differ greatly either. Schroder Leasing is quite typical, as David Roberts, national development manager for IT at Schroder, explains: 'We usually use BACS to pay our resellers, which means payment can be in their bank account just three days after they've invoiced us.'

Because money is probably the closest any product can come to being a commodity, it's not too surprising that leasing companies tend to look and behave a lot like one another, especially when it comes to rates, pricing and processing the transaction. The real difference tends to lie around the edges.

IBM FSL is typical of most captives in that its role in life is to support the parent company's factory. It also exists to make a profit. In the US, for example, IBM Credit Corporation made a net profit of about $290 million in 1997. But it's often unclear whether profit comes before market share when you're used primarily as a marketing device.

Jeff Smith, director of global financing for IBM UK, says: 'Dealers and resellers are looking for quality support.' By this, he means, support 'isn't just a good process, it is collaboratively selling the deal'.

Smith adds: 'Although leasing is not particularly complex, you often need to involve a professional in the selling. And to do that, you need people on the ground.' IBM isn't alone. GE Capital and some, but not all, of the other larger players also offer field-based sales staff who can present complex deals to financial directors.

But where IBM and other captives can make a difference is by using the connections they have with their remarketing operations. As Smith explains: 'Some 90 per cent of all IBM's lease transactions with larger customers have a residual built into the lease.' This means they are calculating their monthly or quarterly premiums from prices set at a discount based on the expected value of the kit at the end of the lease term. And for sophisticated remarketing operations, even low-specification PCs can have useful second-hand value.

Some of the larger specialist lessors are also able to build residuals into their leases. Leasing Solutions International has a separate company, LSI Gold, that handles its own remarketing operations. But none of these companies has the same economic clout as, say, IBM.

Another factor worth looking at is the proximity and quality of help.

GE Capital works as a centralised operation based in Bristol. First National Leasing, by contrast, has about 24 branches dotted around the country.

GE Capital has its own telemarketing support, while First National doesn't.

Other differentiators can occur in the range of products on offer. Schroder has recently launched two products. System Upgrade is for users that know various configuration changes are inevitable within the term of the lease.

Roberts says the product is 'a way of helping customers keep their rentals flat while accommodating adjustments in the mix of products housed within the lease. After the first 12 months of the lease, the customer is able to change or upgrade any product, subject to a minimum value of just #700.'

Select is another Schroder product, this time aimed at off-the-page operators.

After a pilot study in the last quarter of 1997, a telemarketing team was set up solely to work directly with the users of its Select partners. Schroder has worked in this area for some time with the likes of Gateway, Evesham Micros and Opus.

So it's clearly not too easy to choose which leasing company to work with. Compaq has recently switched from Dana Commercial Credit and AT&T Capital to Leasetec. Last year, Dell moved from Leasing Solutions to Newcourt.

If the big boys can't settle on one relationship, then why should the rest of us? Commercial promiscuity is the only way to play the leasing game.