A new lease of life

When cash-strapped businesses are nervous about making major IT purchases, renting or leasing can prove attractive alternatives. Peter Branton reports.

You have visited your customer, you have outlined the benefits of the product, upgrade or whatever to him, and he looks interested. But then he sighs wistfully and, with a look of regret, says that the finance director has told him he cannot possibly spend that much money on equipment this quarter.

As he shows you out of the office with a promise to keep in touch and get back to you soon, your eye happens to fall on a brand-new photocopier, still with some of the packaging on it, in the corner of the room. If he hasn't got any money, where did that come from?

Well, the chances are he leased it, and it is also likely that if you had offered leasing as an option to your customer, he would have been able to do a deal with you as well. So why didn't you?

After all, leasing has been around for longer than the IT industry, and is used by just about every business sector. It is not even as if it is a stranger to IT; quite a few of the world's big mainframe systems have been purchased in that way. Most big hardware vendors, including IBM, Hewlett-Packard and Siemens, have their own finance arms.

"Financing in most industries is an accepted way of selling a product. You are normally offered finance on pretty much any product that you see in an office, even if you went and bought it in the high street," says Sean Williams, manager of financing and leasing at Syscap.

"But resellers are often just happy to get a deal, and they don't look beyond that."

While Williams says resellers are using leasing to a greater extent than they have done in the past, he points out that many only offer it as an option when the customer does not have sufficient funds to buy outright.

"VARs do not seem to see it as a sales tool in its own right," he says.

Arranging financing

According to Williams, between five and 10 per cent of reseller transactions use financing; for customers arranging financing themselves, the figure is closer to 30 per cent.

And yet the benefits from leasing can be considerable. As far as Williams is concerned, leasing brings more benefit to your business than hiring Sven-Goran Eriksson to run the office football team.

"Financing is a way for the reseller to say to his customer, instead of a product costing £20,000 up front it will be £750 a month. You can break the price down to the cost per day if you want to. That has to be a powerful sales tool," says Williams.

George Hall, managing director of reseller Direct Business Systems, which specialises in data storage, printers and photocopiers, agrees. "Leasing can definitely open a lot of doors for you. New startups and smaller companies often don't have the cash to buy outright, so leasing offers them technology today, with tomorrow's money," he says.

Preserving cashflow

The difficult trading conditions of the past year or so have proved to be a considerable incentive for many resellers to look at leasing.

"Leasing in IT is definitely a growing sector for a number of reasons," says Nigel Witton, partner services business manager at distributor Tplc. "In particular, leasing is an excellent way of preserving cashflow."

Instead of waiting 30 or 60 days for an invoice to clear, a reseller can expect payment within a week if the lessor authorises the deal; and since the lessor will carry out stringent checks on the customer's credit-worthiness, credit risk is much less of an issue. Because the reseller is being paid quickly, his own credit status with his distributors is likely to be better as well.

"Interest rates are very low at the moment, so it's a good time to buy into leasing," says Richard Charlesworth, divisional manager for IT finance at Siemens Financial Services (SFS).

Credit limit

The downside of leasing, Charlesworth warns, is that you may set up a large system deal with a customer, only to find that the lessor will not approve credit.

"You may go down the route of selling the customer a bigger system than he would have bought outright, and then you don't get authorisation," he says.

SFS helps resellers to at least partially avoid this obstacle, by reaching an 'in principle' pre-agreed credit limit for specific customers. However, customers with weak credit records or no previous financial history, such as startups, may find that lessors expect them to pay higher interest rates.

The benefits of leasing to the customer, however, go beyond simply being able to spread out payments. Unlike capital purchases, where assets depreciate over years, leasing payments are tax-deductible in the year they are paid. VAT can also work out less on a leased system.

However, customers have to write down the value of their IT assets over a number of years, which can cause problems. "Nobody really knows how long they are going to keep IT kit for," says Witton. "At some stage your accounts are going to have to take a hit."

Disposal dilemma

And then there is the disposal issue. Recent European legislation on disposal means all sorts of equipment, from fridges to laptops, now has to be disposed off in an environmentally friendly way, which means that chucking a bunch of monitors in a skip and forgetting about them is no longer acceptable.

Add in the need to remove programs and data such as personal details from hard drives for security and legislative reasons, and getting rid of kit can become very problematic indeed - not to mention expensive.

According to research firm Meta Group, as much as five per cent of the original hardware cost of systems can now be spent on disposal, which makes leasing an even more attractive option to many customers. "Users must factor rising hardware disposal costs into the budget and initial lease-versus-purchase analysis to ensure accurate, optimal financing decisions," the firm says.

The increased cost of disposal has also made rental of IT equipment more attractive, with a number of players operating in this area, including Syscap, Hamilton and HireIT.

The leasing option

Given all of these benefits, why haven't more resellers been converted to the joys of leasing? "It depends on what background you come from," says Hall. "A lot of resellers have not been sold on the benefits of leasing, so they don't talk about it to customers."

Undoubtedly, some IT sectors are more comfortable with leasing than others.

The convergence between printer and photocopier technologies means that resellers often now sell both products, and the photocopying industry has traditionally been heavily focused on leasing, as much as half of transactions being financed in this way.

Kyocera Mita now offers a leasing scheme to customers through resellers, based on a price-per-page scheme for both printers and photocopiers, which allows dealers to make extra money on the sale of consumables, such as cartridges.

"Instead of making a margin of £50 a box, they can make £500 a box over the length of the contract," says Ian Joslin, head of sales and marketing at Kyocera Mita.

"In some sectors, leasing has had a bad name for some time," says Hall.

Bad publicity

It is true that IT leasing has attracted its share of bad publicity; some customers still remember the Atlantic debacle of the early 1990s, when a financing house went under and plunged its parent company into receivership.

Another problem has been the changing nature of the IT industry. The big iron bought for data centres in the 1980s was, after all, just that: a solid physical asset that it was easy for a financing house to put a redeemable value on over a period of years. Now that software and services take up a much larger chunk of the average IT system, it is much harder to value a deal.

"The problem is the product's intangible nature. In a typical £100,000 solution, £30,000 may be hardware, £30,000 software and the rest services," says Williams. "A non-specialist underwriter might say no; what does he repossess? It is not like repossessing a car, where it is easy to see what the asset is."

However, the growth of specialist players in the market means that resellers no longer need to face this problem when it comes to setting up a leasing deal for a customer, Williams says.

Fear of the unknown

But for many resellers, perhaps the biggest problem is the fear of loss of control over the sale. "Resellers worry that if they bring a third party into the deal they will lose control of it," says Steve Richmond, European leasing manager at reseller Minor Planet, which provides vehicle tracking systems for companies. "There is a real fear of the unknown out there among many resellers."

Williams agrees. "When a VAR wants to do a finance transaction he has to give the customer's details to the finance house, and resellers often feel they are losing control in that way," he says.

A canny reseller can in fact get more value out of customers by offering a technology refresh, whereby the user can upgrade or add extra equipment by extending the length of the lease.

"A customer can look at his monthly expenditure as a rolling agreement," says Williams. "That is a great sales lead for resellers, because customers can budget for their total IT needs."

And if a customer is buying a system outright, there is less chance of losing business than when he is buying in phases, where the reseller may start a project and lose the contract for a later phase to a competitor.

Williams pinpoints a different problem. "Control can be a real problem when you are dealing with a vendor's own finance house. Vendors generally want to sell only their own company's equipment," he says.

But Charlesworth disagrees. "We fund all types of equipment, not just our own kit. We deal with the manufacturers and go through their channels."

Vendors may also handle asset management, such as disposal of unwanted hardware at the end of the lease. Given the environmental costs mentioned earlier, this can be useful.

Rental opportunities

As well as its leasing business, Syscap operates a rental arm. Here, again, resellers have been wary, seeing rental as a threat to sales. But Williams argues that, used correctly, rental opportunities can lead to sales further down the line.

"Most people rent IT equipment with a view to buying," he says. "A customer will take a machine on rental, and when it has proved its benefits they will buy. I would say half of rentals end up as sales."

Other benefits of rental are that it may allow the reseller access to kit he would not be able to source directly from a manufacturer, as a vendor may be keener to 'seed' a new product with a rental firm, where it can be tested by a number of companies rather than a single customer. Rental may also allow the reseller to avoid stockpiling excess inventory, because it can source from the rental supplier.

Williams is a fervent believer in the value of leasing and rental to resellers. "Total cost of ownership is no longer the point. People now are seeing that ownership of IT kit is not what they want, it is the use of it. Nobody would ever describe the IT equipment itself as a good investment; people just want to use this stuff," he says.

SUMMARY

• Leasing is a commonly used business tool in most industries. However, in IT it has been mainly associated with large hardware sales.
• Resellers could use leasing as a sales tool, allowing them to offer customers the option to spread their payments over time.
• Reseller benefits include regular cashflow, quicker payment and customer lock-in.
• Customers benefit by being able to spread their payments. Leasing offers them another means of credit and control over IT expenditure.
• Despite the advantages of leasing, many resellers are still reluctant to embrace it. Few seem to understand the benefits.

PC PORTFOLIO MANAGEMENT

A recent report on PC portfolio management by researcher Meta Group said that leasing provides resellers with a positive disposal strategy. This could be essential given that disposal contributes as much as five per cent to the original cost of systems.

Despite reports of weakness in the PC sector, many Global 2000 organisations plan to update their PC portfolio assets. At the same time, organisations are seeking to trim costs from the PC slice of the overall IT asset portfolio.

Therefore, IT managers must carefully manage PC assets throughout the client life cycle, implementing robust pricing, lease-versus-buy, disposal and refresh strategies.

According to the report, while leasing provides an attractive disposal strategy, more frequent PC refresh, off-balance-sheet financing and capital preservation through deferred payments, Meta does not believe it will become the dominant method of PC procurement. Radically dropping prices will cause many organisations to purchase PCs.

CONTACTS

Direct Business 0191 491 4558
Kyocera Mita 0118 931 1500 www.kyoceramita.co.uk
TPLC 01925 433 800 www.tplc.co.uk
Syscap 020 8254 1800 www.syscap-direct.com