In A League Of ITs Own
Annie Gurton explains why it is better to lease kit than to own it, and reveals how resellers stand to gain
The idea that a business has to pay in full for its IT before delivery is becoming as antiquated as the notion that cars should be bought. Few business-use cars are bought outright: they are mainly leased, and so it is with computers. Resellers and integrators have to be able to offer a leasing or finance service. Customers expect it, and it can oil a sale like little else.
Martin Thornton, chairman of Open Computers & Finance (OCF), says that although many resellers are already offering finance, those that are not had better find a finance supplier quickly, otherwise they will start losing sales.
?There is so much competition between integrators and resellers that they can?t afford to lose out with an easy differentiator. It often costs them nothing to add to their portfolio, yet it can make a big difference as a sales tool,? he says.
Many resellers are finding that their vendor suppliers have leasing and finance schemes which they can sell, sometimes earning a commission from contracts that they pass on.
William Smith, who works for ICL?s open hire programme ? which allows customers to spread payments for hardware, software and consultancy and services ? explains: ?The customer is not restricted to using the scheme for ICL products.?
One problem with finance is that the industry is still recovering from the Atlantic scandal, which involved some large corporations ill-advisedly signing leasing deals which were not in their best interests. Smith says: ?The Atlantic scandal gave finance a bad name, but memories can be short and many have now moved on.?
The benefits of leasing as a form of structuring a finance deal for staged payments far outweigh the disadvantages. And from the reseller?s point of view, it is hard to find any disadvantages. ?The reseller gets paid immediately, in full and up front,? says Thornton. ?The advantage of that, especially to cash-flow conscious small or medium businesses, is beyond price. Many resellers would pay a premium to have it happen.?
Apart from anything else, many resellers are able to negotiate fast payment terms and extra discount with their suppliers, because they know that they will be paid within 10 or 15 days of the invoice.
Leasing is also attractive from the customer?s point of view. Smith says: ?It?s easy to budget, it?s easy for accounting purposes, and it means that IT costs are predictable and on the right side of the balance sheet. It means that they are acquiring a capital item, but not paying for it all at once.?
Smith and Thornton agree that even users that have the cash would do better to use a leasing finance deal and put the cash toward another purpose rather than tie it up in a capital purchase. ?Most finance managers realise that,? says Thornton. ?It is not really a hard sell.?
A variation on leasing is renting, although in legal terms the phrases are virtually interchangeable. In practice, leasing refers to a long-term deal and renting to a short-term deal in which there is no ownership of the kit at the end of the term. Another difference is that lessees are responsible for the maintenance and care of kit, whereas hire companies are responsible for replacing rented kit. But you can be sure that the costs for both can be built into the charges ? it?s just that the maintenance charge may be more hidden in leasing.
Barry Watts, European business manager of Livingstone Hire, agrees that hiring and renting are more expensive than leasing, but says they offer a degree of flexibility that leasing cannot. Even though most leases today allow for equipment to be traded in and upgraded at least once during the life of the contract, many firms need the immediacy of a renting arrangement.
?People need systems for trade shows, exhibitions, for demonstrations and for research and development, and they just don?t want to get involved with a long-term lease,? he says. ?They just want the equipment and software at once and send it back when they?ve finished.?
Nor do customers always want to pay the full price for their IT all at once, he says. Furthermore, the companies that provide equipment without large financial outlay ? like resellers that hire and lease ? quickly become an invaluable part of the way that firms manage their IT requirements.
Watts says: ?We have large customers who will regularly rent kit so that at any time they invariably have some equipment from us. But it is still cheaper and easier for them to rent rather than buy outright.?
Leasing grew in popularity when it offered big tax advantages. Although many of those tax advantages have been reduced or lost, leasing has retained its reputation as a canny way to acquire IT. At one time leasing contracts could only be used for hardware, but these days a leasing contract can be used to cover software, including bespoke software, the programming and consultancy, plus ongoing maintenance and support.
Smith says: ?In effect an entire IT budget can be spread over a long period, with predictable monthly amounts that can be budgeted for.?
Today, leases can also be changed mid-term. The days when a contract for three years locked the customer into a system which it grew out of within a year have long gone. Leases can be altered, upgraded and amended by paying off one lease with a new one.
A sensible reseller will have a portfolio of finance and lease providers, not just one. Jon Davies, director of business development at GVD Finance, which provides financial services to Siemens Nixdorf, says that using finance contracts as an alternative to money is a sensible strategy for reseller and customer, but it is also necessary to match each customer with the right financial provider.
?There are distinct differences between the different players and the facilities they offer, and it is a question of matching the right provider with each customer,? he says.
A blue-chip customer, for example, which is just looking to replace its hardware but will support the system with its internal IT people needs a different deal from a small start-up company, which has little disposable cash and is looking to spread its costs over as long a term as possible.
?At one time,? says Davies, ?the eventual ownership of the kit was an issue, but these days with life cycles being so short, customers often prefer ownership to remain with the finance house. Then it?s their problem to dispose of the kit at the end of the contract.?
Many companies find the idea of mid-term upgrades very attractive. Davies says: ?Users hated the thought of being committed to a long-term agreement long after the machines had become redundant, but that never need happen these days.?
Les Leszczuk, sales manager of Planet Solutions, agrees, saying: ?We offer what we call a refurbishment programme, which means we will upgrade mid-term and take the kit off the customer?s hands at the end of the life of the contract.?
For resellers, the quick cash flow that leasing brings, combined with the high residual value which can be built into contracts if that is what is required, makes leasing extremely attractive.
?Each lease varies and is individual to the customer and to their business requirements,? says Leszczuk.
Planet Solutions will even take on old and already installed legacy kit as part of a leasing contract, and then allow the customer to upgrade after a predetermined period, and dispose of their legacy kit as part of that arrangement. ?We often give the old kit back to the makers,? says Leszczuk.
Planet Solutions arranges finance deals for resellers so they can provide financing and leasing to their customers. ?We talk to each reseller and arrange the finance and leasing which best suits them and their customers. Then, in effect, the reseller sells the leasing contracts for us.?
But, according to Leszczuk, leasing is never a hard sell. ?Think about it,? he says. ?If you are offering a customer a complete system ? hardware, software, installation services, training and support ? for only a small charge up front and then a series of predictable payments, well, wouldn?t you be interested? Combine that with the fact that it makes business easier for the channel and you?d think that all vendors would be making sure their customers were aware of leasing.?
Most of the major vendors have a leasing package available through resellers, which usually, although not always, earn commission on it.
?It would be dangerous to make sweeping claims because each provider and each contract is different, but in general every customer and reseller can tailor the deals as they want,? says Leszczuk.
K2 Systems is one reseller that offers leasing and finance to its customers. MD Tim Baugh says: ?We bring in the leasing option very early when we are talking to a customer, and it definitely influences the sale. Apart from being beneficial to us because of the cash flow advantages, it is good news for the customer.?
K2 has financial partnerships with several companies, including IBM and Hewlett Packard, which have their own finance divisions. The company is also able to offer software-only deals and deals to small clients that may not qualify for the large vendors? finance houses.
Baugh says: ?It requires very little work on the part of our sales people. They get the basic information which they pass on to the finance source which we think is best, and then they work direct with our customer. We get the money about a fortnight later. Basically we act as a marriage broker, and it ensures that we are constantly in a positive cash situation.?
Baugh says that many customers regard leasing as the standard way to acquire IT and IT services, and view leased services as another way of reducing IT costs, at least in the short term. He says K2 is even able to arrange payment holidays and other special payment deals to make life as easy as possible for their customers.
?There is definitely an increased demand for leasing,? he says. ?There is very little resistance to it. About 60 per cent of our customers do it, and 70 per cent of the value of our deals are leased. It may be little more than rental but it makes a very good business proposition for everyone concerned.?