Brian Cantwell reports on ideas to future-proof the leasing way of life, from the second annual Leasing Foundation conference in Paris
The leasing industry has never been accused of being too glamorous. Despite its considerable financial weight, the asset finance industry is seldom covered in the national press. Its personnel are diffuse and tend to come to the leasing market from other areas rather than seeking asset finance as a platform to launch a career. The industry also struggles to attract the top graduate talent which populates other branches of financial services, and its gender imbalance looks very dated. Critics call the market too safe, too staid and too set in its ways.
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In some ways they’re right.
But the leasing market finds stability in familiarity. The flipside benefit of the current state of the leasing market, perhaps in its processes and heritage, include its solid, predictable rates of return so attractive to investors which draws a flock of institutional investors, securitisation vehicles and private equity houses. Market rates are at historic lows and competition for business is fierce among lessors. The corporate consumer, and particularly small businesses, are the most valued they have been in market history.
Yet asset finance is becoming a victim of its own success.
Earlier this month a cross-section of top leasing brass gathered at European lessor Société Générale’s Paris headquarters, in the north-western corporate sector of La Defense, to debate some of the challenges to the business of the leasing market.
The conference had its peripheral moments, including talks from insightful French Buddhist monk Matthieu Ricard, and charming performances from a near-blind 87-year old Cuban jazz pioneer Numidia Vaillant. But it was at its most useful when senior figures took the lead on the conference’s raison d’etre: to discuss why the leasing industry follows and does not lead.
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By GlobalDataInnovation
While some readers might cringe at the sound of a buzzword like innovation being thrown about, consider the awkward silence in the room as CHP Consulting chief operating officer and board member Andrew Denton asked a packed audience which leasing firms had research and development departments. The response? None.
It’s precisely why Peter Thomas, chief operating officer of the Leasing Foundation, has had to work hard to get traction for the Foundation, gathering momentum that has seen senior industry figures join the fellowship of the Foundation in ever-greater numbers, to tackle a market beset by traditional processes and thinking.
The crux of the conference saw a discussion on leasing innovation between ex-IBM Global Finance and IAA-Advisory consultant Nick Gallup; leasing industry veteran and Maxxia chief executive Roger Skinner; Siemens Financial Services Commercial Finance global chief executive Jonathan Andrew; and Finnish leasing executive and senior advisor at Korvenpoika Oy, Artii Aurasmaa.
Each speaker touched on papers they had written in preparation for the conference on innovation in the industry, to bring modernising theories and influence from other sectors into the leasing industry’s pragmatic way of arranging business.
Below are some highlights of the discussion that Leasing Life thought summed up the types of thinking that will help to move the industry into the next generation of business.
Artii Aurasmaa: "I had to think first about the terms that we would use; we were supposed to talk about innovation, about leasing; about the catalysts [for the industry]. Innovation can be defined in a number of different ways, and for me it’s a very broad concept but includes doing something completely new and hopefully something better. Whereas it seems that there are not many research and development departments in leasing companies, I think innovation has to be at the top of any agenda of any industry; because I associate innovation with my definition of leadership. Leaders are needed if you are to change something about your company. If innovation is doing something new, then leadership is all about innovating."
Aurasmaa made an important distinction about the semantics of the word ‘leasing’ and the resultant narrow thinking of the market.
"I think that ‘leasing’ as a term is misused in Europe. In the US it stretches to everything. ‘Asset finance’ is too narrow; ‘life-cycle management’ is again too narrow. What we should be looking at in this conference is how this industry could be the catalyst for change; how assets are being acquired, used, managed and redeployed. That’s the greatest opportunity; that’s where I see the greatest room for innovation and great improvement."
Case study – Secto Leasing
Aurasmaa referenced Finnish-based car leasing company Secto Leasing, writing in his paper that accompanied the conference: "Secto were the forerunners in developing the leasing service for the first concept electric cars at a time when nobody else was interested in the market… more importantly they went the extra mile in studying customer needs around all of the services needed during the life cycle of the electric car – insurance, servicing, charging batteries and even the network of charging stations in Finland. Secto used this understanding to package all of this into a neat leasing offering – and it managed to lobby local authorities to provide electric car subsidies only to leased cars (by distributing the subsidy over the use of the car the government could prevent the misuse of subsidies through exports of the newly purchased cars.)"
Aurasmaa highlighted how Secto’s experience had allowed it greater success in the leasing market.
"Secto’s penetration rate in the Finnish market is nearly 80-90%. That’s the proper lease penetration as opposed to 20%-like penetrations. And why did that happen? This little Finnish company was there to change the market, to catalyse the whole business of selling and using electric cars. This whole process is going to happen throughout the world. But when we see electric cars being deployed, there are interesting problems that we will face; the [power] grids won’t hold; there’s not going to be enough electricity. What we’ll see in the next 20 years is lots more power generation, either nuclear plants or windmills, and the grids will need to be financed. It requires something like the leasing industry to take the market-makers role, and to change it. Otherwise the change will take too long. Then you are going to have the problems of running out of natural resources and having the opportunity to enjoy what the globe has to offer to us. If we can achieve something like that, then we can see that [the leasing] industry has a meaning, it has a purpose, it has an identity, and it starts to attract people, it starts to attract top talent, and good things will happen."
Institutionalised behaviour
Siemens’ Jonathan Andrew’s interpretation of innovation was more applicable to the strong manufacturing background he has, with previous stints at Gateway and General Electric.
Andrew said: "There is this institutionalised behaviour that you get in many businesses that is very different to that of financial services, and I think what you have just described about the Finnish electric car market is a great example of how you shift a market, but you’re disruptive to the extent that you’re challenging existing players in the market so you’re creating a new market from start. You’re not trying to shift a marketplace; you’re trying to create a new marketplace that’s going to challenge some existing ones.
"As we look at new products or services, our market changes and serves the demands of our customers which are more around solutions than they are around provisions of pure assets.
"One instance that came to mind in our organisation – we have multiple levels of training of management programmes, and one of the challenges that’s set for some of the more junior programmes is on a cross-business, cross-nationality basis. They have to work on little projects called business improvement processes, part of which are around innovation.
"A number of years ago one group came up with an idea, primarily in the health care industry, and in the semiconductor business, of producing an implanted heart monitor, that was going to predict when you were likely to have a major seizure or disruption. They combined that with a way of getting that to talk to your mobile phone. This was a group of six people doing this around the globe in their spare time. Now it’s taken off in the US. It allows clinicians and hospitals to be aware of problems far earlier than the patient.
What’s neat and relevant was that there was someone from the financial services industry involved in that, who didn’t understand the technology, but thought about the go-to-market element, and thought they’d produce that little piece of equipment. Why do we want to sell it to the market? Why do we only make it available so that somebody can rent it? And that has really started to get a level of momentum. It’s never going to sell for millions in capital costs but it’s once again a disruptive way of introducing a new technology into the market where actually it’s very hard to enter that space, because the only way you can get to it is through some kind of rental product."
Innovation: proactive or response?
Maxxia’s Roger Skinner said that in a corporate world with innovation within the business is where it added value. "Innovation could be incremental, with small steps, rather than giant leaps. It improves as we see it," he said.
Nick Gallop of IAA-Advisory said: "I don’t think the terms proactivity and response are mutually exclusive [terms] at all. The world changes, then opportunities change with it and financing can help deliver those changes in the way that Artii [Aurasmaa]was describing – finance enabling the change itself to happen."
Aurasmaa added: "I think innovation can be found anywhere. If innovation is defined as creating something better, it can definitely and should be proactive, but it should be reactive, and down to the timescale and resources. There are not many dedicated resources even in the larger firms for us to do development. Research is something that doesn’t pay off anyway so it ought to be done academically. Nevertheless I still think that the most commercially viable innovation is typically combining something that exists and patching it in a better fashion. ‘Asset finance’, or ‘leasing’, or whatever we call our industry should be good at this because finance is one of the pieces of the puzzle when you’re creating something new. Everything needs to be financed."
John Andrew made a further definition. He said: "We have to differentiate between innovation and invention. One of the main differences between the two words is that innovation is the skill of being able to monetise something, to make something economically sustainable, rather than having a great idea that can’t gather funding. Our industry needs to get smarter, and better at adopting ideas that work in other industries. I’m not sure that we’re aware of some of the innovation that’s going on either in parallel or even far-flung industries around us that we can adopt and apply to our market.
"Take, for example, big data. The credit card companies are pioneering it at the moment and they are pretty close in many ways to what we do, in using social media, behavioural underwriting, taking risk based around people’s interaction and social networks, and profiling people. What is our industry doing around that, particularly in the SME space? To really say that there’s an added dimension to understanding risk, and are we really applying that? There are a lot of examples from outside [leasing] that we need to spend more time looking at understanding and really looking at bring to our business."
Cross-pollination of leasing innovation
Andrew said: "We recognised about three years ago that we needed to do something a lot more proactive around innovation across our businesses, and this wasn’t something you could do in a vacuum. And so we created a group, a global group, and asked everyone in our business if they’d like to join an innovation team, not really being aware of how many people would respond, and we had over 300 applicants from around the world of fantastic quality submissions.
"People had taken time to prepare 30-page submissions as to why they wanted to be a part of the team. Eventually we boiled it down to 10 people. That group meets on a regular basis; they use all of the tools that are available to do that, by trying to share some of the knowledge and ideas that exist in different geographies – what’s local to them in different markets – and try to combine that into something that could be meaningful for us. It’s about getting a cultural innovation to thrive in a large corporate environment which isn’t always conducive to that."
Driving innovation
Nick Gallop said a strong team approach to innovations on the every-day methods and processes could reveal rich rewards.Gallop said; "The paper I wrote discussed a few approaches to driving innovation. One was a product at IAA-Advisory called the Captivation Workshops. Very simply, it tries to drive clarity on goals, mission and processes. I think in our industry it’s particularly valuable in supplying finance for another organisation, that you have two cultures working together. If we can get the boundaries together so all can work as a team you can really improve the way you jointly deliver the finance product. Innovation delivers lots of little changes, but because you’re focusing on the most important common elements that are the weak points, it actually delivers noticeable effects really quickly, certainly within a month.
"We’re often quite unrealistic about how good [we as organisations are]. There was some research done by Bain & Co a few years ago on asking people if their company offered them a superior service – they were not only finance companies.
"Something like 80-85% of people said their company offered a superior service. They then asked customers, who generally were able to control their enthusiasm! About 10% of the companies thought they were being offered a superior service. Customers can give a healthy reality check, which is what customer satisfaction is about. The best question to ask customers is: what’s the one thing you’d have us improve? The focus in the question prevents diatribes, and gives practical feedback."
Gallop further explains in his paper: "Combine systematic customer feedback with a planning approach like the captivation workshop to prioritise improvement efforts. The result is an improvement plan that is a response to customers’ issues. With small projects, experience shows that the marginal cost of improvement is low, usually being achieved with a more effective use of existing budgets."
Group sets of innovation types
Roger Skinner talked about the need for a rebellious nature of innovation, and the trust required in corporate structures in order to allow them to flourish.
Difficulties arise when trying to secure funding from the main corporate hierarchy in order to develop innovation, but with no guarantee of any return on the development cash. Skinner worked with Andrew Suckling, group executive for innovation for McMillan Shakespeare Group on his paper, highlighting five systems where innovation can be brought into corporate structures:
- Top-down systems of innovation are driven by senior management identifying strategic imperatives and thereby "pushing" the direction of the innovation. Companies that only push work improvements from above may only generate lukewarm front-line enthusiasm for the change programme.
- Bottom-up innovation models "pull" process improvement, ideas and solutions from all employees, typically with a large focus on the contribution and buy-in of front-line staff (in terms of both the idea process and solution implementation).
- The continuous improvement approach where ongoing improvement is part of everyone’s job description. Individuals or teams suggest local improvements and then with the support of management help to trial the improvements.
- The campaign-based innovation model has similarities to the bottom-up system. The process is conducted in a time-limited campaign. Senior management provide the campaigns with a topic focus.
- Disruptive innovation is developed by a small and loosely structured group of people who research and develop a project primarily for the sake of a new idea, for radical and disruptive innovation.
Skinner quoted the late Apple chief executive Steve Jobs in his paper.
"Innovation comes from people meeting up in the hallways or calling each other at 10:30 at night with a new idea," Skinner stated. And Eric Schmidt, executive chairman of Google said to a graduating class of Boston University: "Innovation is disruptive. You know you are innovating when people are worried about you. Make people worry. Give them a shock. Try something new."
Skinner concluded in his paper: "Look around your office. If everything and everyone looks familiar and feels comfortable, it may be time for some of that shock treatment.
"Your growth and your very survival may depend on it. It’s critical that innovation is never buried away in the business. It must be embraced by the CEO and the board.
If it isn’t, the core business may drag it off into a dark alley and kill it. Innovation is both a threat and a distraction to the core business!"
Conclusion from the editor
Incremental change begins with small steps. The leasing industry has had a lot of change foisted upon it across Europe by the global financial crisis; one of the ways of making sure it maintains control of change, be it through changing economic climates or social attitudes to leasing, is to make sure the leasing business has a recipe for change and innovation in its business plan.
