Financing information technology (IT) always seemed to be
something of an afterthought, with the result that asset finance
penetration of this lucrative sector has never quite lived up to
expectations. Research by Siemens Financial Services published last
year suggests that this is changing. Asset finance now accounts for
around one-third of all sales in information and communication
technology (ICT), and the take-up of finance at point-of-sale was
expected to rise by one-fifth over the next three years, increasing
the proportion of technology investment funded by financiers to 40
per cent. Even so, this still contrasts unfavourably with such
sectors as print and digital imaging where asset finance accounts
for around 90 per cent of sales.
As to how lucrative this market could be, one only needs to look
at a few figures. According to technology analyst company, IDC, the
global IT leasing and financing market exceeded $70bn in 2006, and
is expected to pass $100bn by 2010, a yearly growth rate of 8 per
cent. IT consultant, Gartner, expects total worldwide software
revenue for software as a service would exceed $5.1bn in 2007 – up
21 per cent from last year. It is forecast to reach $11.5bn by
2011. One much talked about technology – voice over internet
protocol (VOIP) – is also expected to grow spectacularly. According
to IDC, the VOIP market was worth $194.8m in 2006 and is predicted
to rise to $2.25bn by 2011. What it also expects to see is a
continuation of the trend away from a hardware-based revenue model,
and towards a software and services-based one.
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This is not to say that asset financiers have not been active in
the IT sector. The generalist leasing company, SG Equipment
Finance, for example, has been in the technology market for over 20
years and operates in about 24 jurisdictions. Around a quarter of
its business is IT related – this sector accounted for €1.88bn of
new business in 2006, its latest accounting year. Much of its
leasing business comes from its vendor finance programmes, as well
as the refinancing of contracts for large, independent IT lessors.
The company offers finance leasing and operating leasing – because
it will take residual values on some of its programmes – as well as
receivables finance and loans.
Captive IT lessors
IT specialist IBM Global Financing is the world’s largest
technology financier, with an asset base of nearly $34bn, and more
than 125,000 customers in over 50 countries. About 90 per cent of
its assets are IBM-related, if Lenovo PCs are still considered as
IBM, according to John Callies, its general manager. He believes
that being a captive financier confers huge advantages on the
business. To begin with, there is the fact that he can keep track
of all of IBM’s world-wide sales and knows what sells well in
Germany, France and so on. Then there is the brand recognition that
comes with the name IBM. Thirdly, and more importantly in terms of
profitability, he says, is the specialised knowledge that he and
his colleagues can bring to their customers.
Siemens Financial Services is also a captive financier, but in
this case only 2 per cent of its ICT related business is Siemens
related. It has been in the market for over 20 years and uses
direct channels, vendor and captive programmes, and brokers to
obtain business in this sector. Approximately 20 per cent of the
company’s leasing business is for IT products and solutions, and
its finance is available in more than 30 of the 192 jurisdictions
where Siemens operates.
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By GlobalDataSyscap is not a captive financier, but it is an IT specialist –
about 95 per cent of its turnover comes from this sector. Like SG
Equipment Finance, much of its business – almost two thirds – comes
via vendor programmes. Its operations are mostly confined to the UK
but it does support its partners in Europe. SME Eurofinance is a
predominantly UK-based player, like Syscap, with around a quarter
of its business in the IT sector. Its mix of business comes from a
direct sales force – the company has offices throughout the country
– as well as supplier relationships. It also acts as a broker, and
of the 50 finance companies with which it maintains relationships,
about half will do IT financing at some level. It also gets
business from banks and accountants. “If a bank has a customer who
wants to buy a large amount of IT and they can’t do it themselves,
they pass in onto us,” says the company’s managing director, Neil
Hutton. “We get more business from banks than we do from suppliers
or from other brokers.”
These companies all offer financing of one sort or another.
Smartfundit.com is somewhat different in that it is a
business-to-business online marketplace bringing together
technology sellers, primarily software vendors, technology buyers
and financiers at the point-of-sale. The buyer’s name is entered
onto the online marketplace, which then captures all the
information publicly available, including a search at Companies
House and a credit reference search, as well as seeking out
potential financiers. All this is done in a matter of seconds.
“What we have on the platform is the underwriting DNA of all of the
principal funders in the UK,” says Chris
Boobyer, chairman of Smartfundit.com, “so we know which funders
in the UK like dealing with which companies.” Basically this allows
the funders to establish the types of companies that they are
willing to consider funding in terms of minimum net worth, how long
they have been established, transaction size, and so on. Companies
buying a piece of software can seek out alternative sources of
finance as a way of assessing the competitiveness of an offer
already being negotiated.
Online IT
Boobyer sees this online marketplace – which launched in 2006 –
as both innovative and disruptive. It is a question of control, he
says. Under existing structures, software vendors lose control of
their transactions when their customers decide to arrange their own
finance; the customer may have little choice except to use the
captive or vendor finance programme on offer. Equally the buyer
loses control by going down the broker route and the financier
becomes beholden to the broker. “What we’re doing is disrupting the
entire vendor and financier chain in the technology marketplace,
because we’ve put control back into the vendor salesman’s hands and
into the customer’s hands.” The asset finance industry is watching
how this develops with interest and keen anticipation, according to
Boobyer.
Any company, whatever its size, can use the system, and this
reflects the way the IT sector as a whole is changing. Ticket and
transaction size have come down over the last five years with
products and services once reserved for the larger business now
coming within the reach of SMEs, says Marc Tendler, principal of
The Alta Group, but this has not been matched by a real
appreciation of the different market dynamics in the small and
micro ticket markets. According to Tendler, there is an assumption
that customer behaviour will simply be a scaled-down version of the
behaviour of the large enterprise sector. “From our experience,
it’s much closer to the behaviour of the consumer sector,” he says.
“The SME sector splits into small and micro ticket in many ways.
Both have different dynamics, with different needs, delivery
channels and expectations.”
Many micro ticket purchases are done by credit card, so any
lessor is competing with that product at the point-of-sale, and if
the reseller has not been trained to provide finance, it is much
easier for them to get their customers to use a credit card. Hutton
says that a number of IT equipment purchases are done on a small
scale, according to an immediate need, and on an incremental basis.
Someone needing a couple of printers and a PC can go online and
purchase them without necessarily approaching a financier with the
result that financing opportunities are missed. This may help to
account for the relatively low penetration levels in the IT sector
in general.
Asset financiers are also having to get used to a change in the
meaning of the term ‘asset’. This has always been something hard,
tangible and, in most cases, metallic. What happens when this is no
longer the case? Boobyer makes the point that what is important now
is not the hardware but the application that runs on the hardware.
“The assets that companies are becoming increasingly dependent on
are their software applications, be they accounting, customer
relationship management or ticket reservation systems,” he says. In
a scenario where a company’s cash flow comes under pressure, what
will the managing director get rid of first, he asks? Will it be
the accounting system or the CRM system? Or will it be the vans
used to deliver the company’s product? The vans will be the first
to go because alternative delivery arrangements can be made.
Turning off any of the systems will effectively halt the company in
its tracks.
These are not the only changes in the IT sector. There are
debates around managed services, pay per use, software leasing and
so on. Here we try to capture some of the flavour of these
debates.”
