Many people have predicted that the
economic turmoil would hit the IT leasing sector hardest. In
reality, there are still opportunities for the leasing industry in
this market, as Jason T Hesse explores
The IT market has always been
a challenge for many lessors, which historically have preferred to
finance hard assets with easily predictable resale values. Yet, as
the market develops, so do opportunities, and many are now keen to
grow their market share.
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This European market report
identifies the sectors that are most profitable in the current
climate, and looks at why certain asset classes are suffering more
than others, particularly laptops and PCs.
Lessors have already successfully
identified that customers want more than just equipment, and are
now developing cost-effective products to offer “bundled”
management services. This trend is set to continue, with customers
seeking solutions, rather than products. While the credit crunch
has certainly affected the industry, lessors now need to focus on
which assets and products will continue to be lucrative in the
long-term. One such asset-type is data storage, a sector where
demand for business is high, and yet leasing companies are seeing a
flattening out of growth.
Storage
EMC manufactures data storage
equipment, providing solutions to large enterprises, SMEs and
consumers. EMC’s finance arm, EMC Global Financial Services (GFS),
writes over $600 million (€462 million) annually, and has a panel
of a dozen funders in the EMEA region. As a bellwether for the
storage market, it is noteworthy that GFS has seen an increase in
enquiries for IT financing products in the past two quarters.
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By GlobalData“We have seen an uptake in demand
for financing from EMC customers who do not customarily use finance
to acquire solutions,” explains Sandy Neville, director of EMEA
Funding and Operations at EMC Europe’s Global Financial
Services.
“There is a golden opportunity for finance
providers to come in and say, ‘you can continue to invest in
products and tools that will help you to reduce your overall cost –
we can help you get there’”
Despite the increase in enquiries,
Neville says that it is too soon to say what the impact will be on
its business: “I would say that at the moment, year-on-year, we are
flat. It will be interesting to see how many enquiries translate
into volume. Certainly, the early indication would be that people
are looking for alternative lines of funding, in any case.”
Against EMC’s entire revenue
portfolio, GFS has a penetration rate of around 18 percent,
although this number rises to around 35 percent when looking at the
market it specifically addresses (it does not finance EMC’s
consumer services and certain software titles).
Despite GFS’ core customer segment
being finance and banking, the financier has not seen business
levels decrease in this sector.
Neville explains: “This came as a
surprise for us, but can perhaps be explained by the issue of
compliance being so high on the agenda.”
Compliance has become hugely
important in the finance sector, and EMC’s customers need storage
solutions for the data that is being produced “exponentially”.
Depending on who you ask, EMC’s market share in the storage market
is between 30 and 40 percent in Europe.
GE Capital Solutions has also
caught on to the interest in storage products, and this month is
launching a Europe-wide payment holiday with a major IT
manufacturer. The offer, which will be aimed at medium-sized
companies, will delay first lease rentals by three months.
“Although businesses may stop
upgrading laptops, they always need more storage, so we have seen –
and are continuing to see – continual growth in this market,” said
EMC’s Neville.
Richard Ryan, a partner at the
leasing consultancy Invigors, agrees with this assessment: “Many
organisations are under legal obligations to keep data, for example
with Sarbanes-Oxley, so people’s requirements for data storage are
increasing steeply. This sector has boomed in the past few
years.”
Servers and desktops
The server and desktop PC
market, on the other hand, is especially vulnerable, according to
Ryan. This is echoed by Charles Ward, the chief operating officer
at Intellect, the UK trade association for the IT, telecoms and
electronics industries.
“It’s important to not just focus
on industry sectors,” he explains. “Yes, clearly the construction,
leisure and financial services industries have been particularly
affected, but there is also a trend to watch in product
sectors.Generally, providers in the PC or laptop arena tend to be
more sensitive to economic sentiment than those at the other end of
the spectrum, who provide long-term outsourcing solutions.”
Although Intellect is seeing signs
of very cautious behaviour within the marketplace, Ward points out
that there are still sectors out there that are set to remain
profitable. For example, the public sector tends to order long-term
projects, so this will be one of the least impacted sectors. This
reflects the general consensus that large projects in general are
still going ahead, despite a decrease in funding for small and
medium-sized enterprises.
Ryan believes this is because SMEs
are usually seen as “riskier” than larger established corporates.
Indeed, EMC’s Neville considers it “lucky” that GFS’s customer-base
is large corporates, and not SMEs.
Discretionary and essential funding
Although it is thought that
large corporates will continue to invest in IT, there is an
important divide between discretionary spending and essential
maintenance. Nick Mayes, a senior consultant at Pierre Audoin
Consultants (PAC), which provides software and services
information, said that there is “real pressure” on discretionary
budgets. Research conducted by PAC has revealed that most
discretionary budgets have been frozen until after the first
quarter of 2009.
Forrester Research confirms the
trend, saying that 31 percent of IT departments in Europe have cut
their budgets. However, things could be far worse. In North America
some 49 percent of IT departments have cut their budgets.
“This is where companies are being
hit hard,” explained Mayes. “Even when budgets become available
again, they are likely to be much lower than before. The levels of
approval for spending decisions have become so convoluted, with
finance departments becoming more involved, that it has become very
difficult for projects to be approved.”
Customers will only sign for IT
projects that will give them a long-term return on investment
within six months, he believes.
But Jennifer Koppy, a research
manager at IDC’s Technology Valuation Service, thinks there is an
opportunity for leasing companies here. She believes there are very
strong value propositions for investing in hardware, due to new
technologies becoming more efficient. Leasing companies can help
customers to “get over the hump” of going into the CFO’s office and
justifying the spend.
“There is a golden opportunity for
finance providers to come in and say, ‘You can continue to invest
in products and tools that will help you to reduce your overall
cost – we can help you get there,’” she says.
Total solution
Intellect strongly supports
the idea that investing in IT can have a “spend to save” effect.
This is especially true in periods of economic downturn, where
businesses should consider investing in new systems that could
deliver a quick return-on-investment.
There is not always an economic
advantage to stopping IT spend, according to Ward. For example,
with planned upgrades or software migrations, there is often an
additional cost to delaying. “The deeper and more complex a
solution is, the more difficult it is to stop,” he explained.
Large “solutions-based” IT packages
have become an integral part of the industry, as customers demand
more than equipment alone. Offering these products is essential for
lessors to grow in the IT leasing industry.
Peter Austin, a general manager at
Siemens Financial Services, agrees that this is where the IT
leasing industry is heading, and says: “You need to look at
offering a wider package than just the kit. Hardware only accounts
for one third of the cost of an IT solution, and customers want a
finance solution that covers both the hard and soft costs.”
For example, Siemens Financial
Services provides white label finance for SAP Financing, which
covers the total cost of an SAP solution, including hardware,
software, customisation, implementation, training and
maintenance.
Koppy wholeheartedly agrees with
Austin. She believes that there is an important gap between what
customers expect and what they’re receiving from IT leasing
companies.
“The overall theme is that
customers are looking for the provider to supply more than just
capital and cash, but also to provide a service to manage their
IT,” she explains. “A lot of end-user businesses we speak to say
that they want lease management services.”
According to IDC, customers are
looking for a long-term partner that will help them to manage
assets and meet internal and external financial reporting
requirements. In fact, in IDC’s 2008 IT Leasing and Financing
Survey, around 60 percent of respondents said that an important
reason to lease is to take advantage of lease management
services.
This trend could also partly
explain why there is a rising demand for operating leasing, rather
than finance leasing in the IT market.
Operating leases
Traditionally, finance leasing
has been the main method of financing IT. In the UK, for example,
the Finance and Leasing Association calculated that in the IT
market, 45 percent is financed with a finance lease, and only 18
percent through operating leases (the rest is hire purchase, loans,
and other financial tools).
GE Capital Solutions is also seeing
an increasing demand for operating leases, explains Véronique
Leroy, GE Capital Solutions’ IT marketing leader in Europe.
“More and more, we are seeing
customers move from an ownership mentality to a usage mentality,”
she says. “Because of the quick obsolescence of IT equipment,
customers are all looking at IT as a service – they do not want to
own the equipment.”
Leroy also does note, however, that
when companies do want ownership of the equipment, it is SMEs
rather than large corporates.
Residual values
One of the difficulties
surrounding operating leases, which may explain the low proportion,
is the issue around setting realistic residual values. Invigors’
Ryan believes this is the case, as IT is an asset class where there
is constant pressure for prices to decrease, while performance
tends to increase.
“It is slightly trickier to assess
true residual values with IT, because it’s one of those asset
classes where price performance tends to push prices down, rather
than inflate at all,” Ryan explains.
The credit crunch has had its say
in the matter, too. Koppy believes that as vendors give steeper
pricing discounts, average prices go down, which has an impact on
residual values.
“Many of these segments have a
fairly lean margin already, and equipment is only getting cheaper,
faster and better. In 2009, vendors will be hungry to maintain
their market share, so they will cut prices,” she says.
“The immediate effect is that the
hardware will become very inexpensive, and this will have an effect
on the secondary market, because prices will go down
significantly.”
IDC believes that the pace of
technology innovation will continue to be “very brisk”, and
suggests that the “subset of companies” that halt IT spending will
instead acquire equipment from the secondary market. There is also
concern that companies are looking to hold on to their assets for
longer periods. As companies put off IT investment, Leroy said she
had noticed that although it was too early to tell what the impact
on residual values might be, companies are definitely waiting
longer to upgrade their equipment.
Remarketing
Remarketers have also seen
residual values decrease. In fact, Dataserv, a pan-European asset
retirement service, even expects the “significant downward impact
on residual values” to continue through the second half of
2009.
Neal Saunders, its managing
director, believes price pressure on IT assets can be attributed to
two reasons. First, the supply price of new equipment is continuing
to fall. “The residual value of a three-year-old asset is under
significant pressure, compared with what someone can buy a new item
for,” he explained.
Secondly, the emerging markets,
where most used assets are sold, are also experiencing economic
problems, and disposable income for second-hand computers has been
reduced.
In order to continue to deliver
fair residual values to its leasing company customers, Dataserv is
trying to sell second-hand IT assets closer to their final
destination, cutting out the middlemen (and commission) as much as
possible.
EMC, on the other hand, has seen
its remarketing business bloom. EMC products have been designed so
that they are scalable – their architecture has not changed since
1984.
What this means in practice is that
slower, older equipment can still be used today. EMC calls this
“n-1” technology, and it is sold at a reduced cost. For example,
customers with a large EMC data warehouse will traditionally not
only have brand new equipment – the customer will use new
technology for data that needs to be accessible quickly, and the
rest will be previous-generation equipment, for long-term
storage.
Thus, when it comes to remarketing,
EMC takes back the equipment, refurbishes it, and sells it with an
EMC used-warranty.
“Because the product lends itself
to this approach, we’ve been very successful with refurbishing and
remarketing previous generation equipment,” explains Neville. “Our
customers can use this n-1 equipment as redundant backup, or as
lower specification storage, for data that isn’t needed
instantly.”
The future?
As to the future, a key issue
facing financiers is whether they will struggle to place credits,
whether captives will continue to have access to finance, and
whether the SME market continue to be a worthwhile customer
segment.
What is definite is that for those
finance companies involved in IT leasing, there are still good
opportunities to be had. The marketplace has not dried up.
Customers still want to lease IT equipment. The true question is
whether leasing companies are willing to evolve in parallel with
the market, to address customers’ needs and requirements. Only time
will tell if this will happen.
