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July 1, 2010updated 12 Apr 2017 4:22pm

Green light for growth

In the world of IT finance, marked volume increases, international growth programmes, acquisitions and competitive pricing have become the standard in recent months as lessors identify a wholesale shift in the way businesses acquire technology assets With economic hardship continuing to affect markets across Europe, the IT finance sector is enjoying markedly high volumes as customers turn away from outright purchase, say major captives like Dell, Cisco and HP.

By Claire Hack

Green traffic lightIn the world of IT finance, marked volume increases, international growth programmes, acquisitions and competitive pricing have become the standard in recent months as lessors identify a wholesale shift in the way businesses acquire technology assets. Claire Hack talks to some of the market leaders to find out how things are taking shape.

 

With economic hardship continuing to affect markets across Europe, the IT finance sector is enjoying markedly high volumes as customers turn away from outright purchase, say major captives like Dell, Cisco and HP.

What’s more, there are concrete plans for growth among both independent and captive providers, as many seek to move out of their Western and Central European comfort zones and into newer markets such as Eastern Europe, Africa, Latin America, China and Japan.

According to many funders, furthermore, a clear shift is taking place, away from the lease of hardware alone and towards ‘solution’-based models, including software, storage and other services in a single package.

 

New player

Deutsche Leasing, for example, is reportedly expecting growth in IT finance over the next year despite having only joined the international playing field in the last three months.

Michael Hellmann, managing director of Deutsche Leasing Information Technology, said: “We’re just getting into new markets and IT finance products for international markets will be available from the 2010-11 financial year.

“We only started internationally in IT a couple of months ago, though, so we can’t tell which market will be the biggest. We think our main markets are going to be the UK, France and the US,” Hellmann said.

The company already has a solid platform in Germany, with volumes of €530m achieved annually, but saw an opportunity to expand into a market with a potential value of several billion euros by going live across the 22 countries in which Deutsche Leasing operates.

Hellmann said: “It was part of our major growth strategy to move into international markets.”

Software leasing, he added, is also growing in popularity among Deutsche Leasing’s clients.

“We don’t just integrate software licensing into an agreement – we integrate elements like customising and training, so the customer is able to incorporate the complete software project,” Hellmann said. “We regard software leasing as a widespread instrument.”

The company’s main competitors are CHG Meridian, ECS and vendor finance providers like IBM Global Finance, Hellmann said, which, like many others in Europe, have moved away from “classic” leasing into much more service-based models.

“We’re also moving in this direction, increasing service offers like asset management, insurance, data erasure and others,” Hellmann said.

 

Pros and cons

However, the high demand for leasing in the IT sector, much like elsewhere, is offset by a general lack of customer creditworthiness, even among larger companies, he added.

“These companies have more than 1,000 employees and annual revenues of hundreds of millions of euros, but they don’t have creditworthiness because of the financial crisis,” he said.

Nevertheless, Germany remains second only to the US in terms of volumes in the IT sector, Hellmann said, followed by the UK and France.

And Deutsche Leasing continues to work with some of the largest businesses in Germany, including vendor finance arrangements with the country’s market-leading telecommunications company.

Major captives like Cisco Capital, furthermore, have also benefited from the economic downturn, picking up significant market share in response to several bank-owned lessors withdrawing from the IT finance sector.

The problem, however, is that now that customers are faced with fewer choices they are becoming more discerning – and more demanding – Tim Shockley, general manager of Cisco Capital’s European arm, said.

“They’re becoming more demanding in terms of what type of financial product they’re looking for,” he said. “Where traditionally companies like Cisco and other big manufacturers just thought in terms of closing business via purchase, we’ve now got a lot more focused on offering financial proposals. Customers are focused heavily on operating expense-type solutions to help with cash flow.”

The picture, Shockley added, is the same across Europe.

“Market dynamics have changed – how you buy technology, how you finance it, how you use it and how you replace it. The financial model has become critical across Europe,” he added.

 

Aggressive pricing

Cisco has recently bolstered its presence in video conferencing equipment, with the recent acquisition of specialist provider Tandberg – a deal completed within the last two months.

“They really lend themselves to leveraging a great financial model, and Cisco Capital can help them scale,” Shockley said, speaking on the potential for leasing to boost the new acquisition’s growth.

“Customers want flexibility and aggressive pricing, which is what Cisco Capital does all day long,” he added.

“Companies that don’t have the financial capability of Cisco Capital are in a much more challenged position.”

Demand, Shockley said, is “simply not an issue”, as opportunities continue to be rife in the wake of the financial crisis.

“By far, [Cisco Technology] would be the so-called 800-pound gorilla in this space, recognising how many other players there are to fill the rest of it,” he said. “Demand isn’t our challenge – it’s how to maximise our efficiency.”

Penetration rates have already risen among network-switching customers over the last five years, he added, and are likely to rise in the data centre market as well.

Shockley said: “This is a very big opportunity for Cisco Capital because the data centre has probably the best penetration rates with respect to leasing and financial solutions. We’re putting a lot of energy and focus into that space.”

The company is also looking to increase its footprint in Europe, with plans to expand into Germany, Austria and Switzerland in the next few years.

“It’s a big opportunity for us – it’s a massive market. We’re investing in it heavily because we feel Cisco Capital can grow in that space much faster than in the rest of the markets,” Shockley said.

 

New markets

Fellow captive HP Financial Services (HPFS) is also looking to grow, although its plans are focused not on developed economies like Germany but on emerging markets such as Eastern Europe, the Middle East and Africa.

Paul Sheeran, vice-president and managing director for EMEA at HPFS, said: “We’re looking at how we can expand our footprint. Overall, we’ve actually done quite well in the last couple of years – obviously, in the downturn, we haven’t been completely unaffected, but we’re seeing growth coming back into Europe.”

Agreeing with Shockley’s assessment of the market, Sheeran added that a significant factor aiding the upturn at HPFS is the fact that customers who would traditionally have used cash to fund IT assets are now turning to financial services.

“Our team are pushing the total cost of ownership concept, looking at purchasing models,” Sheeran said.

“If you look across Europe, each country has its own story, but we’re pleased with what’s happened over the last 12 months and we remain well-positioned going forward.”

Working chiefly with large corporate clients, HPFS boasts a “comprehensive asset management solution”, according to Sheeran.

“It’s not just about how people buy assets – they’re worried about whether assets are disposed of in an environmentally-friendly way, they’re worried about data privacy and making sure that’s handled correctly,” he said.

“We’re offering a full asset management solution through the lifecycle right down to disposal of the assets.”

And the model seems to be working, as the European arm of HPFS is responsible for just over 30% of the captive’s revenue worldwide.

Software financing also represents another opportunity for growth for HPFS, Sheeran added.

He said: “There’s definitely a growing market for software financing as HP builds up its software portfolio – we would expect that to have a key place in terms of services.”

HP also completed the acquisition of 3Com Corporation in April at an enterprise value of about $2.7bn (€2.2bn) and has further plans for acquisitions in the future, he said.

“As the company grows, organically or by acquisition, we’re making sure we’re part of that,” Sheeran said.

 

Solution selling

Acquisition and expansion have also been key to Dell’s growth, according to Rick Stipe, director of Dell Financial Services International (DFS).

This includes the purchase of IT service provider Perot Systems at the end of 2009, as well as several other key acquisitions, he added.

“They really complement Dell’s suite of offerings,” Stipe said.

“The need for an integrated financing solution has increased tremendously as we transition to solution selling, providing hardware, software and services.”

The pattern, he added, is being echoed across Europe, with penetration rates increasing over the last 18 months.

“With the challenges around capital, and the contraction of credit markets, manufacturer financing or captive leasing has really been a bright spot,” Stipe said.

“Our partners have actually seen some strong signals in the market of an economic rebound, which may lead to improved and higher approval rates.”

Operating in about 16 countries across Europe, DFS is not focused on a single client base, however, working with customers of all sizes. Around 60% of its business comes from the UK, France, Germany, Spain and the Netherlands.

Stipe said: “I think in general terms, we’re really redefining the way we go to market, the way we manufacture, the way we build to order and the solutions that we offer.”

The product is still relatively nascent, Stipe admitted, making up less than 10% of DFS’ revenues, but he expects its continuing popularity to benefit growth.

“It really helps to pull together these complex discussions – it provides the flexibility customers are looking for,” Stipe said.

The company is also seeing “good signs of corporate refresh”, with sales growth of more than 20% across its large corporate customer base.

Stipe said: “It’s something we haven’t seen for a while. Our expanded offering is able to present customers with much more than just affordable notebooks.

“It includes services such as software, and we’re moving into an expanded storage product line, which has helped trigger this refresh.”

Growth, furthermore, is expected to continue in leasing as clients look to optimise their operating and capital expenditure, in Europe and globally.

However, Stipe admitted ongoing economic uncertainty continues to have an impact as some customers delay the decision to replace equipment with newer models.

“Customers are not looking to make that decision – they hold off and continue paying rental until they decide they’re able to buy or refresh,” he said.

 

The banking perspective

The demand for leasing from corporate clients is also increasing among non-captives, said Patrick Gouin, global head of the high-tech division at SG Equipment Finance (SGEF).

“This is basically linked to the fact that companies no longer have as much cash – until maybe last year, they were buying equipment or software or other services from their own balance sheet,” Gouin said.

“Now we’re seeing them moving towards using capital to drive their own core activities, particularly focusing on research and development. They’re focusing on what’s key for them, rather than keeping assets which have a short lifecycle on their books.”

Companies are therefore looking more and more for leasing and financing facilities from vendors and banks, he added.

“It’s interesting – we’re dealing more and more with large corporates, together with our vendor partners,” Gouin said.

“From a risk perspective, it’s safer than dealing with small or medium businesses. This is one trend which explains why IT financing is still very safe compared with other assets like construction or transportation, for instance.”

Alongside the rise in popularity for financing facilities for “intangibles” such as software and services, Gouin said, there has been something of a shift away from financing for hardware.

He said: “If you look at the financing market in general – that’s in Europe, APAC and the US – 50% of IT financing is now software and services. This is our approach to the market.”

The third trend visible in Europe, according to Gouin, is the decision among many of the large captives to begin outsourcing some of their financing activities.

“They don’t necessarily want to carry it on their own balance sheet,” he said. “They’re looking to partner up with financial institutions like us.”

And with major funders continually disappearing and reappearing in the market, Gouin said, vendors are now also looking to the banks that remain in the space to offer them long-term stability.

“We’ve had our ups and downs like everybody but in the end, we’ve been there for 30 years longer than other people,” Gouin said.

“People are interested in stability. That’s what we’re seeing in IT finance – clients are being more selective now that there is a limited number of finance providers, rather than cherry picking here and there.”

This is good news for SGEF, he said, with a steady stream of business continuing to come in, including major vendor finance partnerships with Microsoft, secured earlier this year.

 

Good prognosis

The picture overall, then, is one of growth and resilience, as funders’ partners see solid business volumes and the global downturn begins to reverse, according to Rick Trobman, director of global technology programmes at De Lage Landen (DLL).

He said: “We’re well positioned for the future in terms of partnerships. So far, 2010 has been good – we’ve seen a rebound and there appear to be green shoots in the market.”

All signs, moreover, point to a “robust” market for the foreseeable future, according to Trobman.

“We expected solid growth for 2010 and we’ve been lending accordingly,” he said.

The market, therefore, is showing clear signs of health even while the global economy remains weak, and is beginning to embrace the new trends it faces while continuing to grow.

Trobman even pointed out that the current boom in tech finance would only hasten this development, saying: “Such growth is primarily fuelled by the productivity gains inherent in tech investments.”

 

IT leasing at a glance
 

Main European markets

Recent acquisitions

Main staff

Expansion plans

Deutsche Leasing

Germany

Christopher Stein, business developer, IT Finance

Aiming to enter Asia, China, France, UK, US; 10 percent growth in the next year

Cisco Capital

Europe-wide

Tandberg (by parent company)

Tim Shockley, general manger, Cisco Capital, Europe

Aiming to expand in Germany, Austria and Switzerland

HP Financial Services

Europe-wide

3Com Corporation (by parent company)

Paul Sheeran, vice-president and managing director, EMEA, HPFS

Emerging markets – Eastern Europe, the Middle East, Africa

Dell Financial Services

16 countries across Europe

Perot Systems (by parent company)

Rick Stipe, director of DFS,International

20 percent growth already seen in large enterprise space; plans for growth globally

SG Equipment Finance

Europe-wide

Patrick Gouin, global head of high tech division, SGEF

De Lage Landen

Europe-wide

Rick Trobman, director of global technology programmes, DLL

Growth fuelled by productivity gains inherent in tech investments

Source: Leasing Life

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