Despite rapidly changing technology cycles, changes to
capital allowances and confusion over how to implement pay-per-use
strategies, IT equipment financing is proving to be buoyant and
increasingly lucrative to lessors. Russell Davies
reports
Distribution channels
Go deeper with GlobalData
Access deeper industry intelligence
Experience unmatched clarity with a single platform that combines unique data, AI, and human expertise.
Vendor and captive finance programmes, resellers, brokers and
online programmes all contribute to a diverse distribution mix.
John Rees, head of the high tech division of SG Equipment
Finance, says that his business is increasingly vendor focused, and
he sees technology leasing as increasingly going via manufacturers,
true captives, quasi-captives and IT leasing specialists.
There is a greater reliance on the reseller channel, according
to Philip White, CEO of Syscap. This puts a requirement on the
asset finance industry to provide training, and also a service that
reflects the needs of this channel. However, he adds: “There has to
be an appreciation that individual resellers are businesses in
their own right.” They may have alliances with certain vendors, but
they are in business for themselves.
With the reduction in lessor sales forces, brokers are
establishing relationships with suppliers in order to provide them
with links into finance companies, says the managing director of
SME Eurofinance, Neil Hutton. Rod Barthet, chairman of the FLA’s
technology committee, says that brokers are particularly focused on
the SME sector, with growth in the volume of brokers’ business of
around 16 per cent, compared to about 4 per cent for the market as
a whole.
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalDataRapid changes in technology
Because technology changes so quickly, the resale value of IT
equipment is minimal – and according to Hutton, this is the case
almost as soon as it is purchased. A finance company, therefore,
cannot look at it purely as an asset finance deal, and should not
assume that if anything goes wrong, that there will be a
significant resale value. This, in effect, makes the deal one that
is balance sheet-led, rather than asset-led.
It is also important to match the term of the lease to the
economic life of the asset. “What you don’t want to do is to get
customers into longer term leases, just because the monthly
payments are cheaper,” Hutton says.
Alongside rapid changes in IT equipment comes falling costs.
This creates problems for manufacturers, says Rees, because with
the unit cost of technology going down, they have to retain
existing customers and win new ones just to keep generating the
same level of sales. Finance is an essential component in customer
retention in the face of the technical obsolescence of the
products.
Replacement cycles
How should the asset finance industry respond to the way
technology changes so quickly?
According to John Callies, general manager of IBM Global
Financing, the acceleration in technology cycles does not
necessarily make people change their systems accordingly. IBM’s
average lease term for IT equipment has not differed dramatically
in 25 years, largely because most companies that employ technology
do so in tandem with when the technology provides the most
significant amount of incremental value to them.
“Most companies will take PCs and depreciate them over a three
or four year cycle,” he says, adding that that is based upon the
useful life of the asset. “Even if the technology changes every 12
months, they are not going to change their depreciation cycle.”
However, for Philip White at Syscap, the critical factor is that
the industry needs to reflect the ever-changing lifecycles, and
provide facilities that augment rather than inhibit IT strategies.
They need to be flexible enough to allow add-ons and upgrades, and
take into account the business’s own lifecycle strategy and the
economic working life of the asset. “It needs to be the technology,
or the business strategy that is driving the term of the agreement,
not the term of the agreement that’s driving the technology
strategy,” he says.
Tax and capital allowances
As far as Chris Boobyer, chairman of Smartfundit.com, is
concerned, the issues around capital allowances are becoming
increasingly irrelevant. The reduction from 25 per cent to 20 per
cent will largely be covered by the reduction in corporation tax.
His prime concern is ensuring that there are sufficient funders
using the Smartfundit.com platform, irrespective of whether or not
they wish to reflect the capital allowances.
According to Rees, continental Europe does not understand why
the UK has such a focus on capital allowances. “People lease,” he
says, “because they want to have the ability to pay over time, not
because of capital allowances.”
Hutton concurs with both Boobyer and Rees. He does not think
capital allowance reforms are relevant to IT leases when they are
for five year leases or more. “Most IT leasing is not that
tax-driven,” he says, “and I don’t really think that cost makes
much difference.” Customers just want to spread their payments over
time. As far as he is concerned, the change is no different to
rates going up.
Software financing
Most software financing is done via traditional loan products,
but software is becoming a more significant content as hardware
costs go down.
Syscap has been funding software, and the services around it,
for about 15 years, according to Philip White, its CEO, and his
company has specific instruments it uses to fund software.
There are a number of things to be considered, including the
fact that the software licensor’s obligations and rights under the
agreement cannot be diluted. Software financing is one of the
biggest challenges the traditional finance industry has faced, he
says.
“What you’re actually funding is somebody’s right to use
something, rather than actually acquiring an asset, and that
completely flies against traditional asset finance.” There are
implications for tax, consequential loss, rights of repossession
and remarketing.
“It can certainly be a real minefield for people,” he continues.
“But, if you understand the legislation, and you understand the
differing needs of US and UK software vendors, and the way they
would account for it, and the treatment under revenue recognition
requirements, you can start to build instruments and products that
do allow you to do it and still allow the lessor to get some
traditional capital allowance benefits associated with
leasing.”
Software as a service
Software as a service, where clients pay for software on
subscription, is becoming increasingly prevalent. Rather than a
one-off purchase, the customer pays a regular fee for software
which is updated online rather than on a disk. Research published
last year by Survey.com for Smartfundit.com showed around 45 per
cent of the respondents – independent software vendors in the UK –
were already offering this.
Gartner estimates that software as a service will account for 25
per cent of the software market in 2011; currently it is around 5
per cent.
How is this financed? One way, says Chris Boobyer, of
Smartfundit.com, is through a form of receivables financing whereby
a financier is introduced into the supply chain – but is not
involved in the licence negotiation between the vendor and the
buyer – and between 85 and 90 per cent of the receivables due under
the contract are paid up front to the vendor, with the financier
collecting the full amount from the buyer over the term of the
contract. This enables the vendor to replace some of the investment
made in developing the service, as well as reduce the need for
investors to make further equity investments.
Managed services
This is, effectively, where a part of the business is outsourced
to a service provider, and paid for on a regular basis. It has
links with payment for usage, IT as a utility and software as a
service. Like those, it is the topic of a lot of conversations in
the IT sector, with significant business being done, mainly in the
IT departments of large businesses and government bodies. The
demand for managed services is coming from customers, according to
Barthet of SFS. They want services rather than lots of assets. In a
financing world being driven by the customer, funders have to
deliver, he says.
John Callies, general manager of IBM Global Financing, sees
managed services as a continuum to the main leasing business, with
one extreme being where a company completely outsources its data
centre to a managed services company, and the other where the
company wants to own everything. He believes there is a marketplace
along every point of this continuum.
John Rees, of SGEF, believes that the concept of managed
services raises some risk challenges because the industry has been
prepared to finance only the guaranteed minimum payment, because
there has to be certainty over usage. White argues, however, that
there is no real difference between contract hire for a fleet of
cars, and contract hire for a fleet of desktops. Each involves the
procurement of an asset, the ongoing support and maintenance of
that asset, and some level of ownership.
Pay per use
There is a lot of talk about this, according to Marc Tendler,
principal of The Alta Group, and a lot of interest, but it is not
particularly commonplace as yet.
There has to be some critical mass of small company IT
requirements to make it work. A company has to know its usage
levels in order to enter into one of these contracts, especially if
it is subject to a minimum usage charge. He believes that, in the
long term, this is the way all IT will go, it which it becomes more
akin to a utility. There are already a number of utility pricing
models available on the market, some of which adapt the principles
used by mobile phone companies in their charging schemes.
Callies, at IBM, has a number of large finance arrangements
using variable pricing based on usage and he is also seeing a great
amount of interest from clients in the concept. But that interest
dwindles when they see the pricing. “What we’ve found is that most
companies really don’t have the desire to pay a cost associated
with completely variable pricing,” he says. “In the environments
we’re in, what we find more logical is fixed and variable
pricing.”
