Consulting » Lease likely

If ever there were a buyer’s market in IT, this has to be it. With vendors chasing vanishingly slight slivers of business, and big corporates deferring IT spending month after month while they wait for the economy to recover, any client with a budget is manna from Heaven.

Deals are being closed today at prices vendors would have walked away from two years ago. Not surprisingly, in this cut-throat climate, clients are finding that vendor financing is a flexible, deal-making instrument.

What makes today’s IT leasing arrangements – particularly financing deals – so appealing for corporates is that there is virtually nothing that can’t be wrapped up in the lease. Vendors are willing to have software and services, including systems development work, lumped together with hardware in off-balance sheet deals at attractive rates. A few years ago, IT leasing deals were based pretty much on the ‘tinbox’. If you couldn’t kick it, you couldn’t drop it into the lease. But vendors have rewritten the rule book.

John Openshaw, Sun Microsystems’ regional leasing manager of the UK and Ireland, says a leasing deal is seen by vendors as an ideal mechanism for bedding down a long-term relationship with a client. The value of the lease to the vendor is not necessarily the hardware and software being sold on today’s sale. It is, in effect, the view the vendor takes on the value of that particular client company to the vendor.

On this basis, it is no wonder that vendors who have traditionally left financing to the banks have begun developing finance arms of their own.

Fujitsu Siemens, the (TM)5.5bn turnover IT and electronics giant, is a case in point. As Mike Oxby, head of customer financing for Fujitsu Siemens Large Enterprises, explains, his division was formed because Fujitsu Siemens needed to offer something more than its ability to sell hardware in a difficult economic climate.

“Finance is now very much a part of the overall solution the customer expects. Being in the hands of third-party providers to negotiate this side of the deal puts one at a disadvantage, compared with other vendors that have their own financing arms. It was with this background that we formed our own sales financing team, and it has already more than proved the validity of the concept,” says Oxby.

He is quite categorical that Fujitsu Siemens can take risks based on its understanding of the real needs of the customer that a bank would not entertain. Adding software and services is one example. Another more technical instance is capacity on demand, or providing customers with more processors in the box than they need.

A Fujitsu Siemens lease can cope with the idea of additional capacity being switched on and off as occasion demands, whereas a traditional lease struggles with the idea of dynamically changing values.

Traditional leases were based on a predefined amount to be paid back over a specific time at a preset interest rate.

Modern leases in IT are not like that any more, says Oxby. “Vendors are offering more flexible forms of leasing to make it easier for clients to buy our equipment.” This means, for example, matching the payments to reflect a client’s seasonal business, so they pay less in low-revenue months than in high-revenue months.

Alternatively, it can mean matching the lease payments to the expected income stream from the project the IT system is supporting. So, for example, it can mean starting off with low payments in the early stages of a project and gradually ramping the payment up to match the anticipated increased cash flow from the project.

This sounds ideal, but the world has seen vendor financing come unstuck in the telecoms sector in the past two years. Vendors were striking innovative, ground-breaking deals with dotcom companies, often taking equity in the company rather than actual cash payments.

These ground-breaking deals meant vendors were writing huge amounts of business, but acquiring little or no cash for their sales efforts.

It all looked good on paper, but when the big crunch hit the telco sector, the dotcoms melted away and vendors were left holding paper instead of cash. Even worse, their equipment went not to them but to the liquidator and was sold for cents on the dollar to companies that might otherwise have turned into new business for the vendors. It was all very messy indeed.

Is Oxby worried that vendor financing will end up giving the kit away in a similar fashion? He recognises the risks but is confident that Fujitsu Siemens’ understanding of its client base is deep enough to avoid any replay of the telco scenario. “The risk of clients defaulting on a lease is not unique to the IT sector,” he points out. “Both the lessee and the manufacturer need to take a long-term view. For us, helping customers progress their business now, with a view to helping them upgrade their business IT infrastructure once again in another four years, is a sensible approach,” he says.

Openshaw agrees. Talk of IT following the telco industry down the road of imprudent vendor leasing is misplaced. It will not happen. These are tough times,” he emphasises.

“The name of the game is to get clients to spend their money today, instead of sitting on their hands for another year or so. The way we do this is to offer a complete, bundled solution all on a lease contracts that chief finance officers will find attractive,” he notes. The way to do this is to bundle everything in with the lease so it all turns into a revenue expense that can be matched against incoming revenues. “When you talk to the finance function, this is exactly the kind of conversation you get into. It is different from the kinds of conversations we used to have with IT directors,” he says.

According to Openshaw, Sun’s finance arm is finally emerging into the sunlight, as it were, after a long struggle with Sun’s own account managers, who, like most IT account managers, are protective of their relationship with the client. Now, he says, the more astute account managers have recognised that the leasing arm’s creative input can help clinch their deal. Perhaps the key card the finance arm has to play, Openshaw says, is precisely its ability to have a direct conversation with the finance function in the client company. “FDs love the idea of not having to take any hit on their balance sheets for large capital items. Plus, we give the company the ability to refresh its technology in two, instead of three years’ time. This means they can refresh their hardware and software when the business requires it, rather than when the bottom line dictates,” he says.

According to both Openshaw and Oxby, price is not the most critical factor in the deals they get involved in. Because these tend to be big-ticket items and can involve servers that cost anywhere from upwards of a million dollars, many other considerations, such as scalability, manageability and reliability, come into play.

Robert Fleming, senior director of applications marketing at Oracle Europe, believes companies are more focused on – besides the price of a deal – the total cost of ownership of the associated software and hardware. “Clients want to know the cost of support, the number of consultants the system is going to require, and the technical staff the client is going to have to recruit to run the systems,” he says.

Fleming points out that as a software vendor, Oracle’s approach to leasing is more specific than Sun’s or Fujitsu’s. It only does financing deals for its own software. Any servers, memory, operating systems software or third-party consultancy support has to be dealt with by the client through another leasing operation.

“If clients want more of a bundled arrangement, we can provide our software suite on a lease basis, then take over the support of the installation for a monthly fee,” he says.

One of the things Sun now does is enable clients to bundle all kinds of minor purchases for inclusion in a lease deal. “Once the relationship is in place, it becomes a way for the client to move to an easier procurement platform. Where they are making regular purchases we can look at putting all the invoices into a quarterly or monthly schedule and add these to the lease. It is crucial to work with customers to find ways of enabling them to spend today,” he concludes.