IT Equipment Financing on the Increase: Study
Not only is the IT equipment financing activity rising, but more new business is also coming from the reseller channel, according to a recent report.
The Equipment Leasing and Financing Association of America (ELFA) commissioned consultancy The Alta Group to conduct a study on how U.S. businesses and other organizations acquire IT equipment and what drives their decision-making process. Arlington, Va.-based ELFA released the study last week at the 45th annual ELFA Convention in Palm Desert, Calif.
According to the report, IT equipment financing has grown to $40 billion per year: a 67-per-cent increase from just three years ago, when compared to findings in a similar 2003 IT equipment-financing study commissioned by the association. IT equipment financing as a percentage of total U.S. equipment financing activity nearly doubled from approximately 12 per cent in 2002 to 22 per cent last year, the study noted.
Tony Mynsted, principal with The Alta Group in Lawrence, Kan., said the report sheds light on three important paradigm shifts in the IT leasing industry: commoditization, channel sales and consultancy selling.
The report said that today, distinguishing the differences between IT products is becoming more difficult than ever, prompting the rapid commoditization of equipment -- and making it increasingly difficult for equipment leasing companies to establish and recover residual values. Commoditization means "smaller products, more power and better price points," said Mynsted. Leasing companies are increasingly investing in the "small-ticket process" and "the size of deals is becoming much smaller," falling under the $200,000 mark, he said.
According to the report, more new business is also coming from the reseller channel. Lease finance companies will be relying more on the channel and less on direct sales over the next several years. "This is another trend that has been going on for years," partially due to the commoditization trend, Mynsted said.
Chief financial officers (CFOs) are also paying more attention to IT equipment acquisitions, the report noted. So much money is spent on IT equipment that many organizations now consider IT spending an integral part of the capital budgeting process.
Mynsted said that with CFOs getting more involved with IT decisions, leasing companies need to have the skills to approach the CFO about the financial details of the deal before trying to close the deal on a product basis. "I don't think they are very prepared for it. They say they are but I think the percentage is low," said Mynsted. In the last 10 years products have usually been sold by offering blind discounts from the manufacturer, but "that is not as important to the CFO" as, say, the right payment stream option, he said.
"What is required here is a consultative selling model, where you find out what the financial requirements are before you sell the deal," Mynsted said. "That's where you actually go in 30 to 45 days before the deal and talk to the financial person in the organization, before the product guy goes in to close the deal. It's a complex sale where you go in and spend time with the financial community to make the sale."
The study also found that customers are increasingly demanding total-solution financing. "The solutions are no longer just hardware solutions; there is a lot of hardware, software and services" combined into multi-vendor solutions, Mynsted said. "CFOs are also engaging in the IT leasing process because of this," he said. Whereas before, it would have been easy for IBM Global Financing or HP to go into a company and close a lease deal based on one vendor's hardware, "today, that may only make up 30 per cent of the content of that lease," Mynsted said.
