IT Equipment Financing: A Model Purchase? - IT Week

Monday, September 19, 2005

by Sarah Perrin, Best Practice

Models for IT financing are evolving all the time, and companies are no longer restricted to either buying or leasing equipment

Making decisions about how to finance IT involves far more these days than comparing the upsides and downsides of cash purchases versus loans, and hire purchase against leasing. As an alternative to obtaining in-house software and systems, new IT models are emerging under names such as ‘on-demand computing’ or ‘software-as-service’, offering a different method of procuring and paying for IT.

When it comes to financing traditional IT resources, companies seem to be moving away from bank loans. According to a survey by Siemens Financial Services, 43% of medium-sized UK businesses use leasing to finance IT projects, compared to 20% using loans."

Just 1% opted for hire purchase, reflecting the fact that the pace of technology change is now so fast that ownership of technology is seen as less important than ‘in-use’ benefits.

Robert May, managing director of Ramsac, a generic reseller servicing the SME industry, firmly believes in using lease finance whenever possible. ‘Presumably the advice that accountants are giving to their clients is around good cash management,’ he says. ‘On that basis, don’t spend your cash on something that’s going to depreciate. Treat the equipment you are using like gas or electricity and rent it.’

With a traditional lease, at the end of the term, the ownership of the equipment can often, if desired, be transferred to the company for as little as one more payment period.

Financing options continue to develop. As May points out, five or six years ago finance was generally only available against items that could be reclaimed if the lessee defaulted, that is, hardware. ‘Now it’s very easy to finance entire IT projects, for example, training and support as well,’ he says.

May adds that it is also possible to include equipment already purchased in the financing agreement. For example, a firm seeking finance for new accounting software could include its existing photocopiers in the agreement, allowing it to get cash back from the deal.

Finance packages are widely available from all the major IT companies. IBM, for example, will finance IBM and non-IBM hardware, software, training and support costs. Jens Teichelmann, director of channel and SMB (small and medium business) financing at IBM Global Finance, sees some big advantages from leasing IT.

‘Businesses can deduct the cost from income, which can potentially reduce tax. Secondly they don’t have to pay over the length of the lease the full amount, as they would if they were buying it upfront,’ Teichelmann says. This is because IBM can estimate relatively accurately the IT equipment’s residual value at the end of the lease term, reducing the total lease cost.

At the end of the lease term (three years on average), if the business no longer wants the IT equipment, IBM will take it back and potentially refurbish it ready for selling or leasing to new clients. For SMBs who do not require the most up-to-date technology, this can also be an attractive way of gaining cost-effective technology.

IBM’s financing arm also tries to adapt its finance offering to individual business needs. ‘When SMEs invest in IT, there are usually a lot of upfront costs before they receive the benefits,’ Teichelmann says.

‘We are able to structure the lease in such a way that it overlaps with the benefit. If a SAP implementation takes three or four months, we can say that in the first three or four months you won’t pay anything, but start the lease payments from then on.’

When considering the financing options for new IT systems, it’s also worth taking a broad view and looking at some of the new ways that IT services can be delivered. Take the ASP (application service provider) model. This essentially involves an IT company supplying software applications and services on a pay-per-use basis.

The ASP hosts, manages and maintains the applications at its own website and makes them available to users via the internet. The great advantage for small companies is that they have access to the latest software without having to invest large sums. Such ‘on-demand computing’ or ‘software-as-service’ models are becoming increasingly common.

Dr Paul Booth, technical manager at the ICAEW’s IT faculty, says the ASP model now seems to be taking off. ‘It does look to be a model that is coming into its own after unjustified hype a few years ago, before broadband became common,’ he says. The fact that telecoms technology is now available to support the IT has made a big difference to the practicability of such online IT models.

There has been plenty of ASP product development in the accountancy sector. ‘There are a number of accounting products that are being sold into accountancy practices as a means for them in turn to offer what would have been called bureau or bookkeeping services in the past, but are now much more sophisticated,’ Booth says.

‘They enable the client and the accountant to have access as appropriate to the system.’

Clients access the software online to enter the usual accounting data, such as invoices, while the accountancy firm can access it to run reports that support advisory work. ‘That’s what makes the ASP model that much more attractive to an accountancy practice,’ Booth explains. ‘It enables them to provide the means to do the low-level work, the basic bookkeeping, and gives them entry into more value-added work.’ (See box above for three such products available today.)

ASP models are best suited to stand-alone applications, such as accounting software, office productivity suites, sales force and customer relationship management (CRM) applications, and HR packages. Major IT players such as Siebel, Oracle, SAP and Sun Microsystems have online offerings, as do newer entrants to the market such as salesforce.com, a leader in the online CRM field.

The cost of Siebel’s CRM OnDemand service in the UK starts at £50 per user per month, and is applicable to sales, marketing and service personnel.

There are now 40,000 users of the service, and an average of 20 users per company. Although primarily aimed at SMEs, large companies have also been signing up in order to provide cost-effective CRM software to staff who may only need to use it occasionally.

Using the system is simple. There is no need to invest in servers or networking. Once a company has loaded up its data, it can access it from anywhere in the world.

A small company with 20 people wanting to use the system could realistically have Siebel’s CRM OnDemand up and running within a week, according to Neil Morgan, Siebel’s EMEA vice-president for marketing.

‘For big procurement, companies have always had the option of leasing and so paying over time,’ Morgan says. ‘Now this pay-as-you-go model for hosted software gives that to anyone. We have people [customers] with one or two users in a 10-man company.’

Morgan sees three key benefits arising from the model. ‘One is that you can spread the cost over a long period of time. Secondly, it completely changes the risk profile of the IT programme because there is no upfront investment and you can stop it at any time.

Thirdly, it comes out of expenses rather than capital budget, and that has changed the nature of procurement.’

Sarah Perrin is a freelance journalist