Assets on Hire

With the rise of SMB into prominence and the potential opportunity it is expected to bring in, the IT market is keeping its fingers crossed with many major system integrators and vendors in India bringing in customized and tailor made solutions for the SMB. On the other hand, although the enterprise segment continues to bring in the major share of revenue both for the large format system integrators as well as the vendors, this space is estimated to be freezing out. “While the enterprise segment continues to occupy the largest chunk of revenue, it is the SMB where the growth lies in the near future. The sheer volume of the small companies accounts for the reason,” said Seepij Gupta, Associate Research Manager-IT Services, Springboard Research.

The Hiring Trend

In a general trend, it is often noticed that small firms and in some cases even the bigger ones often opt for hiring IT hardware as well as software rather than go for outright purchases. The primary sectors are IT/ITeS, manufacturing and BFSI.

“Recent economic trends have resulted in making companies more cautious in terms of what they spend and where. Although the cash flow situation of Indian companies has improved in recent times, most companies are still very cautious and keeping within their spending limits,” said Tirthankar Sen, Director-Channel Research, Springboard Research.

It is in this regard that leasing services has gained much popularity recently, especially after the onslaught of the economic turmoil. Through leasing, total cost of ownership (TCO) is lowered as IT hardware and software standards are introduced and companies begin to proactively plan life cycles for IT assets. By adopting a more formalized approach to technology refresh and deployment, companies are often able to minimize ongoing support costs, improve productivity and maximize the usefulness of their assets. This augurs well for SMBs.

Giving an overview of the trend of the leasing services, Rajiv Menon, MD-APAC and Japan, Cisco Capital said, “Direct costs are straightforward to measure and understand. However, they typically represent a smaller portion of TCO than indirect costs. Indirect costs are those associated with planning, audit and other incidental costs such as consulting, configuration management, downtime (both planned and unplanned), integration, and maintenance.”

The larger consequence of an overlay solution in this regard, is the increase in unplanned downtime created by additional hardware and network complexity. As carefully as organizations plan rollouts, purchase management tools, and invest in training for their IT staffs, unplanned downtime will occur simply because of the complexity of the network.

The Traction

In the initial phase, greater amount of traction was seen from the IT/ITeS segment, followed by the government segment in its 'modernization projects', particularly post SWAN rollouts when RFP's came with inbuilt staggered payment options to be offered by the system integrating partner. Thereafter, it was the manufacturing segment followed by service providers which engaged with us for financing solutions. “Financing from Cisco Capital allows customers to adopt a lifecycle management approach to solution acquisition. Studies have shown that the productivity benefits of having in-place the most up-to-date equipment outweigh the long-term maintenance costs associated with obsolete technologies,” he added.

Also, on account of the inherent off-balance sheet nature of an operating lease, leasing IT assets in particular which are highly depreciating in nature enhances financial ratios in areas like return on total assets, return on equity and leverage ratio (total debt/total equity). Also, in addition, it is often estimated that the overall internal rate of return on operating leases are much lower than the cost of capital of the companies. This is primarily due to the residual value that the leaser takes in the equipment that is being leased. On a post tax basis, leasing IT assets is actually cheaper than buying outright, thus saving significant capital for the company, which can be redeployed to their core business growth and needs. Also, leasing provides a protection mechanism against high-technology obsolescence, and provides a hassle free solution to 'asset life cycle management' for companies.

“With respect to depreciation, there is no depreciation expense for the customer when the asset is acquired using some forms of financing as the asset sits on the financier's balance sheet. By acquiring using opex rather than capex, customers avoid the requirement for long-term maintenance and disposal of the equipment and can lower total cost of ownership,” Menon stated.

Also, the fast access to latest technology along with easier disposal of old IT products act as key motivators for enterprises to opt for leasing. Upgrades and changes of technology are some of the crucial requirements for a company as it grows with the market dynamics changing all the time. Often it is advised that to contend with larger, better-capitalized competitors, it would be wise to explore leasing and financing alternatives for IT infrastructure that allow for usage without having to allocate capital budgets.

The Big Business Opportunity

IBM Global Financing (IGF) has been operational in India since last 10 years catering to clients across verticals. In its India operations, IGF has primarily three defined business lines. Client Financing part focuses on offering leases and loans for IT procurement to IBM end clients for direct or indirect transactions. The Commercial Financing business line caters to the short-term financing needs (30 to 90 days) to tier-1 channel partner for IBM or some selected vendor partners. However, the most concentrated and prominent business line for IGF is the IBM Global Asset Recovery Services (GARS), which offers most efficient, all-green disposal solution, using scalable, reliable processes that prevent re-use and recycling capabilities.

Also, GARS complies with applicable local environmental and disposal regulations and includes buyback at agreed prices, disposal of unusable equipment and data security. Using total disk over-writes, GARS may recover, recondition and reconfigure usable IBM equipment as IBM Certified Used Equipment which offers a great alternative solution for many a business and IT situations.

“We provide customizable lease and loan offerings to much of 90 percent of the Fortune100, as well as small companies with as few as 10 employees. Small and medium businesses and large enterprise alike can acquire the business and technology solutions through IBM Global Financing to create enhanced value and drive profits. Our offerings are designed to enable IT organizations to operate in a new economy and mindset that demands high value, transparency, and proof of return on investment,” said Sapan Kumar Jain, Country Executive-IBM Global Financing (IGF), IBM India/South Asia.

Innovative, customized financing helps maximize cash flow, preserve capital budgets, gain tax advantages, reduce risk of obsolescence, and retain the flexibility to easily upgrade technologies as needs evolve. Customers can also reduce upfront investment by focusing on a usage model where the cost of equipment is matched to business revenues. “This allows businesses to spread the cost of equipment and services over several years, freeing cash for alternative growth opportunities. For large companies, the driving objective for the Cisco Capital engagement is to look at keeping non-core assets off their balance sheets, while at the same time protecting themselves from technology obsolescence,” Menon concluded.

While banks have been providing financing options, many of them lack the capability to cater to the end-to-end financial needs of enterprises and SMBs. “There are very few banks that actually understand the unique technology needs of this segment,” Menon said while sharing his perspective over banks. Moreover, the procedures and regulations adopted by some banks make financing technology with them problematic for some companies. NBFCs provide financing options for technology solutions with more customer-friendly procedures than banks, but the options provided by NBFCs are generally not as comprehensive or attractive as those of technology provider, particularly OEM financiers.

Predictive Key

“As the economy is coming out of the recession, we see the growth returning which is reflecting in a positive momentum in IT sector as well. However, like many part of the world, in India we still see pressure on the liquidity because of some huge IPOs, 3G spectrum auction and FDI inflow,” Jain said. The demand for financing and leasing, in general, has increased significantly over the last couple of years as a result of the increasing awareness about TCO. “There is persistent uncertainty in the market as a result of the global downturn and credit has become harder to come by in many countries globally. This has led to an increased focus on the way in which companies acquire IT equipment-internal investment hurdles have increased and companies are looking to maximize the investments that they make in IT and to achieve faster break even and ROI,” Menon concluded.

As the growth in Indian economy is coming back, SMBs as well as the larger corporate are looking at preserving their capital for the core business while hunting for an optimal way to procure IT assets to keep the competitive edge while preserving the cash.

“Clients also want to go green and do look for a solution to dispose off old IT assets safely and securely. IGF through its wide portfolio of offerings is able to meet the client needs while allowing them to focus on their core business,” Jain concluded.

Avishek Rakshit

avishekr@cybermedia.co.in