Assets on Hire

With the rise of SMB into prominenceand the potential opportunity it isexpected to bring in, the IT marketis keeping its fingers crossed with many majorsystem integrators and vendors in Indiabringing in customized and tailor madesolutions for the SMB. On the other hand,although the enterprise segment continues tobring in the major share of revenue both forthe large format system integrators as well asthe vendors, this space is estimated to befreezing out. “While the enterprise segmentcontinues to occupy the largest chunk ofrevenue, it is the SMB where the growth liesin the near future. The sheer volume of thesmall companies accounts for the reason,” saidSeepij Gupta, Associate Research Manager-ITServices, Springboard Research.

THE HIRING TREND

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

“Recent economic trends have resulted inmaking companies more cautious in terms ofwhat they spend and where. Although the cashflow situation of Indian companies hasimproved in recent times, most companies arestill very cautious and keeping within theirspending limits,” said Tirthankar Sen,Director-Channel Research, Springboard Research.

It is in this regard that leasing services hasgained much popularity recently, especiallyafter the onslaught of the economic turmoil.Through leasing, total cost of ownership (TCO)is lowered as IT hardware and softwarestandards are introduced and companies beginto proactively plan life cycles for IT assets. Byadopting a more formalized approach totechnology refresh and deployment, companiesare often able to minimize ongoing supportcosts, improve productivity and maximize theusefulness of their assets. This augurs well for SMBs.

Giving an overview of the trend of theleasing services, Rajiv Menon, MD-APAC andJapan, Cisco Capital said, “Direct costs arestraightforward to measure and understand.However, they typically represent a smallerportion of TCO than indirect costs. Indirectcosts are those associated with planning, auditand other incidental costs such as consulting,configuration management, downtime (bothplanned and unplanned), integration, and maintenance.”

The larger consequence of an overlaysolution in this regard, is the increase inunplanned downtime created by additionalhardware and network complexity. As carefullyas organizations plan rollouts, purchasemanagement tools, and invest in training fortheir IT staffs, unplanned downtime will occursimply because of the complexity of the network.

THE TRACTION

In the initial phase, greater amount of tractionwas seen from the IT/ITeS segment, followed bythe government segment in its 'modernizationprojects', particularly post SWAN rollouts whenRFP's came with inbuilt staggered paymentoptions to be offered by the system integratingpartner. Thereafter, it was the manufacturingsegment followed by service providers whichengaged with us for financing solutions.“Financing from Cisco Capital allows customersto adopt a lifecycle management approach tosolution acquisition. Studies have shown thatthe productivity benefits of having in-place themost up-to-date equipment outweigh the long-term maintenance costs associated with obsoletetechnologies,” he added.

Also, on account of the inherent off-balancesheet nature of an operating lease, leasing ITassets in particular which are highlydepreciating in nature enhances financial ratiosin areas like return on total assets, return onequity and leverage ratio (total debt/totalequity). Also, in addition, it is often estimatedthat the overall internal rate of return onoperating leases are much lower than the costof capital of the companies. This is primarilydue to the residual value that the leaser takesin the equipment that is being leased. On apost tax basis, leasing IT assets is actuallycheaper than buying outright, thus savingsignificant capital for the company, which canbe redeployed to their core business growthand needs. Also, leasing provides a protectionmechanism against high-technology obsole-scence, and provides a hassle free solution to'asset life cycle management' for companies.

“With respect to depreciation, there is nodepreciation expense for the customer whenthe asset is acquired using some forms offinancing as the asset sits on the financier'sbalance sheet. By acquiring using opex ratherthan capex, customers avoid the requirementfor long-term maintenance and disposal of theequipment and can lower total cost ofownership,” Menon stated.

Also, the fast access to latest technologyalong with easier disposal of old IT productsact as key motivators for enterprises to opt forleasing. Upgrades and changes of technologyare some of the crucial requirements for acompany as it grows with the market dynamicschanging all the time. Often it is advised thatto contend with larger, better-capitalizedcompetitors, it would be wise to explore leasingand financing alternatives for IT infrastructurethat allow for usage without having to allocatecapital budgets.

THE BIG BUSINESS OPPORTUNITY

IBM Global Financing (IGF) has been operationalin India since last 10 years catering to clientsacross verticals. In its India operations, IGF hasprimarily three defined business lines. ClientFinancing part focuses on offering leases andloans for IT procurement to IBM end clients fordirect or indirect transactions. The CommercialFinancing business line caters to the short-termfinancing needs (30 to 90 days) to tier-1 channelpartner for IBM or some selected vendorpartners. However, the most concentrated andprominent business line for IGF is the IBM GlobalAsset Recovery Services (GARS), which offersmost efficient, all-green disposal solution, usingscalable, reliable processes that prevent re-useand recycling capabilities.

Also, GARS complies with applicable localenvironmental and disposal regulations andincludes buyback at agreed prices, disposal ofunusable equipment and data security. Usingtotal disk over-writes, GARS may recover,recondition and reconfigure usable IBMequipment as IBM Certified Used Equipment which offers a great alternative solution formany a business and IT situations.

“We provide customizable lease and loanofferings to much of 90 percent of theFortune100, as well as small companies withas few as 10 employees. Small and mediumbusinesses and large enterprise alike canacquire the business and technology solutionsthrough IBM Global Financing to createenhanced value and drive profits. Our offeringsare designed to enable IT organizations tooperate in a new economy and mindset thatdemands high value, transparency, and proof of return on investment,” said Sapan KumarJain, Country Executive-IBM Global Financing(IGF), IBM India/South Asia.

Innovative, customized financing helpsmaximize cash flow, preserve capital budgets,gain tax advantages, reduce risk of obsoles-cence, and retain the flexibility to easilyupgrade technologies as needs evolve.Customers can also reduce upfront investmentby focusing on a usage model where the costof equipment is matched to business revenues.“This allows businesses to spread the cost ofequipment and services over several years,freeing cash for alternative growth opportu-nities. For large companies, the drivingobjective for the Cisco Capital engagement isto look at keeping non-core assets off theirbalance sheets, while at the same timeprotecting themselves from technologyobsolescence,” Menon concluded.

While banks have been providing financingoptions, many of them lack the capability tocater to the end-to-end financial needs ofenterprises and SMBs. “There are very few banksthat actually understand the unique technologyneeds of this segment,” Menon said whilesharing his perspective over banks. Moreover,the procedures and regulations adopted by somebanks make financing technology with themproblematic for some companies. NBFCs providefinancing options for technology solutions withmore customer-friendly procedures than banks,but the options provided by NBFCs are generallynot as comprehensive or attractive as those oftechnology provider, particularly OEM financiers.

PREDICTIVE KEY

“As the economy is coming out of the recession,we see the growth returning which is reflectingin a positive momentum in IT sector as well.However, like many part of the world, in Indiawe still see pressure on the liquidity because ofsome huge IPOs, 3G spectrum auction and FDIinflow,” Jain said. The demand for financing andleasing, in general, has increased significantlyover the last couple of years as a result of theincreasing awareness about TCO. “There ispersistent uncertainty in the market as a resultof the global downturn and credit has becomeharder to come by in many countries globally.This has led to an increased focus on the wayin which companies acquire IT equipment-internal investment hurdles have increased andcompanies are looking to maximize theinvestments that they make in IT and to achievefaster break even and ROI,” Menon concluded.

As the growth in Indian economy is comingback, SMBs as well as the larger corporate arelooking at preserving their capital for the corebusiness while hunting for an optimal way toprocure IT assets to keep the competitive edgewhile preserving the cash.

“Clients also want to go green and do lookfor a solution to dispose off old IT assets safelyand securely. IGF through its wide portfolio ofofferings is able to meet the client needs whileallowing them to focus on their core business,”Jain concluded.

AVISHEK RAKSHIT(avishekr@cybermedia.co.in)