CIOs and anyone involved in IT procurement should assess the benefits of leasing and alternative financing over making capital purchases for new IT equipment, software and services. Cliff Saran looks at the options.
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- IT finance and asset management cuts costs and keeps up with technology
- Don't let IT budgets constrain your business growth
- Buy second-user IT hardware to make list-price savings
- Finance and second-user options for software licensing
- Case study in technology finance: Open Business Solutions
Have you considered financing IT? Spreading the cost over a fixed term can be the cheapest way to fund major IT projects, refresh hardware and ensure the business does not fall behind in technology developments. Moving IT spending from a capital expenditure (Capex) to an operational expense (Opex), is one of the main attractions of cloud computing and software as a service. Financing can offer CIOs some of the financial benefits of the cloud model, but without the need to re-think existing IT strategies based on non-cloud infrastructure.
It is all about cash-flow. Financing enables companies to get more purchasing power out of their budgets and preserve cash for operational issues, says IBM.
Ajay Khindria, IBM Global Financing Director UK and Ireland, said: "Financing gives companies flexibility in managing their budgets. Financing enables companies to get more purchasing power out of their budgets and preserve cash for operational issues. For large investments (relative to the size of the organisation), financing can help alter the characteristics of an investment, so the costs match the anticipated benefits. In some cases, financing is simply too good a deal to turn down: if you are planning an investment, and planning an up front purchase, why wouldn't you acquire it with a one-year loan, potentially as low as 0% instead?"
According to the Evaluate opportunity cost report from analyst Gartner, leasing equipment over a fixed period and returning it all on time can be less expensive than getting a poor deal on buying smaller quantities every year. Author Stewart Buchanan says that, although returning the equipment on time at the end of an operating lease typically provides the least-cost option, most clients expect additional costs for late return or purchase at the end of the lease.
It is often cheaper to buy the asset than to continue leasing for an extended period of six months or more. Stewart Buchanan warned: "If you buy the equipment, you will also take on disposal costs and either have to find a buyer for aging second-user systems or pay to recycle them. Every alternative has different cost implications that need to be accounted for in full to support a business decision. The organization can only determine whether the opportunity represents good value after its total cost is known."
According to IBM, trends in financing are changing as the economy enters recovery. "Whereas 'cash is king' was the mantra, it's more cash is a constraint on growth. Managing it, and optimising its use remains a critical business objective, and that in turn drives interest in financing."
Given constrained IT budgets, financing offers a variety of alternatives to simply deferring the investment to the next quarter, or the next financial year. And if the investment is intended to give a competitive edge, deferral carries a non-trivial penalty by not upgrading or refreshing.
"The ability for the customer to afford new technology with a known fixed payment, reduced up-front costs (compared with a cash purchase), a better defined TCO and ROI which leasing provides are issues that most CFOs understand are the best option for their company's risk management."
HP's financial services division grew 17%, reflecting a greater emphasis by corporate users to lease IT and spread costs over buying equipment outright.
One of the key drivers has been the difficulty for SMEs getting credit, says Trevor Evans, channel sales director at HP UK and Ireland.
"Throughout 2010, for smaller and medium-sized business, the availability of credit was a difficult issue. That drove an exploration of alternatives in the form of loans and leasing. Taking capital goods off business balance sheets onto lease is quite appealing in environments where credit is constrained. From a PC standpoint, it is a trend of using PC lease facilities in order to stay on track for a refresh and avoid being left with legacy equipment. The cost remains fixed for the duration of the lease," said Trevor Evans.
The economic situation in 2010 accelerated the trend. Evans expects many organisations to restructure PC refreshes towards leasing and taking capital goods off the balance sheet for a while. It will continue to be a trend, Evans says.
Meanwhile, Dell is bolstering its financial arm. In April it announced it was acquiring Dell Financial Services (DFS) Canada and Dell-related assets and sales and servicing functions in Europe. These acquisitions will enable the company to provide financing direct to its Canadian and European customers.
CIOs may also consider buying second-user systems. For instance, Comtek says refurbished Cisco networking products offer savings of 60% to 90% from list price.
"Since last year we have doubled our workforce," says Askar Sheibani, CEO of Comtek. This is because the company has been seeing growing interest in refurbished equipment, due to the effects of the economic downturn and the waste electrical and electronic equipment (WEEE) directive.
Askar Sheibani says: "There was a perception that refurbished products were of poor quality. But repaired products are actually better because when they go through testing, we may find certain components are weak. When these are replaced we are able to extend the life of a product for many years." Comtek gives a one-year warranty on its refurbished products. "Global integrators are now seeing repaired products are not only cost-effective, they also improve quality."
Comtek has benefited from running second-user systems itself. "We reached an agreement with the administrators for Nortel, involving one shipment of equipment from Nortel's Lab facility, which was destined for electronic waste." Comtek purchased eight 40 containers full of 300 tonnes of Nortel products. Comtek used the Nortel equipment to built a Nortel Lab, where it repairs GSM and optical communications products.
Financing is not just limited to hardware. Most software financing is basically a pure financing model of a hidden license purchase, says Stefan Ried, principal analyst at Forrester. "Some are already a time-based subscription which you can renew for example every year. Microsoft sells its MSDN, Microsoft developer subscription this way. Very recently the large middleware suppliers also offer pure opex models."
It is even possible to buy second-user software licences for Microsoft and SAP software. Discount Licensing specialises in SAP and Microsoft second-user licences. The company began in 2004, initially specialising in Microsoft Open licences. The company later expanded to enterprise licences.
The Microsoft licence agreement offers a provision for transferring, which may occur if the company is insolvent, or downsizes, says managing director Noel Unwin. To comply with licence audits, he says: "We provide documentation including a sale of purchase agreement, unique licence number, volume licence key, a copy of the licence agreement, and a Microsoft Notice of Potential Transfer form, which the customer signs and sends to Microsoft."
Business can make huge savings from between 20% to 90% over the original licence cost, says Noel Unwin. His customers vary in size from businesses with 100 users, up to large enterprises. "We are now selling to companies with up to 100,000 users, but our core business is in the 5000-10000 seat market."
One of the reasons Discount Licensing is seeing demand for second-user licences is because larger enterprises that have an enterprise agreement, may require extra licences to top it up. He says the company is also seeing growing interest in companies not wanting to renew licenses. "The majority don't want to buy premium Office 2010 licences that they then downgrade to Office 2007." Instead, those companies would simply purchase second-user Office 2007 licences.
And it is not just Microsoft licences. Discount-Licensing.com began selling second-user SAP licences nine months. Unwin said: "It is a similar model to Microsoft in terms of licence transfer. Users also need a maintenance contact with SAP, provided through a third-party maintenance firm."
He says businesses can expect to save 40 to 50% on the SAP licence fee. Business tends to come from companies new to SAP, says Unwin.
There is no doubt that cloud computing is having an impact on the types of financing now available to CIOs. Forrester's Reid says: "We believe at Forrester that the financing volumes are heavily stimulated by the cloud computing trends. Enterprises try to put something in the cloud to achieve elasticity and turn from an traditional Capex model into pure Opex. The possibly cheaper price of infrastructure is not the number one motivation any more. It is the elasticity and time to market." So, if a switch to the cloud fails for some reasons like compliance or the lack of integration to the existing legacy, a CIO can turn to financing to at least benefit from moving an up-front software licence fee to an Opex.
With products like Google's Chromebook and software subscriptions such as Salesforce.com, businesses are being offered monthly and annual contracts for IT. Leasing is providing a way to pay monthly or annually for traditional IT products and services. For cost conscious CIOs, IT departments can even purchase second-user hardware and software licences to help stretch IT budgets.
Open Business Solutions, which specialises in IT services for enterprise, manufacturing, service management and asset management, is using IBM Global Financing to provide an IT BuyBack and Disposal Services and financing the hardware components of an IT upgrade.
The service provider turned to IBM to provide a scalable platform on which it could host a software as a service product for its clients. It needed to support multiple clients from a single infrastructure investment.
It has used an IBM's Power 7 platform based on two System p750 servers with IBM Storage DS4700 Express device, coupled with an IBM Storage TS3200 tape library at both primary and secondary sites. Implemented by Specialist Computer Centres, an IBM business partner, the configuration gives an identical replication of hardware and software across two geographically separate sites (50km) and means that the infrastructure is continuously available and is protected against physical failure and site loss risks.