STRATEGY: Lessons in leasing

STRATEGY: Lessons in leasing

"There are one million small businesses in Australia, 85 per cent of which have less than five staff, and they each spend $6000 to $7000 per annum on IT," explains Ned Montarello, managing director of IT equipment leasing firm RentSmart. It is his way of quantifying the fiscal prospects of a recent deal with NAB (National Australia Bank), Australia's largest bank, to automate approval for office equipment loans up to $20,000 to its entire database of customers. If successful, the deal will be worth millions, possibly billions.

NAB's pursuit of a small-ticket financing model is representative of an accelerating trend in the IT industry to outsource ownership, not only of hardware but increasingly of services and software. It is, for businesses, a means of stabilising cost structures and utilising tax breaks by keeping assets off the balance sheet.

In the US, acquisitions throughleasing have reached 40 per cent, according to IBM. With its participation figure closer to 25 per cent, Australia's uptake of rental schemes has been hindered by the "must own it" mentality of the locals. Nevertheless, we appear to have finally hit the "acceleration" point on the adoption curve, assisted psychologically by the relegation of PCs to commodity status, according to Michael Edwards, consumer psychologist at NSW University's School of Marketing.

Ron Harris, managing director of Harris Technology and a strong advocate of the rental model, is one industry player banking on leasing becoming a dominant form of buying.

He has invested heavily in developing an online leasing system for his retail customers, which automatically calculates the repayments on the lease amount while checking applicants' credit ratings at the back-end without human intervention. Purchasing approval can be granted within three minutes.

"We see so much opportunity in rental," says Harris. "[Knowing] the way technology changes these days, people [realise the technology they own today] is going to be prehistoric in four to five years. [Renting allows them to] keep their capital in their business."

Harvey Norman has also seen enormous increases in the leasing and financing business stream. "It is one of the most popular forms of purchasing today," says John Slack-Smith, general manager of Harvey Norman's computers and communications division.

The mega-retail chain generates $70 million worth of sales per year on IT equipment, making it one of the largest IT leasing operators in the nation.

Meanwhile, outside the retail space, PC vendors have struggled to find their feet with the leasing model over the last five years. After minimal success doing small-ticket financing in-house, Colin Byron, Asia-Pacific sales manager for Hewlett-Packard Technology Finance Group, says the manufacturer turned to its dealers to boost the initiative through customer contact.

"Leasing needs to go through the normal supply chain," Byron says. "It's easier to finance end-users through a channel."

"For customers, the benefits are a quick, easy service with the capability to be approved online, over the phone or over the counter in minutes."

For resellers, the attraction is equally great, as participation in a leasing and financing scheme usually translates into easier sales (with an increased opportunity to bundle peripherals), ongoing customer contact, rebates from vendors, and immediate payment for the sale by the lease operator -- as opposed to standard 30 to 60 day arrangements via vendors.

"Resellers that pay attention to the financial requirements of their customers are gaining a competitive edge over those who do not," says Andrew Rutter, newly appointed general manager of IBM Global Financing.

"Leasing clients buy more - and more frequently - than those who purchase outright. This is not only attributable to leasing as an effective financing method, but also to financing types, structures and delivery mechanisms that are complementary to the needs of business."

The requirement of businesses to stabilise costs and retain focus is driving the inclusion of intangibles, such as service and management, in IT financing packages. KAZ Computer Services has become one of the early adopters of this concept, signing a five-year facilities management deal with Lease Plan Australia to provide 24x7 systems monitoring and maintenance.

The current lawlessness of the leasing and financing sector is bound to cause teething problems. However, Rentworks' national sales and channels manager, Sean Cookson, says it also creates room for careful experimentation. It is often only through volume sales that the implementation of a rental scheme is warranted, and for those PC resellers or service providers that rely on higher margins - rather than volume - forming buying groups in order to reap the benefits may be the answer. It is clear, however, that there are few reseller businesses to which leasing cannot be applied in a beneficial sense.

Benefits of leasing

Remove sticker shock - A rental arrangement shifts the customer's focus from the invoice price to a weekly instalment - $24 per week versus $3000 is an easy sell.

Up-sell opportunities - Resellers are able to stretch their customers' dollar further. Customers may come in with a preconception that they only have $5000 to spend on a laptop, and end up being able to bundle in a printer, scanner and monitor with their laptop for only a few dollars difference on a rental plan.

Repeat business - Leasing can be used as a life-cycle management for customers, providing a platform to re-pitch. PC resellers are nowhere near full capacity in this respect, says Rentworks' Sean Cookson. "It's important to maintain customer profiles."

Manage credit risk - A reseller's ability to manage credit risk is vital in financial health and directing resources to customers who will provide a return. Credit assessments can reveal weaknesses in the financial capacity of firms while gauging the ability to pay on time.

Inside the buyer's brain

Leasing behaviour unravels the rational economic view of man. Michael Edwards, consumer psychologist at NSW University's School of Marketing, says there are four elements churning in the consumer's mind when making a purchase:

- Simplicity The more a market matures, the more it differentiates until it experiences a form of backlash - the rejection of information overload. Buyers see leasing as a low-fuss method of purchase and resellers should aid this. The perception of ease is enough.

- Gratification The desire to have something - and have it now - is powerful, but it is vital to maintain momentum. "Perceived scarcity and the feeling that if I don't get it now I never will, is the key," says Edwards.

- Desire for variety Australians are, by nature, early adopters and novelty seekers. We value flexibility if the price is right and the transaction is clean.

- Possessiveness Leasing removes the sense of self from a transaction, which presents a barrier - particularly in personal purchases. This can be replaced with a sense of community, exemplified by Apple user-groups. Alternatively, commodification dampens emotional attachment as the product loses its uniqueness.

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