IT Infrastructure On Rent

With the onset of the global slowdown and the financial crisis deepening its
roots in India, the business of IT has begun to change its course. It is in this
scenario that companies across India are developing a concept quite unique in
its own aspect. Major IT companies and a few solution providers (SPs) are coming
forward to focus on the concept of leasing IT infrastructure to clients who want
to refrain from undertaking fresh purchases at this time of global slowdown.

Conservative budgets

One of the key areas that companies are looking at cutting costs is IT
purchases. Most companies have put a hold on their IT purchases and upgrading of
infrastructure due to conservative budgets. Seeing the opportunity in this space
many companies are now offering IT infrastructure on easy lease terms, shedding
the brunt of over-resourcing on IT enabled services. Leasing allows businesses
to spread the cost of equipments and services over several years. Thus they can
opt for flexible upgrade options provided by technology players.

Gartner, in a recent report, noted that through leasing, total cost of
ownership (TCO) is lowered as IT hardware and software standards are introduced
and companies begin to pro-actively plan lifecycles 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 arrangement suits SMBs well.

Mumbai-based Allied Digital Services (ADS) is one such SP that has created a
business division called AssetLite Equipment, which offers finance for IT
procurement to customers.

While explaining the objective for starting this division, Nitin Shah, CMD,
ADS said there are IT companies like Cisco, IBM, HP and Avaya which extend
finance to corporates who are buying their products. But a customer often needs
financing for the entire solution stack which will be a mix of several vendor
products. Besides, they do not need finance merely for certain hardware or
software component, but for the complete project rollout. In the current
scenario where banks have become very strict about offering finance for IT
infrastructure acquisitions, Shah hopes that more customers will be glad to
avail of AssetLite's offerings.

“Corporate customers need a neutral agency which will finance their entire
project implementation and that is where AssetLite comes in. It will give capex
finance to customers, acting like a leasing company, for a stipulated time
frame. At the end of that period, the products will revert back to the ownership
of AssetLite,” he noted.

Leasing options are particularly beneficial for the SMB segment since they can invest in iT by making payments on a monthly or quarterly basis

Speaking about the market, Shanker V, Director-Corporate Strategy, AssetLite
shared, “Discretionary spending has certainly experienced a slowdown when it
comes to IT spending. However, basic stuff like upgrades, necessary server
purchases to run business operations or purchase of equipment to sustain and
grow business operations cannot be postponed indefinitely.”

Benefits of leasing

Giving an overview of IT leasing services in India and its implications,
Gautam Munish, VP, Cisco Capital India stated, “Leasing enables companies to
gain maximum benefit from using technology solutions without having to incur a
large capital investment. It provides the option to reduce upfront investment by
focusing on a usage model where costs of equipment are matched

to business revenue. This allows businesses to spread the cost of equipment and
services over several years thereby freeing cash for alternative growth
opportunities.”

Leasing options are particularly beneficial for the SMB segment since they
can invest in information technology by making payments on a monthly or
quarterly basis. This allows them to maintain consistent and balanced operating
and capital expenditures with a reduction on costs on fixed capital.

Explaining the benefits of IT leasing services, NL Narayan, GM, Sun
Microsystems Global Financial Services said, “Due to the inherent off-balance
sheet nature of an operating lease, leasing IT assets 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). In
addition to the above, the overall IRR (Internal Rate of Return) on operating
leases are much lower than the cost of capital of the companies. This is due to
the Residual Value that the lessor 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. These savings can instead 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 lifecycle management for companies.”

In today's scenario of global financial meltdown, companies are going all out
to limit capital expenditure. Faced with limited budgets in their operational
estimates, companies are opting to invest in point solutions that solve
immediate needs but are often not fully integrated or compatible with wider
systems, resulting in lower long-term productivity.

“There are significant opportunities for IT leasing services in India with
enterprises looking at reducing their capital expenditure in the current
economic conditions. The market is expected to show a double digit compounded
annual growth with enterprises realizing the cost advantages associated with IT
leasing and the benefits related to obtaining equipments with the latest
technologies. Key verticals expected to demand these services include BFSI,
government and the telecom sector,” said Deepika Chaubey, Project Manager, Ovum
India.

Solution to cost-cutting

Upgrades and changes in technology are crucial requirements as a company
grows and the market dynamics change. This is where leasing comes to the rescue.
To compete with larger, better-capitalized competitors, it would be wise to
explore leasing and financing alternatives for IT infrastructure that allows for
usage without having to allocate capital budgets.

“Most companies look at leasing as merely another financing option. However,
there is another important factor that is driving smart companies to opt for
leasing IT infrastructure. IT assets depreciate rapidly and technology
obsolescence is high. When equipment is leased, the ownership of the computer
lies with the lessor. Also, the risks of disposal and realizing value of the
computers are borne by the lessor. The lessee gets the right to use the asset
for a fixed duration and then returns it to the lessor. The lessee has an option
to then buy the asset, but most smart companies choose not to buy assets that
have depreciated significantly,” added Shankar of AssetLite.

According to Alan van Niekerk, CEO, Rentworks India, purchasing equipment up
front depletes the organization's cash reserves or can dramatically increase
debt. In the acquisition and management of computer equipment, with a useful
life of less than three years, financial common sense says that it is less
expensive to rent than to buy these equipment.

Traditional funding usually leaves the organization with outdated equipment
at the end of its useful life, which still owes depreciation value that needs to
be recovered. These options also need to be treated as a capital expense.

“Rental payments can be treated as an off-balance sheet operating expense. By
comparison, the cost of purchasing or the traditional leasing of equipment must
be treated as a capital expense, thus having a negative impact on your clients
balance sheet. Through the rental program all equipment and its associated costs
will be covered by a fixed quarterly/monthly payment without escalation. This
allows clients to minimize and easily predict cash flow as well as hedge against
inflation,” advised Niekerk.

Target verticals

As the trend for leasing IT infrastructure gathers momentum, it is
increasingly being adopted in all verticals. Speaking about the change in market
dynamics and the segmentation of leasing options, Munish of Cisco said, “In the
initial phase, greater amount of traction was seen from the IT/ITeS segment, and
then came traction from the government segment, particularly post SWAN rollouts
when request for proposals 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. At present we are also seeing a good amount of traction from the
commercial segment. The enterprise segment usually opts for the Fair Market
Value lease, as well as loans. The commercial segment goes for the same.
Companies whose profitability sees sharp variable gradients usually select
Finance Leases.”

The extreme credit crunch of FY 2008-09 Q3 has certainly put the spotlight on
balance sheet structure and financing options of both large and small companies.
Operating leases, which are

off-balance sheet for the client and which allow pay-as-you-use payment plans
without any upfront capital cost are gaining ground now. The increase in
customer interest was partially offset by the reluctance of banks and leasing
companies to extend credit and close deals due to the perceived risks of credit
quality coupled by the apprehension of non-performing assets (NPAs).

Promoting leasing on the IT front, Jens Butler, Principal Analyst-IT Services
and Sourcing Asia Pacific, Ovum said, “The boost in the field of IT leasing will
come from the ability to provide renewable services around the equipment and
license funding, due to freeing up of funds.”

Depending on the scope of the organi­zation's technology needs, it may be a
good strategy to have some leased and some purchased equipment to get the best
TCO. This may be a good strategy for a large migration project, with many
tem­porary people needed as well as temporary servers; a new office or division
that's operating on an experimental basis; or other foreseen temporary needs for
computing resources.

Channel opportunity

In the IT leasing scenario, vendors have taken the lead offering crucial
leasing services across the nation. However, it is in this space too that the
channel can find an opportunity. A few solutions provides like AssetLite and
Digital Waves, have already identified the opportunity.

Commenting on Cisco's conduct of leasing IT infrastructure, Munish said, “We
work with our channel partners with regard to addressing the requirements of the
SMB segment. There is no set protocol for channel partners. Once they approach
us on behalf of a customer, we evaluate the proposal on a case-to-case basis.”

Keeping in mind the return of these products, AssetLite is also working on
activating the secondary market where these used products can be deployed or
sold. “Our actual revenue will be visible only after three years, when we can
sell these products for a margin, which will be over and above the lease
revenue,” said Shah.

He added that there are other renting and leasing agencies which offer
hardware on rent but at the end of the lease period, they do not have a clear
cut plan to dispose the products or resell them.

The company will also limit itself to offering only IT infrastructure and
will also open this offer to other solution providers, besides its parent
company-ADS. It has tied up with some banks, which will help it in extending
finance to the customers, where Asset Lite will take the underwriting.

“There is increased market awareness in today's economic environment, and we
are seeing more customers interested in exploring that option, compared to
outright purchases. The global slowdown is definitely an overall opportunity for
IT leasing companies without a doubt. But selling leasing is not similar to
selling hardware, as we would need to reject certain customers' requests as
well, based on weak credit profiles,” added Narayan of Sun Microsystems.

Another SP that has recently forayed into the IT leasing space is Bengaluru-base
Digital Waves. The SP offers various leasing options in the field of IT hardware
and has recently added UPS to its list of products on rent. “In this regard, we
follow the 'operating lease model' which acts as a tax saving benefit for the
client. In this scheme, since the leasing amount is shown in the credit overhead
in the balance of payments sheet, the company is able to get tax savings as
there is an outflow,” said Preet Sonawala, Director, Digital Waves.

Like AssetLite, Digital Waves also has two options-pay-as-you-use and
end-term option where, at the end of the contract term, the client can purchase
the equipment at a fair market valuation. The SP also has an 'upgrade option' of
the leased IT hardware where the client has the option of adding new equipment
at any point of time.

“Normally, the leasing period varies between one to three years with the
customized option of monthly, half-yearly, quarterly and annual rental plans
depending on the cash flow situation of the client. There is 'new equipment
leasing plan' which is mid-long term. Under this plan, after laying down the
necessary requirements of the client, fresh equipment is purchased and leased
with warranty coverage provided directly by the vendors. Also, we have 'old
equipment leasing plan' which is a short term plan. Here, old equipment is
leased to clients with short term requirements, and warranty under this scheme
is offered by Digital Waves,” explained Sonawala.

Long way to go

The trend of IT infrastructure leasing has gained momentum in the US and
western Europe, however, much has yet to be achieved in India. Though, IT
leasing is operational in the country and has been since the 1970's, there is
limited knowledge about this field. As long as companies look to leverage
technology for competitive advantage, there will remain an ever increasing need
to stay on the cutting-edge of technology. In view of this, IT infrastructure
leasing may continue to grow in India.

Apprehending the success of IT leasing in India, Butler apprehended, “In the
Indian scenario, I am not sure about its future and the trend it will follow,
but a lot will depend upon the availability of credit, the length of the
recession and future IT budget changes.”

Assuring SPs of the opportu­nities in this segment, Sonawala said, “I would
definitely recommend SPs to venture into the leasing business or work with
leasing companies as it'll have double benefits for them. In the first place, it
will help them to upsell their product and boost sales. A greater amount of
customers can be reached and they will be able to reap the profits by promoting
leasing. In the second place, SPs will see faster sales since they will be able
to cater to all the needs of the customer by promoting leasing options.”

One thing is certain, with the slowdown in sight, IT infrastructure leasing
in sure to gain momentum. The faster solutions provides realize this and
capitalize on the opportunity at hand, the fast they can see their business take
on a new shape and grow further.

Avishek Rakshit

avishekr@cybermedia.co.in

With inputs from Vinita Bhatia