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Channel partners mull technology leasing in tough times

Channel partners turn to technology leasing for customers without access to cash or credit.

Vendors and distributors push technology leasing as a way to battle tightening credit lines and dried up cash flow. But some partners resist leasing and vendor financing because it complicates deals. Most solution providers want to focus on technology -- not finance.

Technology leasing "is an extra step in the process as you're putting together a solution," said Maryann Von Seggern, director of Cisco Capital. "You have to bring [customers through] a credit review and come up with the structure. There's lead time involved." When cash was more available and "deals were blowing through the door," partners didn't have to shoulder the extra burden, she added.

But partners can't afford to pass on technology leasing due to complications.

"Some people say, 'I'll be happy if I can get in and get out.' In a tougher market, more customers need help with not just technology but also business," said IDC analyst Joseph Pucciarelli.

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"For those companies that made a nice living by just solving technical problems, that was great. I am not sure that there is as big a market for that in the next 24 or 36 months," Pucciarelli added.

Some partners say they will stay away from leasing until change is absolutely necessary.

"We do zero leasing because we have very little demand in our market," said Steve Harper, president of solution provider Network Management Group Inc. in Hutchison, Kan. "Small banks, CPA firms, law firms in Kansas are still flush with cash. I'm sure if cash dries up, for some business, leasing will become an option."

Solution providers have thus far been shielded from economic turmoil by long sales cycles. But by most accounts, that's set to change in the coming two quarters. John Paget, president of Avnet Technology Solutions Global in Phoenix, expects the credit crunch to catch up with customers around February 2009. Paget's guesses are backed up by a recent ChangeWave Research survey of nearly 2,000 IT executives; nearly half of respondents said they will decrease spending on IT or purchase nothing at all in the first quarter of 2009. That's likely the result of cash flow or credit problems.

That means despite wariness among partners and customers, there will be an uptick in leasing. Market analysis by IDC indicates that 15% of IT equipment in the U.S. is currently leased or financed through in-house or independent financing operations. IDC predicts that number to increase 10% in 2009, despite the fact that IT spending will decline.

Benefits of technology leasing

At this point, partners and customers have to think about the benefits of technology leasing.

For partners, leasing means cash up front.

"With traditional sales you have to worry about the end user maybe paying late," said Kelly Carter, director of finance at distributor Ingram Micro. "[Customers] are getting long-term financing, but the reseller is being paid within a couple of days."

Brent Smith, president of solution provider ANI Direct, said his company gets paid in 36 hours on a leasing deal instead of waiting 45 to 60 days.

"It eliminates our credit risk and puts it on the lender, not us," he said.

Leasing can also mean longer-term relationships with customers.

"You don't get a lot of extra money out of [the extra work it takes to lease], but you get an intimate understanding of customers' finances and business processes," Pucciarelli said. "If you have vision into the bigger problem, then you have the opportunity to provide a bigger solution."

Cisco's Von Seggern has found this to be true.

"When a partner goes in with leasing, the transaction size is 34% larger," Von Seggern said.

As for customers, the most obvious benefit is the ability to keep a little cash around while still getting new technology.

"[Partners have to say,] 'Mr. or Ms. SMB customer, you're hurting because you don't have that cash you need to keep running your business. Yes, [leased equipment] is depreciable, but I am also going to give you services and [a better] system and you're going to pay for this month after month and that's how you're going to stay in business,'" said IDC analyst Christina Richmond.

Leasing also enables customers to refresh technology more often, Carter said.

Pucciarelli pointed to the "bathtub effect." Leasing enables customers to run technology at the "lowest possible operating cost," but when "costs begin to tip up" because of acquired problems, customers can start a new lease.

"They can use the equipment during the most cost-efficient part of its lifecycle," he said.

Which is the right lease?

Part of the secret to successful technology leasing is finding the right contract for the right customer.

Depending on the vendor or distributor, there are several types of leasing, but the deals typically break down into three categories. One type has customers pay a significant amount monthly with the ability to buy the equipment at the end of the contract for a nominal amount (sometimes even a dollar). Another has the customer pay a little less monthly and then pay 10% of the total cost at the end of the lease. The final option enables customers to return old equipment and refresh with updated technology at the end of the term.

The right choice differs depending on the type of customer. Some partners are leery of so-called fair-market-value contracts in which customers lease for 36, 48 or 60 months and then either pay the fair market price for the equipment or return it.

"The problem is, [fair market value] is a subjective price we don't know. Is there some guy sitting around in a beanie hat and big thick glasses figuring that out? We tend to stay away from those," said Glenn Conley, CEO of Metropark Communications, a solution provider in St. Louis, Mo.

But Von Seggern said Cisco likes to see customers return equipment at the end of a lease and that those contracts can benefit customers.

"We actually want to get that equipment back … we then remarket that equipment," Von Seggern said. "For customers, it's a way to use your lease as a way to manage your technology refreshes."

A few catches

Conley sees more customers ask for technology leasing, but he said this is "a double-sided sword" since they don't always qualify for deals.

"In some fields -- anything that touches real estate, mortgage or home builders, even companies that manufacture shower stalls -- those companies are difficult for us to get funding on," Conley said. "In the beginning of the summer, we put in a lot of car dealers and it wasn't a problem; now they're a problem too."

In some cases, Conley said he has taken to "split leases," in which a third-party financing company comes in with the distributor and his company.

"With everyone's credit lines getting pinchy, you have to make some creative moves from time to time," Conley said.

Trickle-down education

As the economy makes leasing more popular, vendors and distributors work to educate partners, and solution providers are doing the same for their customers.

Cisco offers multiple partner training programs for leasing, including video-on-demand sessions and a four-hour class.

Ingram Micro reaches out to customers, but its strategy is to take the burden off of partners as much as possible.

"We stress that all you have to do is contact us and we'll do most of the [financing] work for you," Carter said.

Smith said ANI spent lots of time getting its sales people up to speed on leasing.

"We talked about it in our sales meetings all the time. Then we got testimonials from guys that had done it. We had to do a couple of deals for the guys to understand," Smith said.

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