The vexed question of how to stimulate innovation in the global asset finance and leasing industry was explored at the recent Leasing Foundation’s Catalysts meeting in London.
Andrew Denton, chief operating officer at CHP Consulting started the debate with the valid observation: “Leasing is an industry that is famous for its innovation - yet there is not at present a framework within the industry to create innovation. The time has come, therefore, to take the first steps towards a re-structure to enable innovation within asset finance”
Innovation as a concept, however, comes with different definitions from different sectors of the industry.
A fundamental change
Artti Aurasmaa, CEO of 3 Step IT, pointed to a “massive change that has recently occurred in society as a whole, that is driven by technology, but which is making society look at itself in a totally different way”. The very way that we acquire and use assets is undergoing a transformation, he argued.
“Our children’s’ social networks have now become global,” he said. “For them possession of an asset is no longer of real importance. What are important are the opinions and experiences they have and in which they participate. This is echoed increasingly in the business world – it is not really the things that we own that makes us what we are – it’s more about having access to the goods and equipment that we need to have the type of experiences for which we seek”.
He added: “This fundamental change of paradigm is shifting the focus from ownership towards usage and sharing. This provides an enormous opportunity for the leasing industry to be the advocate and catalyst of change.”
Aurasmaa predicts that the rapid expansion of mobile internet is soon going to reach a new milestone as “Internet of Devices” (IOD) becomes reality.
“Tens of billions of assets,” he stressed, “including most of the light bulbs on the planet – are going to be connected to the internet. This development opens up enormous opportunities for tracking and managing assets. When these new capabilities are combined with dynamic and transparent asset finance solutions, a solid foundation for a new ownership model is possible.
“We as consumers or businesses no longer need to own a multitude of assets that we use only occasionally. For example, our most valuable purchases, such as cars, do not need to be compromises to fit many different purposes: instead we have an access to use the type of assets we need at any given time or place – and we could even use our existing possessions to finance this.”
A change of ethos
Roger Skinner, chief executive of Maxxia, a relatively new entrant company in the asset finance and leasing industry, pointed towards the need for a change in the ethos of the industry. He said: “After the banking crisis we looked at asset finance services and how banks and the leasing industry had funded those assets. We examined what customers’ experiences had been – and should be – from a trust perspective.
“We concluded: if you are going to place a residual value on an asset why not tell people what it is? Why hide it? If a manufacturer is giving away a 35% discount why not share it with the client and tell them what the discount is?
“It’s a different approach,” he added, “but one to which we are committed.”
Skinner explained that with a focus on transparency and collaboration with customers Maxxia aims to create finance solutions that meet the individual objectives of an organization.
“In our discussions we start with the company – not the asset – and work collaboratively to offer the solution that will help organizations in their investment programmes.
“Our intention is that our customers will experience a real relationship that involves absolute clarity and genuine trust. Combining the four core lending principles (cash flow, competence, character and capability) with our core values of trust, transparency integrity and empathy we start to build to a new innovative approach for our customers.”
A new captive’s experience
Nick Gallop, marketing director EMEA at Dell Financial Services told how becoming a new captive finance company only last year proved to be innovation in its own right.
“While captive finance is not innovative per se,” he explained, “it’s worth a quick reflection on Dell’s recent experience. Even though Dell had a good working partnership with CIT, trading as Dell Financial Services, integration delivered a major boost to our business: In only six-month financing penetration rates have risen significantly. The improvement has happened because the sales teams are integrated, they share the same opportunity pipeline; the captive uses a different, risk model; there’s a different attitude to blind discount; etc. From the perspective of this paper, the captive move gives scope to combine parent and captive processes, and so to develop financing capabilities to do much more.”
So for Dell Financial Services, not only did moving to a captive status increase finance penetration but it also assisted in the financing of the software component.
Gallop added: “With neither residual value nor real collateral, financing software poses challenges. If you can use financing to improve software sales the gross margin reward for the parent is dramatic. So instead of leases or loans, we’ve introduced receivables financing to the licence renewal discussion. Now major customers are contracting more three-year renewals. This innovation offers customers a better per annum price and payments that fit their budget, the parent gets a bigger sale and a longer-term commitment, and the captive sees a 1-2 point improvement in penetration rates.”
It also helped optimizing the end of lease experience for its clients.
“Independent financing organizations make money out of customer inertia: at the end of a lease many carry on paying for months, or years. A captive has an opportunity to optimize the end of lease behaviour for the whole organization. Proactively seeking to refresh or replace equipment creates sales for the parent, and helps customers run more efficient IT using the latest equipment. If you can mine historical invoice data appropriately you can extend the approach to equipment that was financed by a third party and drive a financing switch as well as equipment renewal.”
This innovation, Gallop said, leads to customers pleased with the proactive approach, creates sales opportunities for the parent and offers the captive more to finance and the chance to displace a third party.
Attracting bright new talent
Successful innovation in asset finance is, ultimately, probably dependent upon a source of new talent into the industry.
“What steps can we take,” Andrew Denton asked, “to bring in the best and brightest into the industry?”
Aurasmaa stressed: “You need to have, within the industry, those companies which are well managed, which really take care of their employees - and are perceived as great places in which to work. When that happens you start attracting top talent regardless of which industry you are.”
He added: “that leads on to the need for greater transparency in the industry. If we have a culture that is not clearly showing everything that is going on – then it is going to be very difficult to attract the best talent.”
Gallop said that the industry has not always been good at attracting the most appropriate people. “Employing someone as an accountant and then expecting them to be successful salespeople has been a fault in the past,” he added.
Addressing low penetration
The relatively low level of leasing penetration is an indication of the product’s malaise.
Aurasmaa stressed; “Looking across Europe, at lower than 20% the penetration of IT leasing is still ridiculously low. In reality leasing should be seen as the perfect instrument to finance IT assets – which will not hold much value after a couple of years.
“In order to successfully penetrate that 80% of customers who, for one reason or another, don’t seek to lease their IT assets, it should become a principal industry aim to fully research the market and ascertain exactly why.”
Aurasmaa believes that the rewards would be great. “We could double or triple the size of the industry by knowing exactly what we are doing – and what we could do differently. Then there would be plenty of space for everyone to grow. That’s where the opportunity really lies.”