Software leasing has been avoided by
many lessors and funders, thereby allowing the specialists to
profit. Grant Collinson explores the
threats and opportunities in this area of technology
Something sets software leasing apart from
much of the asset financing industry which historically has put
lessors and funders off this growing market.
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“It’s unsecured asset finance which is a bit
of an oxymoron really,” says Matt Porton, director of Genesis
Capital, a finance broker specialising in IT funding.
Software leasing began about 20 years ago at a
time when information technology was already established as a vital
asset for businesses of all kinds.
At that time, the price of hardware, which
constituted the majority of IT leasing, was dropping while the cost
of software was on the increase which prompted Porton and his
business partners at the time to start Genesis 15 years ago,
specialising in leasing software.
“It was reasonably obvious [then] that, out of
the whole IT market hardware prices were falling rapidly and
software prices were going up as it became evermore complicated and
detailed and able to run more and more parts of a business,” says
Porton.
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By GlobalData
Opportunity for
independent lessors
It was for this reason that Syscap, another of
the UK’s independent software lessors, became involved in software
leasing too; that and the absence of bank-owned competition in the
sector.
Philip White, chief executive of Syscap, says
the banks didn’t want to be involved in the leasing of software and
Syscap sought to take advantage: “The reason we existed was because
the traditional broad-base bank-owned leasing companies liked hard
assets they could touch, sniff, feel, repossess and which had a
tangible future value that was written down in a book somewhere
based on historical performance; they liked things with
wheels.”
The lack of residual value and remarketing
opportunity, which put off some finance companies then, remains and
has meant those involved have had to adapt to a more subtle form of
risk management.
For White that means choosing relationships,
with vendors and customers, carefully and knowing the products they
are leasing.
“Understand customers, understand your
partners and understand the products, mitigate everything you can
around performance risk on products,” advises White.
“We feel comfortable from a risk perspective
by understanding the products and market we sell in to and the
vendors we work with.”
Part of the risk mitigation, says White,
involves the other ‘soft products’ software leasing companies
provide for such as training and implementation.
He says the main risk to the lessor from
leasing software is a client who won’t pay because the software
doesn’t work and adds that more often than not this is because they
have tried to cut costs in the implementation or training.
“It is about choosing your relationships,”
says White. “Hardware doesn’t work without software and to get the
best out of your software you have to implement it properly and you
have to train the users.”
Rapid growth
The market for software leasing has been
growing rapidly since it began, representing around 80% of business
for both Syscap and Genesis Capital.
For BNP Paribas Leasing Solutions it has
developed over 20 years from small local initiatives to an
important function globally and, says Richard Gendeau, director of
partnerships, with the bank’s Technology Solutions division,
nowhere more so than in Western Europe.
“Software leasing in Western Europe is
stronger because in the US loans are more often used and Asia is
not as mature a market. Western Europe is the most mature and
leasing is the financial model that is most often used.
“Software leasing is business as usual for us
now. It has been so for about five years.
“We feel it is as secure as hardware
financing. This is where we have had a break through in the market
considering most leasing companies are concerned only with tangible
assets.”
Not immune to the
downturn
Despite considerable growth over the last two
decades the software leasing market has not been immune to the
economic downturn of the last few years.
“For the last two to three years you’ve seen,
whether cars, software or housing, a challenging economic climate
with people not spending money,” says White.
Porton says Genesis has seen a sizeable drop
in deal size and the amount of total new business over the
recession years but suggests it is more to do with a reticence from
funders than market demands.
He says: “There is undoubtedly a level of
uncertainty that hinders people’s buying decisions and slows them
down in terms of commitment but there is demand across the whole
piece.”
Indeed, like other leasing sectors, business
has begun to pick up as businesses large and small take advantage
of apparent green shoots. Genesis, says Porton, has seen a 41% rise
year on year for the first half of 2011 in the number of
proposals.
“2011 is the first year where the latent
demand of the last couple of years has come through,” says
Porton.
Customers, he says, who have put a hold on
their investment now have trailing edge software and are looking to
get ahead of their competitors by investing in new products sooner
rather than later.
White agrees and thinks leasing will benefit
even more post-recession as companies still want to keep capex
low.
“Having sat on their hands and done nothing
for two years, many organisations have got legacy technology that
is chugging along and which is impairing their growth,” says
White.
“If they want to look after the pennies then
an alternative method of acquisition is a far more sensible
economic investment.”
Looking like it has overcome a bump in the
road, Gendeau predicts software leasing will overtake hardware
leasing at BNP Paribas in the future and says the two markets are
already a similar size.
He says despite the growth over the last five
to 10 years, which he estimates is in the double digit percentage
area, and, he adds, not 10%, there is still little competition from
large names, which makes it all the more compelling an opportunity
for the French bank.
While the big name financial institutions may
be not yet be seriously involved in software leasing, the software
vendors are starting to take notice of the funding model, says
Gendeau, with the top 20 vendors looking to structure leasing
options.
What does the future
hold?
Gendeau adds software leasing has increased
visibility and thinks it will be the standard way to procure
software in the future.
He says leasing companies all have different
approaches to structuring deals and the sector needs fine tuning on
both lessor and vendor side.
He says the relatively young market will reach
maturity in the next 10 years which will mean more widespread
cohesion on how deals are structured.
All indications point to a bright future for
software leasing but there is one potential cloud on the horizon:
the Cloud.
Known previously as application service
provision (ASP) and software as a service (SaaS), the system of
pay-per-use software packages hosted online now called cloud
computing is on the rise.
While the concept is not new Porton feels this
latest rebranding has the potential to take off where ASP and SaaS
failed.
“There is more momentum this time that when it
was called application service provision 16 years ago,” says
Porton.
The Facebook and Twitter generation, suggests
Porton, are already happy to do huge amounts of personal computing
online and for them the leap to the Cloud for business is not so
great as it once was.
Gendeau sees the Cloud as a potential blip in
his otherwise positive forecast.
“It is a potential threat because of the
flexibility the client has in not having in-house IT management or
needing additional IT resources,” he says.
He believes, as essentially the tax and
accounting benefits to the client will be the same with Cloud or
software leasing, the decision will be based on whether the client
wants to have control over their IT resource and network or whether
they will prefer to outsource it.
White believes the Cloud is not much of threat
to the leasing industry because it will only really appeal to very
small operations and is not viable for sophisticated
operations.
“If I’m a manufacturing business and I want
ERP (enterprise resource planning) software, I don’t want it every
third Wednesday, I want it 24/7,” he says.
Porton also sees the Cloud as applicable to
the very small business. He also sees an opportunity for leasing
should the technology be successful as some smaller software
vendors will not be able to adapt to the cash flow implications of
pay-per-use computing.
He suggests some vendors used to receiving
sums of £50,000 upfront for a delivered system will struggle to
adapt to £1500 a month.
Porton points out around 25 software companies
account for 80% of the global market turnover and while the
companies dealing in the other 20% still account for a huge amount
of business they lack the resources to take the cash flow hit from
Cloud.
“The opportunity,” says Porton, “to do leasing
will actually grow for those software houses that will find it
difficult to manage the cash flow implication of going on the
cloud.
Software leasing, he says, offers customers
the spread payment profile without the vendors having to take the
cash flow hit.
Whether the Cloud is dark or has silver lining
what is for sure for is that businesses will continue to invest in
software one way or another and the growing leasing market will
have part to play.
As White puts it: “Software is what drives
businesses.”
grant.collinson@vrlfinancialnews.com
