Changing Paradigms of Technology Financing
Amit Mehra, Regional Manager and Country Head, Cisco Capital India
Article was published in the Information Week
The onset of the financial crisis in 2008 prompted a restructuring of the global economic order. The global economy was shaped by a confluence of powerful forces resulting in an environment that, while different from the past, was no less rich in possibilities for those who were prepared.
In the Asia Pacific region, the altered environment threw up two key trends that seem to have converged to change the way organizations approach information and communications technology (ICT) procurement. One, a fluctuating economic uncertainty that appears here to stay, and the other, a proliferation of new technology devices and solutions, from mobility to video, cloud computing, and analytics. Whether it is service providers or enterprise organizations, the resultant theme from these trends is the need to become more efficient and effective with regard to allocation of capital and investing in new technology.
In addition to changing how companies acquire technology, the new environment has also altered the decision-making dynamic within organizations. Leading analysts have confirmed that a majority of CIOs in the APJC region now report to the CFO, with the latter overseeing all investments directly.
Financing as an option for ICT procurement
Today, the rationale behind buying outright is being challenged as customers move to models that match cash flow to the delivered benefits. New models include simple lease solutions as well as other financial and operational arrangements such as ‘on demand’ consumption or ‘pay as you use’ models that typically incorporate the added benefit of balance sheet management and even shared risk with the vendor.
This is in contrast to an earlier school of thought where companies acquired technology to focus on building capacity to address peak loads and maximize uptime. Capacity building took priority over ROI and TCO and often, equipment was deployed well beyond its end of life, causing major disruptions in refresh cycles and creating IT silos within the enterprise.
An agile IT infrastructure responds to business needs in a much swifter manner, and enables faster business growth. It does this by enabling open APIs and providing a platform running analytics.
An agile IT ecosystem has security as a fundamental building block where threats are detected and mitigated quickly.
Now that the attributes of an agile IT environment have been established, it is critical to understand the transition process from an existing 'slow' IT set-up to a more robust and faster one. The answer lies in SDN. SDN can be used to build an application centric infrastructure, which can effectively change the language used by customers from 'how' to 'what'. Currently, a significant amount of time is spent on going through voluminous documentation to determine how a solution actually needs to be configured, and in most cases, it deters customers from enabling those solutions that can help the business. What we would need to ensure easy role out of solutions, is a controller that is built on the basic premise of an application, i.e., an application centric controller.
Based on the analysis done in one of the large IT companies, an application centric infrastructure would result in significant savings when it comes to network provisioning, operations and management. It proves how any enterprise can benefit from SDN as a technology using the API controller.
In the current economic environment, interest rates sit well below the typical return on capital expected of today’s enterprises. Forward-thinking companies are therefore wisely reinvesting their cash to focus on core activities and making use of vendor financing solutions to facilitate IT acquisition.
Speaking at the 4th annual TMT Finance & Investment Asia conference in Hong Kong in 2013, Amit Sinha, Managing Director, Head of TMT, DBS Group, said, "Vendor financing will be a significant growth driver across Asia. A lot of telecom operators are using vendor supported financing, rather than going to the long term bank financing market - and this trend is likely to grow across Asia. Reasonably priced three to five year vendor financing options are available to help support operators with the purchase of equipment and infrastructure.”
A survey commissioned by Cisco Capital and conducted by Forrester Consulting on New Needs, New Models released in August 2013 surveyed 330 key decision makers across organizations in Australia, China and India. A majority of the respondents felt that external financing uptake would be fueled by new technology trends such as ‘BYOD’ and the proliferation of business video and other collaboration solutions. The rate of technology change juxtaposed with a need to maximize working capital was also of critical concern with heads of procurement and finance. This shows that organizations are looking to use capital as efficiently as possible as they access the equipment and other resources they need.
A strategic approach to technology financing
The greater flexibility afforded to customers will define the future of vendor financing, a trend that is expected to continue and probably expand to include software and services. Another significant benefit of vendor-specific finance solutions is that they are fine-tuned for the purchase of that vendor’s IT solutions and are therefore flexible, commercial and innovative purchasing options.
Vendor lease solutions can come with the added benefit of rentals being tax-deductible. Off-balance-sheet vendor solutions can influence existing operating expense budgets related to legacy infrastructure. This can help to improve capital ratios, and for companies in the financial services industry, it can help enhance compliance and drive down borrowing costs.
Financing can help organizations deploy a complete and integrated ICT platform today without being limited by an annual CAPEX budget. A lease arrangement can further enhance purchasing power and enable businesses to manage their cash flow effectively and rapidly adapt to changing economic conditions.
With budgets increasingly restricted, financing is the ideal way for businesses to acquire the technology they need to achieve their goals and their growth targets. For most enterprises, financing is not just an alternative method of funding the acquisition of technology, but an approach to business that offers important technical, cost, and operating benefits.