Changing the Mindset Towards Financing Enterprise Technology
Scott Griggs, Head of Market Development-APAC, Cisco Capital
The article was published in ET Telecom
It has long been common for businesses to lease technology assets such as PCs, printers, hand-held devices, and copiers rather than buying them outright. This is not surprising because having a recurring payment model, rather than outright ownership of such IT assets, offers a number of inherent benefits. The standardization of technology company-wide, assurance that technology remains current and the ability to treat some of these assets as operating expenses as opposed to capital expenses are just some of those benefits.
There is enough awareness that these types of technology assets have a stipulated useful life and that they become obsolete rather quickly, and as a result, organizations plan ahead to replace this equipment on a regular basis. Surprisingly, the same logic is often not applied by organizations when it comes to other enterprise technology, whether one considers data center, storage, or networking technologies. The disadvantages of using this equipment beyond its useful life are often not considered.
Core IT equipment is often ‘sweated’ considerably more than employee - or customer-facing technology, and not replaced as often as it should be. One reason often cited is that since this equipment often resides in the backend, its sub-par performance is not blatantly obvious to many people within the organization. This is in sharp contrast to a device such as a PC, for example, that might freeze several times during a day.
The use of obsolete enterprise technology has a very real, if not as obvious, financial impact in the form of increased maintenance costs, sub-par technological performance, and higher energy costs compared with current technology. But despite the lower overall efficiency, higher maintenance costs, and possible regulatory consequences of using obsolete enterprise technology, the immediate upfront cost of replacement is one of the biggest deterrents to organizations performing regular hardware refreshes.
One of the most obvious ways to fix this is for organizations to adopt a product lifecycle approach to acquiring enterprise technology, rather than looking at this investment as merely a one-time cost. And financing, rather than buying upfront, is an effective means to achieve this lifecycle approach. Just as in the case of PCs and printers, there are very limited benefits today to owning an asset rather than paying for the use of that asset.
Today, in many cases it makes sense to finance rather than buy enterprise technology outright. Some of the important benefits are:
- Free up cash and reduce payments: Financing lets organizations spread the cost of enterprise technology over a period of up to five years, in some cases. Unlike a cash purchase, there is the benefit of smaller, predictable and more manageable payments that help preserve the capital budget for other investments.
- Preserve credit: Vendor financing ensures that lines of credit remain open, leaving more cash within the business.
- Make things flexible: Flexible repayments allow businesses to benefit from the technology while structuring payments in line with business needs. If the solution being rolled out is complex, this option may allow the organization deploy it fully before it starts paying. Repayment structures can also be aligned with seasonal revenue peaks, for example, for tourism, retail, or educational businesses where cash flows are non-linear throughout the year.
- Keep technology fresh: The organization can adapt its technology in line with business needs or as new technologies are introduced, without major cash expenditure. At the end of the finance term, it can simply return the equipment and migrate to new equipment that meets its changing business requirements. Alternatively, if it chooses to retain the equipment, that’s still an option.
In the long run, how organizations choose to fund their technology investment becomes as crucial as deciding which technology to invest in. Therefore, it is very important for an organization to seriously evaluate.