Knowledge Network

Today's minnow, tomorrow's giant

Gautam Munish, Vice President, Cisco Capital India

India has become a key player in the modern global economy, serving as a significant global hub for knowledge based economic activities, both as an "offshoring" destination as well as through the growth of indigenous firms. This explosive growth is being driven in a large way by the burgeoning small and medium business (SMB) sector, which is experiencing double digit growth. According to an AMI Partners report, there are more than 7.6 million SMBs in India and they are taking the country's economic prowess to new highs. SMBs are set to increase their IT spends by 24 percent in 2007 to a whopping US$8 billion to acquire and upgrade IT infrastructure.

With the stellar performance of the Indian economy and indications that the momentum will be maintained, it is not difficult to see that today's SMBs are actually tomorrow's large businesses in the making. It is widely accepted today that as Indian SMBs gear up to become links in global supply chains, there is a need to make their business processes integration-ready. Also, as every business knows, competition brings with it formidable challenges. All of these mean investments in IT hardware, software and networking equipment. Indian SMBs in particular are looking to increase their operational efficiency, employee productivity, customer responsiveness, cost containment, and network security as well as increase their agility to react to competitive pressures and high speed business changes. Yet, many SMBs still find it difficult to bridge the gap between technology requirements and budget availability and are not able to exploit their true potential. Offering leasing options could provide the answer and may prove to be a win-win formula for both SMBs and technology providers.

Acquiring Technology

According to a study conducted by AMI Partners, out of the US$8 billion expected spend on IT infrastructure, US$1.2 billion is expected to be spent on their overall Internet infrastructure and solutions alone, a steep rise of US$300 million over last year.

Today, competition has brought SMBs in direct conflict with larger players in the market with large IT budgets. The issue is further complicated by an 'ownership mentality' which encourages SMBs to opt for purchasing the equipment rather than exploring financing options. Any comprehensive technology adoption or upgradation requires large monetary commitments. In a scenario characterized by limited budgets, SMBs have been studied and found to invest in point solutions. While these may solve the SMB's immediate needs, sooner or later these individual products begin to affect productivity. Upgrades and change of technology are also crucial requirements as the company grows and the market/customer dynamics change. It is thereby important to explore the route of leasing and financing offerings that allow usage without having to allocate capital budgets.

The three primary sources of technology financing solutions are banks, non-banking financing companies (NBFC) and technology providers (primarily OEM financers). While banks have been providing financing options, many of them lack the capability to cater to the end-to-end financial needs of SMBs. There may be only a few banks that actually understand the unique technology needs of this segment. Moreover, the procedures and regulations adopted by some banks are as cumbersome as any other asset financing. NBFCs provide financing options for technological requirements with more customer-friendly procedures than banks but the options provided are generally not as comprehensive or attractive as technology providers particularly OEM financers.

Technology providers targeting the SMB market must develop and market financially friendly and easy-to-understand lease and loan solutions to aid in the development and growth of small and midsized businesses. Further, they could create innovative, flexible financing solutions in differing forms. This may be created to remove cash flow issues, allowing the SMB to spread the cost of the purchase over a number of years. It could be to open up flexible repayment terms matching the costs to the benefits over time. Or it might be in the form of an operating lease, turning capital expenditures into operating time. This could easily be a boon for the sector as technology providers have a sound understanding of customer requirements and are sometimes able to customize their offerings as per customer requirements, or even design products and solutions from ground-up.

The Leasing advantage

Although many variations of lease financing are available, the two general types of leases are the Capital Lease or Finance Lease and the Operating Lease. The choice of lease is based upon the customer's long-term plans for the assets involved.

Leasing provides the option to reduce upfront investment by focusing on a usage model where costs of equipment are matched to business revenue. This allows businesses to spread the cost of equipment and services over several years thereby freeing cash for alternative growth opportunities. At the same time, businesses can avoid technology obsolescence and opt for flexible upgrade options being provided by technology players.

According to the Gartner Dataquest report1; the following are the benefits that leasing offers to the SMB market:

  • Provides an alternative means of funding that preserves capital - Although it is true for all sizes of organizations, it is highly important for SMBs that may want to use existing sources of capital funding to grow their business.
  • Provides better cash flow management - Rather than funding the entire capital purchase at one time, payments are converted into predictable, regular periodic expenditures.
  • Provides flexibility to refresh technology when needed - Since a lease is tied to a specific contract term, companies have used leasing as a means to routinize technology refresh. Leasing makes sense for SMBs that want to change or replace their IT assets on a specific and systematic basis. If the lease has been obtained from an OEM financer, then they can provide the necessary advice on the timeliness and course of technology refresh.
  • Can provide an enforced technology management strategy - Leasing and financing can be at the heart of an SMB's technology management strategy. They require an SMB to implement some form of IT hardware and software standards, and to rethink, streamline and standardize organizational processes for acquiring, deploying and retiring IT assets.
  • Lowered TCO - Often as a byproduct, total cost of ownership (TCO) is reduced as IT hardware and software standards are introduced, and SMBs begin to proactively plan life cycles for IT assets. By adopting a more formalized approach to technology refresh and deployment, SMBs are often able to minimize ongoing support costs, improve productivity and maximize the usefulness of their assets. The benefits of leasing and financing, however, are not just for SMBs.

1Gartner, Inc. "Dataquest Insight: Will SMBs Ever See the Value of Leasing IT?" by Frances O'Brien and James A. Browning, April 22, 2007.

While spending on technology is indeed the need of the hour, companies need to constantly question themselves as to whether they are spending wisely. Leveraging financial instruments such as customized leasing can provide a one-stop solution to their technological needs while at the same time freeing capital for other business opportunities. With a proper technology roadmap in place, SMBs can sustain and indeed increase their competitive edge in global markets.

 

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