With the onset of the global slowdown and the financial crisis deepening its roots in India, the business of IT has begun to change its course. It is in this scenario that companies across India are developing a concept quite unique in its own aspect. Major IT companies and a few solution providers (SPs) are coming forward to focus on the concept of leasing IT infrastructure to clients who want to refrain from undertaking fresh purchases at this time of global slowdown.

Conservative budgets
One of the key areas that companies are looking at cutting costs is IT purchases. Most companies have put a hold on their IT purchases and upgrading of infrastructure due to conservative budgets. Seeing the opportunity in this space many companies are now offering IT infrastructure on easy lease terms, shedding the brunt of over-resourcing on IT enabled services. Leasing allows businesses to spread the cost of equipments and services over several years. Thus they can opt for flexible upgrade options provided by technology players.

Gartner, in a recent report, noted that through leasing, total cost of ownership (TCO) is lowered as IT hardware and software standards are introduced and companies begin to pro-actively plan lifecycles for IT assets. By adopting a more formalized approach to technology refresh and deployment, companies are often able to minimize ongoing support costs, improve productivity and maximize the usefulness of their assets. This arrangement suits SMBs well.

Mumbai-based Allied Digital Services (ADS) is one such SP that has created a business division called AssetLite Equipment, which offers finance for IT procurement to customers.

While explaining the objective for starting this division, Nitin Shah, CMD, ADS said there are IT companies like Cisco, IBM, HP and Avaya which extend finance to corporates who are buying their products. But a customer often needs financing for the entire solution stack which will be a mix of several vendor products. Besides, they do not need finance merely for certain hardware or software component, but for the complete project rollout. In the current scenario where banks have become very strict about offering finance for IT infrastructure acquisitions, Shah hopes that more customers will be glad to avail of AssetLite's offerings.

“Corporate customers need a neutral agency which will finance their entire project implementation and that is where AssetLite comes in. It will give capex finance to customers, acting like a leasing company, for a stipulated time frame. At the end of that period, the products will revert back to the ownership of AssetLite,” he noted.

Leasing options are particularly beneficial for the SMB segment since they can invest in iT by making payments on a monthly or quarterly basis

Speaking about the market, Shanker V, Director-Corporate Strategy, AssetLite shared, “Discretionary spending has certainly experienced a slowdown when it comes to IT spending. However, basic stuff like upgrades, necessary server purchases to run business operations or purchase of equipment to sustain and grow business operations cannot be postponed indefinitely.”

Benefits of leasing
Giving an overview of IT leasing services in India and its implications, Gautam Munish, VP, Cisco Capital India stated, “Leasing enables companies to gain maximum benefit from using technology solutions without having to incur a large capital investment. It 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.”

Leasing options are particularly beneficial for the SMB segment since they can invest in information technology by making payments on a monthly or quarterly basis. This allows them to maintain consistent and balanced operating and capital expenditures with a reduction on costs on fixed capital.

Explaining the benefits of IT leasing services, NL Narayan, GM, Sun Microsystems Global Financial Services said, “Due to the inherent off-balance sheet nature of an operating lease, leasing IT assets which are highly depreciating in nature enhances financial ratios in areas like return on total assets, return on equity and leverage ratio (total debt/total equity). In addition to the above, the overall IRR (Internal Rate of Return) on operating leases are much lower than the cost of capital of the companies. This is due to the Residual Value that the lessor takes in the equipment that is being leased. On a post tax basis, leasing IT assets is actually cheaper than buying outright, thus saving significant capital for the company. These savings can instead be redeployed to their core business growth and needs. Also, leasing provides a protection mechanism against high technology obsolescence, and provides a hassle free solution to asset lifecycle management for companies.”

In today's scenario of global financial meltdown, companies are going all out to limit capital expenditure. Faced with limited budgets in their operational estimates, companies are opting to invest in point solutions that solve immediate needs but are often not fully integrated or compatible with wider systems, resulting in lower long-term productivity.

“There are significant opportunities for IT leasing services in India with enterprises looking at reducing their capital expenditure in the current economic conditions. The market is expected to show a double digit compounded annual growth with enterprises realizing the cost advantages associated with IT leasing and the benefits related to obtaining equipments with the latest technologies. Key verticals expected to demand these services include BFSI, government and the telecom sector,” said Deepika Chaubey, Project Manager, Ovum India.

Solution to cost-cutting
Upgrades and changes in technology are crucial requirements as a company grows and the market dynamics change. This is where leasing comes to the rescue. To compete with larger, better-capitalized competitors, it would be wise to explore leasing and financing alternatives for IT infrastructure that allows for usage without having to allocate capital budgets.

“Most companies look at leasing as merely another financing option. However, there is another important factor that is driving smart companies to opt for leasing IT infrastructure. IT assets depreciate rapidly and technology obsolescence is high. When equipment is leased, the ownership of the computer lies with the lessor. Also, the risks of disposal and realizing value of the computers are borne by the lessor. The lessee gets the right to use the asset for a fixed duration and then returns it to the lessor. The lessee has an option to then buy the asset, but most smart companies choose not to buy assets that have depreciated significantly,” added Shankar of AssetLite.

According to Alan van Niekerk, CEO, Rentworks India, purchasing equipment up front depletes the organization's cash reserves or can dramatically increase debt. In the acquisition and management of computer equipment, with a useful life of less than three years, financial common sense says that it is less expensive to rent than to buy these equipment.

Traditional funding usually leaves the organization with outdated equipment at the end of its useful life, which still owes depreciation value that needs to be recovered. These options also need to be treated as a capital expense.

“Rental payments can be treated as an off-balance sheet operating expense. By comparison, the cost of purchasing or the traditional leasing of equipment must be treated as a capital expense, thus having a negative impact on your clients balance sheet. Through the rental program all equipment and its associated costs will be covered by a fixed quarterly/monthly payment without escalation. This allows clients to minimize and easily predict cash flow as well as hedge against inflation,” advised Niekerk.

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