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Key questions facing Captives and Vendors

While the credit crunch has been breaking around us the initial impacts on Captive and Vendor Finance Companies has generally been indirect in nature, such as a rising delinquencies. Now as we head down into a recession there are a number of key questions, challenges and actions that Captives and Vendor Finance companies should be addressing. It is a good time for leasing companies to review their positioning and assess how well they can survive the turbulence ahead.

Some of the key challenges and actions are:-

Portfolio Credit risk profile. In the present environment the leasing companies will need to understand the latest credit risk profile of their existing portfolio. As various industrial segments consolidate during this recession, and other customers credit ratings change, the Leasing Company needs to be sure of the true risk they are taking.

Collections. Now is the right time to invest in the collections process to reduce aged tails. It would make sense to promote the direct debit penetration on new business to improve the process. Equally if the recession is as bad as some fear then you will need to check that the legal collections process has the capacity to handle increased activity.

Partners. Having a slick process to pay partners for business in a short period of time will ease their liquidity concerns and gain you more business. However you need to have a clear view of any exposure you have to them and their financial stability to weather the storm. What contingency plans do you have to cover the marketplace should one fail?

Interest Rates. Despite headline rate reductions the true cost of new borrowings is likely to rise as the financial institutions seek to increase their provision levels and recoup their profitability. This will interact with pricing issues and could result in squeezed margins.

Residuals. To the extent there are residual positions these need to be reviewed to validate if they are still achievable. Particularly if new products are being discounted and there is a glut of off lease equipment to be disposed of, it will make the realisation of residuals more challenging.

Expenses. With a squeeze on margins is the expense base appropriate for the current environment and activity? If cuts are being made then you need to ensure that core business activities are protected.

These are some of the key questions and actions. It is always beneficial to make an objective and honest assessment of your business so you can identify both the strengths and weaknesses and take appropriate action on a timely basis.

• New Customers. With the increasing focus on capital utilisation although general activity may be down there may be an increase in leasing. Given that the marketplace is going to get tough you may end up with less competition as some businesses withdraw. Keeping in touch with the market will leave you well positioned to take up any opportunities as they arise.
• New Resources. Building on this last point, as businesses withdraw there may be good quality resources available to help position yourself for the future.
• New Partners. Equally if competitors withdraw from the market then the opportunity arises to secure new partners and outlets if you are nimble and know what you are looking for.
• New Portfolios. The inevitable consequence of businesses withdrawing from the marketplace is that portfolios may be available for purchase. If you have the funding lines available and the right team and advice to manage the due diligence process and negotiate the deal then you could emerge from this recession bigger and better!

Of course other competitors may move in to your segment or a vendor may decide to create a captive, however we are probably all used to those sorts of challenges.

If you would like to discuss a structured ‘fitness assessment’ or any other issues raised by this article please contact Brian Thompson on +44(0)845 003 1000 or email brian.thompson@invigors.com

Authored by Brian Thompson

Vendor Programmes - weathering the storm

As yet another storm moves through the Caribbean there is uncertainty and concern about the course it will take, its severity and what sort of evasive action should be taken. For many lessors in Western Europe (and in the UK in particular) there is similar uncertainty and concern about the course and severity of the current economic situation.

Lessors are speaking openly about their expectation that the level of write-offs is still a long way from its peak. For some, the economic indicators are moving towards a point where evasive action (in some sectors at least) seems like the only sensible thing to do, even though margin pressure has eased off.

In the world of vendor finance, an economic downturn can put severe strains on the best of relationships between financier and manufacturer/supplier. The usual flash point (the “downturn conflict”) occurs as manufacturer customers look to free up their bank lines by taking credit from other sources. The increased flow of transactions within the programme, usually from the weaker credits, comes at exactly the time that the finance company is looking to tighten up its credit underwriting. This can also be combined with a reduction in programme resourcing as the financier seeks to reduce costs ahead of an expected reduction in profitability.

So just when the manufacturer feels they are starting to deliver the long-requested “increased lease penetration”, the financier seems to want less business and worse still, may be removing resource support. The result can be at best an unpleasant tension and at worst the end of the programme. It’s worth remembering that Invigors’ research indicated that 60% of vendors had changed their finance partner in the last 2 years.

What can be done to avoid this situation? We have developed a 7 stage best practice approach to vendor programme planning, implementation and management. Within this approach, the key to avoiding the downturn conflict is way back in the planning and implementation stages of the programme where it is vital to anticipate issues and have a joint plan of action which the financier and manufacturer agree to. If this is created as part of a programme value model, there is a greater level of understanding of the credit and financial implications of an economic downturn for both parties and the action that will need to be taken to maintain a robust and viable programme.

But with the storm imminent and no agreed plan of action between financier and manufacturer, what can be done to minimise damage to or loss of valuable but vulnerable programmes?

Actually, quite a lot. Our Programme Review Plan provides a focused and effective way of evaluating key strengths and weaknesses in a programme, identifying short-term corrective actions and mapping out medium-term enhancements. One example of this is to provide clear guidance and training to the manufacturer sales force on which customers should be encouraged to seek finance and which should not in the current climate.

The costs of working with an impaired, sub-optimal programme or worse still, losing it entirely are high. The lead time on finding a replacement programme can be very long.

So emerging from a downturn conflict with a stronger programme and relationship is a good place to start re-building after the storm has passed. If you’d like to discuss how to do this, contact Richard Guilbert on 0845 003 1000 or email richard.guilbert@invigors.com.

Increase Sales in Vendor Programmes

Vendors want to sell more equipment whilst lessors want to sell more finance – are these two principles entirely compatible and are there any true partnerships? When serving “vendor” finance, we need to be mindful of feedback from dealers and the vendor’s sales team.

Recent surveys point to vendors and dealers believing that lessors have automated their systems and processes to increase efficiency, but they feel only the lessors directly benefit. It seems automation is driving rigid decisions. Feedback further states that lessor staff are not skilled, trained or empowered to make decisions concerning deal flexibility, process or products. There is also a feeling these appeals are not encouraged by some first level sales staff, with increasingly poor explanations, solutions or feedback being provided.

As a result, lessors need to re-visit the “human touch” which may have been lost in gaining centralisation, automation and standardisation. Dealers in particular state that aside from credit acceptances, there is little difference between many lessors who fail to offer unique selling points, services or products – “they just do what they do”. Having asked dealers what would encourage them to use one of their existing lessors exclusively, they couldn’t see the logic in doing so – “shopping around is necessary to get flexibility”. Perhaps this is one of the reasons for the rise in office equipment/ IT finance brokers.

There is a less obvious risk in this for lessors. If a lessor’s customer-facing staff get used to selling with restricted entrepreneurialism, they are less likely to chase flexibility or promote new ideas to the business. This could result in a lack of product development, business being rejected out of hand or being placed in the hands of competitors. I am sure there is a knock-on effect to staff retention!

It is interesting to note that, when asking some lessors what their unique selling points are, an immediate response is often not available – at an individual level staff often have their own view, with little organisational consistency. So it strikes me that corporate identities need to be created or reconsidered, focussed on delivering something a little different or with different values than their competitors.

Focus also needs to be on improved vendor and dealer partnerships. The more that lessors and their services are perceived as the same, the more complacent dealers will get with offering finance. Finance will only be discussed when customers demand it. The result will be reduced lessor visibility, a lack of loyalty to any one funder and an increase in “shopping around”. To some degree, this is a feature of many sectors already.

When considering areas to focus on, remember that vendor management often enter into finance programmes expecting tangible benefits such as; refresh programmes, improved customer retention, mid term upgrades, increased equipment prices, improved margins and improved trade debtor days [quicker payment]. Even though these features may be expected and sold by lessors, they are rarely demonstrated quantitatively and often not delivered as genuine benefits. They are certainly not normally laid down as a partnership goal!

In evidence of this I would quote a vendor who recently said words to the effect of - “rather than discuss finance penetration rates, service level agreements [often not met] and small amounts of commission [compared to equipment margins], why don’t lessors help me to sell more equipment or accessories, these are items which get real attention”. An equipment dealer stated to me “if a leasing company would get me 100% [or very close to] acceptance rates, of course I would use them exclusively”.

It therefore makes sense for lessors to qualify benefits that vendors can get from a financing programme. Of course this is normally done as part of the sales process, but it should be extended to offering and demonstrating solutions linked to tangible or financial benefits which appeal to vendors. This will probably involve ideas to promote equipment sales flowing through the route to market or to demonstrate the value of quicker payment and reduced debtor days. Qualifying the route to market and everyone involved in selling these products, throughout the channel, needs deep consideration as well - which is often another missing key ingredient.

In summary, vendors and lessors are compatible, but feedback and surveys say it is necessary to marry up with vendors/ dealers strategic initiatives better. Also, design some lessor differentiation and improve the delivery of the “leasing benefits” above. Specifically, dealers are further adding a requirement for the human touch to be reconsidered.

These are some “key ingredients” to a successful vendor programme. Do you have them in hand - if not, why not contact Simon Corbett (click here) for an independent view?

Where do Vendor Programmes go wrong?

Statistics can be deceiving, but if 2004 leasing penetration of capital investment in Europe was the same percentage as in the US, an additional $150billion+ of leasing volume would have been written in Europe during that year. And Leaseurope 2005 Statistics indicate a 13.75% increase in European leasing volumes compared to the previous year.

Securing a share of the sizeable and growing vendor programme market is highly attractive for leasing companies. But setting up a successful programme can be an elusive goal for both financier and vendor. Where does it go wrong? There are many potential pitfalls, but experience suggests there are 7 areas of high risk.

• A vendor’s DECISION to use finance should be based on thinking through its strategic importance and position alongside other services. Failure to do so can result in finance being under- or over-emphasised, with a detrimental effect on other services, or even product sales.
• Programme preparation requires RESEARCH at an early stage to ensure that the programme can meet customer needs, match or exceed competitors’ offerings and deliver value within the vendor’s business model.
• PARTNER SELECTION should be based on a structured, independent selection process to maximise the chance of success. Both partners should be ready to align their objectives (even if they don’t share them) and understand each other’s business models. Without this mutuality, unrealistic promises are made, which in turn lead to broken commitments, unclear responsibilities, communication breakdown and mistrust.
• Beyond this, programme STRUCTURING should be based on clearly-stated vendor and financier objectives, with allocated responsibilities, mapped processes and defined success measurements.
• PEOPLE allocated to (or hired for) the programme will either facilitate or inhibit its success – it is vital to avoid the trap of using busy, distracted, untrained or unsuitable staff and equally important for senior management to be visibly involved and supportive.
• Having reached ROLL-OUT, it’s tempting to assume that you’re home and dry, but that’s not the case! This stage requires detailed planning, communication, resourcing and a mechanism for resolving issues quickly.
• Finally, ongoing MANAGEMENT of the programme is a continuing requirement for its success. Having a programme management team that meets regularly and has sufficient information and authority to take corrective action helps, but the programme culture needs to be instilled and nurtured.

Many programmes fail to reach anything like their full potential. Why? Because some of the basic building blocks listed above are omitted or ignored. Invigors has broad experience in building and running successful programmes – contact Richard Guilbert (click here) or Simon Corbett (click here) to see how we can help.

Software as a Service - Financing Opportunities

After a slow start, Software as a Service (SaaS) looks set to grow rapidly, presenting both opportunities and threats for technology finance companies.

So what is SaaS? Most users buy a license to use a particular piece of software which is then installed and run on their own computers. The license contract may include some maintenance provision for patches and upgrades together with support, but the actual implementation of the software is “in-house” as far as the user is concerned. With SaaS, the software hosting is outsourced to a third party. The user still has access to the application, but through a different means of delivery.

The two key characteristics of SaaS differentiating it from traditional software usage are that the application is accessed remotely over a network (often the Internet), and that it is paid for on a subscription basis.

The concept itself is not new though and was consistently over-hyped during the dot.com boom.  Many mistakes were made, primarily in misreading the market requirement and over-estimating the capabilities of the technology to deliver.

Since then much has changed. A number of factors have come together to make SaaS a much more viable proposition.

• Firstly software vendors have learned from their earlier mistakes and have redesigned their applications to perform better when delivered over a remote network.
• Next, vendors have moved beyond the hype and demonstrated that SaaS can deliver real benefits to users compared to traditional software purchase. Salesforce.com boast cost savings of 80% - 90% on total cost of ownership (TCO) over traditional CRM software,  while IBM has developed a cost-evaluation model which demonstrates that an SaaS-based CRM implementation can reduce TCO by up to 32%.
• Thirdly – in the ongoing search to cut costs, corporates are outsourcing more and more of non-core business, including IT applications.
• Finally, with the widespread adoption of broadband, SME’s typically have sufficient bandwidth to make SaaS a usable proposition.

In the enterprise space, most of the major vendors are offering SaaS versions of their applications, including IBM, SAP, Oracle and Microsoft. Of these, the latter is making a strong play for the SME sector with the launch of its Office Live suite, which is an integrated set of on-line applications for small businesses. Competing with these are the pure-play SaaS providers such as Salesforce.com, RightNow and Google.

On the surface this is potentially bad news for IT lessors, even those that don’t have a significant interest in software leasing. Any migration to subscription-based SaaS will reduce the demand for software leasing and will potentially have a knock-on effect in terms of demand for hardware.

But to what extent is SaaS now a real threat to the established software market? To be honest it’s difficult to tell. Current figures put SaaS as representing no more than 6.5% of the $84bn global application software business though the market appears to be growing at around 50% per annum. Despite some of the obvious benefits of the SaaS model, its main appeal is to particular types of user – companies which are highly distributed or are undergoing rapid change. And there will always be a demand for in-house software for applications which need extensive customisation, are considered to be competitive edge, or are to be better managed internally for security reasons.

However there are also potential opportunities for funders in the new order. Far from cutting out the reseller channel as might be expected with a subscription based service, SaaS is encouraging software vendors to develop their partner base. Software vendors have found they need to build partnerships with infrastructure and service providers, since they don’t have the capability to deliver SaaS on their own. Experience has shown that the reseller channel is often better placed to sell SaaS as it owns the end-customer relationship and better understands their requirements.

Both of these offer finance opportunities. On one hand, infrastructure providers need hardware on which to run hosted applications and the associated network infrastructure for online delivery. Since the dot.com bust the Service Providers which survived are financially stronger and may represent a better credit risk than before.

SaaS contracts tend to have a firm term income stream for the vendor or reseller which is financable and could potentially be sold to a lessor with or without recourse. The vendor benefits in that, dependent on the recourse nature, they may obtain a true sale or an immediate cashflow benefit with the sale recognised over time. So for SaaS it appears that behind every cloud is a silver lining, though, from a finance perspective, this will require some creativity and careful assessment of performance risk to exploit it successfully.

Software Financing in Europe - the view from the street

As hardware prices continue to drop and software financing becomes more widespread, it would be reasonable to expect the IT vendor financing community to have risen to the challenge and developed a common approach across Europe. That expectation is based on an optimistic assumption that the legal, tax and accounting rules can’t be too different from country to country, even if full harmonisation is still some way off.

But when you get on the street and ask lessors, manufacturers, regulators and advisers how software financing really works in practice, a somewhat different picture emerges. Take the discussion with them further into the area of market perception and the whole idea of software financing in Europe starts to look like a business where non-specialist financiers should tread very carefully indeed.

One of the main differences is the standard type of product that is (apparently) used for financing software. For example, in Belgium and Holland the feedback is that Loans are the product of choice, whereas the view from France is that a Receivables Purchase product is gradually being replaced by a Software Operating Lease product. Operating leasing is also a possibility in Italy.

But if you dig a little deeper, the message is that these products depend on appropriate permissions from the software houses – permissions which some of them are reluctant to grant. Market rumour suggests that some lessors are relying on “deemed permission” from the software house, but some fear that this may eventually antagonise the software houses in the longer term, resulting in a drift back towards more traditional products.

And what if things go wrong? Credit perspectives on software financing range from a qualified acceptance that it carries no less security than other IT assets, to (at the other extreme) a simple “no”. But the credit culture in European countries varies enormously and this adds another complexity to an already challenging set of circumstances. A commentator on the Italian market recently told me “The court process [in the event of company failure] ranges from 2-3 years, with little expectation of any recovery, other than perhaps from guarantors.”

Software financing is potentially a huge business, but you really need to do your homework before jumping in.

European Vendor Programmes

Where does it go wrong?

Every major manufacturer selling in the European marketplace has to decide what additional services are to be offered alongside the core products. The drivers for this are well-documented, although they may vary from industry to industry. So whether it’s a loss/damage insurance policy for a laptop computer, a full maintenance contract for a vehicle or a loan-based finance product for software, decisions need to be made. Offering finance is usually high on the agenda.

And it can be at that first decision point that the first big mistake is made – that of launching a finance offering without properly researching the market, understanding the full cost/benefit analysis for the vendor or defining the strategic role that financing will play. The temptation to push ahead “because the competitors are doing it” or“there is evidence to suggest higher revenue, profitability and customer retention” is high, but the marketplace is littered with the chaos of under-researched programme launches.

The knock-on effect reaches right into the financiers and leasing companies themselves, because if the vendor is not rigorous about setting up the programme (and many will not have the experience internally to do this), they will rely heavily on their chosen finance provider to fill in the gaps. It’s not surprising therefore that research shows that many manufacturers are unhappy with the way their programmes are going and tend to blame the finance partner. (Invigors International Vendor Programmes Survey).

Not to say that the finance providers themselves are blameless – with constant pressure to increase volumes, and with high costs of delivery, it’s tempting for financiers to promise much but struggle to meet the high expectations of manufacturers, many of whom are not sympathetic to the world of narrow leasing margins and expensive resource. And the second key decision area is at the point of choosing an appropriate structure for the programme, selecting the financier and deciding on the roll-out approach, including geographic coverage. It may sound obvious, but linking all of this back to the market research, cost/benefit analysis and strategy is critical and is sometimes sacrificed in the rush to “get something in place”.

You might expect programmes that achieve reach the roll-out stage (having avoided the obvious mistakes) would automatically be successful, but this is the third and final area where corners are cut and things go wrong. Both the manufacturer and the financier need to focus on training the sales force, reviewing and measuring every aspect of the programme and driving further refinement and improvement.  

It all sounds rather daunting but the differences for the manufacturer (and their finance partner) between programme success and programme survival can be enormous.