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When an IT manager finally takes on the CIO mantle, he is often faced with responsibilities that sometimes go far beyond technology issues, and he has to deal with arcane terminologies that have more to do ends up dealing more with finance than technology. He is required to justify all his investments in IT. There is constant pressure to use innovative techniques to bring down the total cost of ownership (TCO) and maximize the return on investment (ROI).

Therefore, finance and not technology happens to be the greatest challenge in IT today. Says SR Balasubramanian, VP, information systems, Hero Honda, "A major challenge confronting decision makers today is making the right choice when it comes to paying for the technical assets essential to business operations." Growth in the current technology marketplace is being driven by faster product cycles, faster depreciation schedules, e-business implementation and focus on integration and infrastructure.

India Inc is on a growth mode and there is greater requirement in terms of technology upgrades and flexibility to deploy better technology, without having to deal with capital losses associated with the sale of obsolete equipment. What works wonders, under the given circumstances, is financing or leasing of IT infrastructure. Says Srinivas Chakravarthy, Country Manager, IBM Global Financing, "Financial offerings are required to be structured in line with the technological life of the IT assets as well as customer usage pattern, to provide CIOs with adequate investment protection."

The power of leasing
Indian corporations have traditionally been cost conscious. Most technology investments tend to become more cash hungry, over a period of time, with expensive maintenance and disposal costs. Says Alan Van Niekerk, CEO, RentWorks India, a rental services provider to technology companies across Australia, New Zealand, South Africa and India, "What you see is not what you get. Renting the IT infrastructure provides more return on the rupee spend."

The benefits of leasing are multifold. Says Arindam Bose, head, IT, LG Electronics India, "A purchased asset is a fixed asset that becomes a hurdle to technology refresh in the long run." Benefits include reduction in TCO, hassle-free technology refresh from time to time, conservation of capital, preservation of existing credit lines and, last but not the least, tax benefits. Says Ramesh Vishwanathan, Country Manager, HP Financial Services, "Leasing means no large sum outlay. Costs can be spread over the lease term, which even out your cash flow and retain capital in the business for longer."

Cash reserves may also be utilized better to reduce secured debt facilities, which negatively impact the balance sheet of companies. Says RentWorks' Niekerk, "Traditional lease and asset purchase facilities are now recorded on the balance sheet as financial debt, which may unnecessarily affect existing credit limits and financial ratios and tie up security that could be used for other business purposes."

While a lease is customized to each transaction's particulars, the fundamental choice is between an operating lease and a finance lease.

Operating Lease: An operating lease is desirable by corporates because it allows them to treat payments as an operating expense. It protects the lessee from overpayment, resulting in lower monthly installments. Operating leases offer tax advantages as payments are treated as off-balance-sheet costs. Says Niekerk, "Operating lease is not treated as a depreciating asset, it is treated as an operating expense." Also known as true lease or fair market value lease, it is preferred by companies operating under intense budget constraints, or cash-rich companies that are concerned with increasing productivity than to expend it on 'enablers' for the business. When leases are structured as true leases, the end user may claim the entire lease payment as a tax deduction. The equipment write-off is tied to the lease term, which can be shorter than depreciation schedules, resulting in larger tax deductions each year. The deduction is also the same every year, which simplifies budgeting.

Finance lease: Unlike an operating lease, it is a full-payout or non-equity transaction. In other words, the full value of the leased equipment is paid along with the interest during the life of the lease agreement. Besides the regular lease payments, the lessee is also responsible for maintenance, tax and insurance changes. Says HP Financial Services' Ramesh Vishwanathan, "Typically, Indian companies prefer to own the equipment at the end of the lease period for a nominal payment. This is a typical characteristic of the Asian culture as opposed to a more mature global market." Also most vendors offer initial discounts. A finance lease is similar to an automobile lease, at least structurally. However, the real difference exists in terms of resale value, which is zilch in the case of IT equipments, at the end of the lease term, which is, typically, three years. If the lease is structured in a manner that would limit the amount of corporate income tax, it can more than offset the tax liability associated with the earnings. A finance lease is suitable for a company that is short on operating budget money but with room for capital budget. Typically, lease periods are 36 to 48 months. A fair-market-value lease for 36 months is less expensive than purchasing over a 30-month lease period.

The market options
Two key vendors offering financing options are IBM Global Financing (IGF) and HP Global Finance. Then there are players like RentWorks, who offer both hardware and software on rent, which is, technically, an operating lease. A typical IT lifecycle is one that would span the following stages: IT transition, where one needs to maximize financial return on the legacy equipment; acquisition of new equipments; management of solution cost over time and finally, cost and risk associated with end-of-life disposal. Service providers offer solutions for new asset lease where equipments of the customer's choice are given on lease; asset recovery services, where unwanted and obsolete IT equipments, with residual value, are resold to the service provider, in some cases, thereby converting IT assets to cash; and exchange plans which give clients the flexibility to replace some percentage of the equipment with new equipment, during the contract period. While all financing companies provide services on more or less similar terms, what varies is their business model. While HP Financial Services requires at least 30% of its customer's IT infrastructure leased, to comprise of HP products, RentWorks is vendor-independent and leases equipments that are selected by the customer from the vendor of his choice.

Arindam Bose, head, IT, LG Electronics “Purchased hardware is a fixed asset that becomes a hurdle to technology refresh in the long run” Arvind Kumar, CIO, Anand Automotive Systems “Most Indian companies try to derive maximum usage and push the products to obsolescence” SR Balasubramanian, VP, information systems, Hero Honda  “Outsourcing is probably a better option to leasing and many companies will look at the same”

Financing options also vary from one enterprise type to another. Schemes for large IT enterprises (over 1,000 employees) may include multi-vendor hardware, software and services installations, with assistance from dedicated financing specialists. Schemes for medium enterprises (100-1,000 employees) combine and balance the flexibility of small business offerings with the competitive rates required by large enterprises and, finally, schemes for SMBs. Interest rates fall broadly in the 4-12% range, with the exact range varying from vendor to vendor. Says HP's Vishwanathan, "The rates are higher for SMBs where the risk is also higher."

It's not just hardware but also software that can be taken on lease. While hardware is given on lease, software is financed through loans, which technically differentiates a lease from a loan for the finance company but means little to the customer who pays for the entire package. Licensing, in case of software, lies with the end customer. Says Vishwanathan, "No sub-leasing happens for software." This makes standalone financing of software difficult. Software financing is gaining prominence as there is greater demand for mission-critical enterprise solutions like ERP, e-business, customer relationship management and business integration, that tend to entail large front-end expenditure and overwhelm IT budgets.

Financing and India Inc.
Has financing of IT infrastructure taken off in India? Yes and no. Says Arvind Kumar, CIO, Anand Automotive Systems, "The ideal lifeline for any hardware is three years. Most Indian companies try to derive maximum usage and push the products to obsolescence." He observes that financing to ensure technology refresh from time to time and combat obsolescence may not be the primary concern if one is to go by typical Indian psyche. "Keeping pace with technology transformation is more critical for banks or IT or ITeS companies", says Kumar.

Balasubramanian of Hero Honda prefers to leave critical financial decisions to the company's finance department. Says S Chhabra GM finance, Hero Honda, "Cash rich companies like us prefer a purchase to a lease. It is the interest differential that drives a purchase-decision." Counters RentWorks' Niekerk, "Interest is only one factor in the equation. What about the cost of disposal; the cost of using out dated equipment; cost of AMC for old equipment that is worth less than the AMC; cost of having to reverse decisions that were made earlier due to change in circumstances and cost of inadequate infrastructure due to budget constraints?"

Kumar and Balasubramanian may not have sent very positive vibes, but players in the finance space are quite upbeat about the changing mindset and the deals that they have been signing to lease IT infrastructure. Observes HP's Vishwanathan, "It is the lack of awareness that is the major roadblock." A factor that contributes to inadequate awareness is the chequered past of the leasing industry. Non Banking Finance Companies have always used leasing as a tax shelter and have failed to promote the advantages of leasing.

A change, nevertheless, is in the air. RentWorks has 130 customers. Companies like Hindustan Lever, ICICI Prudential, Nicholas Piramal, DHL, TCS, E&Y and LG Electronics, among others, have started taking IT infrastructure support on lease. The most common equipments that are rented are PCs, laptops, servers, mainframes, routers, modems and printers. LG Electronics, for example, has leased a server worth Rs 7.5 crore. Sectors driving the growth are ITeS and banking, in addition to FMCG. HP Financial Services has names like Bank of America and General Motors, in India, and PSUs like Bharat Heavy Electrical Limited, in its kitty and is currently negotiating with some other leading names.

Also driving the leasing and financing growth are startups and SMBs. As says HP's Vishwanathan, "Startups and SMBs often have inadequate infrastructure and, unlike cash-rich companies, are incapable of making purchases to ramp up the existing infrastructure." These are typically companies that are left with no choice but to take the required IT infrastructure on lease, to meet the requirements of a particular contract or a project.

The outsourcing route
Bharti Televentures has outsourced its hardware, software and IT infrastructure requirements to IBM. Payments made to IBM will be linked to the percentage of revenues generated by Bharti Televentures and the revenue payment is modeled to decrease with the increase in Bharti's revenues. Says Hero Honda's Balasubramanian, "Outsourcing, as opposed to leasing, is a better option." This could well be the sentiment of a cross-section of CIOs in corporate India.

Financing of IT infrastructure is still evolving and has a long way to go before it matures. India Inc is still trying to identify the best route to beat technology obsolescence, create tax-friendly balance sheets and generate better TCOs and higher ROIs for companies. Sums up Ramesh Vishwanathan of HP Financial Services, "India Inc should aggressively look at solutions to reduce the vintage value of existing equipments, take advantage of declining customs duty and fair market value and meet the requirements of the dynamic market." What is going to be the next trend and how soon, we will have to wait for some more time, perhaps, to know.

Bhaswati Chakravorty in New Delhi

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