Morgan Stanley estimates that US companies threw away $US130 billion in the past two years on software and other technology that was unnecessary.  So rather than writing out massive cheques for system make-overs an increasing number of New Zealand organisations are exercising a new caution through outsourcing, leasing or try before you buy solutions.

The process is a bit like buying a car. Once the customer decides on the model, the colour and interior the emotional and technical commitment has been made. The options for purchase then need to be thrashed out and many companies are often surprised at the flexibility offered through leasing or financing. 

Leasing or rent-to-buy solutions help take pressure off IT budgets and reduce some of the risk of hardware redundancy and version control.  The cost is typically spread over three years with upgrades to the latest version promised during that period.

Finance deals don't go on forever - the typical lease period will be three years. The client is then given an option of handing the equipment back or upgrading. After the three-year period the lease may roll over for another 3-6 months while they finalise the equipment they plan to purchase. 

While independent finance companies are eager to broker such deals, top 10 IT vendors like Hewlett Packard, IBM, Oracle, PeopleSoft and others are making sure they're flexible enough to work within tight budgets and partner with each other to meet customer needs.

"It's something everyone considers. Some people want to buy outright and depreciate it although you don't see too many massive cheques coming across the counter in on-off payments these days.," says PeopleSoft account executive Asbjorn Aakjaer.

Others want to lease or negotiate some form of extended payment term. "The bigger the deal the more interest there is in hanging on to the cash for as long as possible," says Mr Aakjaer.

Upgrades assured

Certainly there are concerns about buying technology that could quickly become redundant but as part of its maintenance contract PeopleSoft gives purchasers access to all upgrades.

"Most of our customers take advantage of our software updates - we do major releases every 12-18 months and there are lots of little sub-releases."

Since the company began releasing fully web capable and modular versions of its software there's been a much greater interest in lower end systems, although PeopleSoft mainly focuses on mid-market companies with revenues of $50 million and upwards.

PeopleSoft works through finance companies, or with major hardware vendors who offer their own financial package. "People are often buying new hardware at the same time as deciding on the applications they want to run and because we have strong partnerships with hardware companies we spend a lot of time on sizing exercises to make sure the customer buys the right hardware and the right version of everything," he says.

"Once they've decided on the hardware and software they want to run we look at how they're going to pay for it. "New Zealanders are very prudent when it comes to making decisions that involve large expenditure."

Asset management

IBM Global Finance manager Alexia Stoddard says IBM provides competitive rates and larger companies can use IBM Global Finance asset management services, which are provided free of charge, to keep track of IT assets across a range of sites.

"Technology refresh enables companies that need more computing power to scale up their computing power as and when required by the demands of new software applications. It means companies are not limited by buying technology that becomes quickly outmoded," she says.

While the trend toward large computer companies offering finance packages has been ongoing with both HP's technical finance division and Compaq's finance company the merged entity is seeing a greater demand to help finance all facets of a company's IT requirements.

John Sutherland Hewlett Packard's Asia Pacific manager director for financial services says "Businesses, as they grow and have greater data requirements need greater processing speed - they've gone from 286 processors to Pentium 4s and the next version will be out in the near future. Even large organisations with significant IT management teams have problems with the speed at which technology is changing. We help them manage that from a financial perspective," he says.

Unbelting expenditure

"Leasing provides that flexibility to unbelt a massive capital expenditure on day one and structure into the transaction other components such as a technical upgrade or refresh of equipment at certain points." 

Mr Sutherland says clients from large international banks, educational and government institutions and telecommunications companies down to small family run businesses are using its finance packages in order to own an asset that depreciates very quickly. The majority of the financial arrangements however are in the medium to large enterprise space.

And HP is conscious that a large organisation may have preference for a mix and match of equipment from a variety of suppliers and will structure a plan accordingly. For example a firm may want HP desktop computers and high end servers but prefer printers, networking switching equipment and LAN software from Cisco or Alcatel. "We can provide the facility to bundle all that in one financial payment on a monthly or quarterly basis. We would pay the different vendors," he says.

Likewise, around 60 per cent of IBM's portfolio of leased technology is not IBM brand technology.

October 2002

By Keith Newman