While its necessary to acknowledge that the general economic climate is not an ally of late, thats small consolation to those firms that need to grow and prosper. But lets not overlook the fact that these same economic conditions are affecting the customer as well as the MSP. The silver lining in this pervasive cloud is the possibility that theres a solution that benefits both parties.
Y2K concerns and the if you build it, they will come mentality that ruled during the recent economic boom have given way to a more sober, deliberate process that revolves around cost justification and return on investment. By itself this reversal actually benefits the MSP model that emphasizes these factors. However, during the current economic downturn, psychological factors like fear and uncertainty have conspired to create a logjam that prevents growth for both the MSP and their customer. And to continue with the logjam analogy, fortunately its not necessary to remove all of the logs in order for the river to begin flowing; as the current picks up, some of the remaining logs will be washed away with it.
Devising a strategy that removes key logs will benefit the people down river that are parched as well as those upriver that are flooded. Budgeting concerns, which are related to costs, can be removed by using the tried and true strategy of paying over time. By integrating many of the components that make up a successful IT strategy, costs are more efficiently allocated, which improves return on investment. Financing and leasing have traditionally been used to address these issues. Since this has proven to be so successful with automobiles, copiers and mainframes, why is it not modified to serve the needs of the MSP community to any large degree? Much of the cause of this is due to some notions that upon further scrutiny are not as compelling as advertised.
1. Our customers pay cash. Also known as none of our customers ask to lease. As networked PCs and workstations began replacing mainframes, leasing became a much more prevalent acquisition method for smaller systems. And why not? Simply replacing the hardware and software with what is a functional equivalent does not mandate a change in the acquisition method. Dell, for example, has increased lease sales 300% while overall revenues have increased only 13% during the same time period. Limiting sales to cash only restricts the MSP to an ever shrinking segment of the market.
2. Our customers have their own leasing company. Integrating a lease offering into the initial sale creates a safety valve when pricing objections appear. What occurs when the customer has a leasing company behind the scenes is that the customer drives down the sale price of the equipment as low as possible then drives down the lease rate thinking that the combination of these separate actions produces a net savings for them. The typical result of this scenario is that all parties lose. The MSP and the lessor lose margin and all parties incur administrative costs required to assemble the disparate finance, hardware and documentation components.
3. Our customers never get credit approved. If this occurs on a frequent basis, a review of the targeted customers is probably in order. There are varying degrees of risk tolerance among lenders but aside from the rare inane objections, the vast majority of lenders review and make similar judgments based on the same criteria. If an MSP has customers whose credit requests are usually declined, thats an indication that these customers probably have a tenuous grip on their own survival. There is an increased likelihood that these customers will either fail outright or curtail spending so severely as to remove them from the roster of potential sales. They do not make an ideal customer base in either event.
4. We have no set products that we sell or set prices for those products. In the early stages of any business, its imperative to establish a beachhead from which additional conquests can be launched. Having a simple, reliable financing option available helps develop this. Absent of this, there is a significant risk that the MSP will drift into customization at commodity pricing.
5. Sales are slow right now. Given the fact that leasing comprises an ever growing percentage of total IT sales, its almost impossible to grow sales without growing leasing. The cause and effect relationship between leasing and sales is frequently misinterpreted. Successful integration of leasing into the initial moment of the sales cycle will increase sales. Simply appending a leasing option to an already firm sale cannot create that same sale and adds virtually no value to the MSP.
In addition to those mentioned above, leasing does have some indirect benefits for the MSP. According to the ELA, 95% of all high tech equipment is replaced within 36 months. The lessor that acts as the MSPs advocate can be very helpful in generating repeat sales. A properly integrated leasing option can also help hone the internal discipline of the MSP. In the end, the goal of expanding the market rather than competing for a share of the existing market is served by leasing.
For the most part, the impediments listed above were born during the late 90s boom when the current of the river was strong enough to carry all of the logs downstream. The end of that economic cycle saw the logjam begin to accumulate. Its well within our power to remove enough of the logs so that the current can do the rest but its going to require that we wade into the chilly water. The reward for this is control over our own destiny.
Frank Latourell is president of Oakland Financial, Inc., a full service leasing company focused on managed services/IT outsourcing businesses. For more information, visit http://www.itlenders.com
