"If it appreciates, buy it. If it depreciates, rent it"
22.04.2002 - CCL press release

The business benefits of IT finance
Suki Gallagher, Managing Director of IT finance specialists CCL, sets out her view on why IT should be acquired using finance, instead of cash.

Technology is currently developing at such an exponential rate. There are very few things that depreciate as quickly as an IT solution. Businesses are able to justify this depreciation by the fact that most IT solutions will deliver a return on investment long before they become obsolete. However, we should question why there is still such a strong emphasis on ownership, when it is more pragmatic to rent the IT solution for the period of time that it will deliver benefits to the business?

The ability of UK business to get to grips with the concept of rental-based IT acquisition has far-reaching consequences for the ability of British business to compete at a global level. North America is already way ahead, on both the technology learning curve, and their ability to see the benefits of IT rental. How long will it be before the UK wakes up to the potential of IT rental to help businesses achieve their full potential, and exceed their best forecasts? Currently around 30% of IT solutions are financed in the UK, this is in stark contrast to the USA, where the figure is over 80%.

At CCL, we believe there are two key reasons for the reluctance of UK business to adopt the rental model:-

Firstly, business decision makers know that their IT systems are business critical and see ownership as imperative. We believe that IT financing can be compared with car financing. When a customer signs a contract for a new car, they accept that they will replace their car every three years. Therefore, a rental payment through a leasing arrangement is an attractive alternative to outright purchase. The fact that they never own the car is outweighed by the benefit of always having a new car to drive. At CCL, we find that most of our clients upgrade their solution long before the rental finishes, taking them on to the next phase of development. Furthermore, through our unique Rental Exchange® mechanism, our customers can easily accomplish an upgrade, without necessarily increasing their repayments. This allows them to keep pace with new technology, without impacting on their cash flow.

The second reason for resistance, is that IT rental is often perceived to be a more expensive route than a cash purchase. If businesses factor in the cost of decommissioning the solution (currently estimated at 5% of the capital cost), rental actually becomes more competitive. One benefit of IT rental, is that you have the ability to return the solution to the finance company at the end of the term.

In reality, purchasing cannot be compared with financed IT acquisition on a like-for-like basis. Rental is:-

• The difference between being able to acquire an IT solution now, gaining competitive advantage, or waiting until you have the cash, then trying to play catch up.
• It's the difference between being able to buy the solution you need, rather than the one you can afford.
• It's the difference between a major investment every five years, and an ongoing, responsive arrangement that can continually flex to fit the demands of your business and IT strategy.

Cash purchasing means a substantial ongoing financial commitment, which many businesses - particularly SMEs - simply find unmanageable. Cash is needed for the business, to meet existing commitments, to pay staff, for crises or emergencies, to deal with economic downturn. The demand for cash has a direct impact on IT budgets, which get slashed or axed, meaning that acquisition goes on hold, or is reduced. Whilst this addresses the short-term demands of the business, in the long-term, it holds the business back in realising the objectives of its IT strategy and the consequent business benefits.

An IT rental solution fits in with existing business commitments. It becomes just another monthly commitment, comparable with a cost or (very small) salary, depending on the size of your investment. It responds to your changing IT needs, and the fact that your strategy and solutions are under constant re-evaluation.

It is accepted that paying for cars, buildings, plant and machinery over a period of time makes good economic sense. The business benefits that result from IT are very similar to those that result from manpower. But no business would pay a member of staff three years salary on the day of their appointment. Yet this is what every business does when they use their own cash to acquire an IT solution.

When you rent an IT solution, you don't just benefit from the solution itself, you also create the opportunity to keep up with the exponential rate at which technology is developing. This means that your business doesn't just get ahead, it stays ahead.

Technology will not wait until you have raised the cash. IT finance allows you to get ahead, and stay ahead, now.

Industrialist JP Getty once said: "If it appreciates, buy it. If it depreciates, rent it." .