IT industry offers rental options to attract firms into new technology

If you believe the industry gurus, businesses will soon be renting email, enterprise resource planning (ERP), customer relationship management (CRM), and supply chain management (SCM), from their service provider.

However, it may need more than impassioned pleas from Tony Blair and his eCzar to shatter the perception within much of British business that technology adoption is disruptive, expensive, and it doesn't always pay for itself.

The government's recent experiences at the Passport Office (see Newswire 1 July) and Social Security (see Newswire 22 July) appear to testify to this.

Risky business

The main barrier to corporate investment in new technology, particularly in small and medium sized businesses, is risk. Consequently, the information technology industry is fast coming to the conclusion that it needs to change the way it sells its product to reduce the amount of risk in the equation, i.e. help companies finance their leap into the Internet world.

This model is likely to prove lucrative to those in the industry with the deepest pockets - the finance houses.

Traditionally, most businesses pay for hardware, software and services (installation) outright. The kit is housed on the business premises, and if it hasn't paid for itself by the time it becomes obsolete and replaced, that’s life.

The Internet is beginning to turn that model on its head. It’s more common to find company websites hosted on a server at the Internet Service Provider (ISP) through which the business accesses the Internet.

Usually this server is owned by the ISP and the client just rents the space by the megabyte, payable monthly. This model is expected to spread into new areas such as the provision of applications such as email.

Great expectations

If business-to-business ecommerce lives up to industry expectations (see vnunet.com 20 September), ecommerce sites will need to cope with any amount of transactions at any given time, without collapsing.

So if a business takes the step from web-presence to web-selling, it will require expensive high-capacity servers running software that will grow to meet future demand, an investment that may not pay dividends for years to come. Many businesses will simply not be able to justify (or afford) such a significant outlay.

The IT industry believes the solution is to offer ecommerce installations payable on a monthly basis, which may be fixed rate, calculated on the number of transactions processed or as a percentage of the revenue the site brings in.

Industry visionaries believe this is the birth of a new model that will grow to include rental of applications like email, accounting systems, human resources, CRM and SCM all hosted at the ISP or application service providers (ASP).

High finance

However, somebody has to pay for the hardware, software and service. Many ISPs are young companies that cannot afford the colossal investment required to set themselves up as ASPs.

IBM Global Services, for example, is setting up an ASP service in the UK, and has calculated that it will take seven years to make back its investment on each contract. The difference between many ISPs and IBM is that the vendor owns a financing company.

The UK independent technology leasing company Syscap has been eyeing this new financing opportunity.

"We believe that the future of the IT leasing industry depends on its ability to move with the times, and yes, without doubt, it has to embrace all the opportunities that exist to enhance its customers’ business and IT infrastructure, particularly in light of the escalation in ecommerce," Philip Brook, Syscap group managing director, told vnunet.com.

"Syscap has been exploring this avenue for some months and is currently in negotiation with a number of ISPs. We already offer 'website /ecommerce finance as part and parcel of our IT finance offering and are reviewing the applications hosting/rental issue. "As an independent organisation we are able to move very quickly and capitalise on the opportunities that exist in this dynamic growth sector," he added.

But Syscap will target this financing offer at the small- and medium-sized business it has leased hardware to for the last ten years. "Offering companies the opportunity to finance their website or ecommerce solution, as well as their entire IT infrastructure, will ensure that they are given the chance to compete fairly in their marketplace," explained Brook.

Leap of faith

The move from leasing hardware for a fixed period at a fixed price, to leasing an intangible service like the rental of an ecommerce site or email or ERP or CRM applications, is likely to be as much a leap of faith for the leasing companies as their customers.

Such deals are likely to involve new payment methods based on usage, or the number of transactions processed, which means that the leasing company shares the risk of the venture with the customer and the ISP. Should the venture prove unsuccessful, while the hardware and software could be salvaged, the soft cost, the investment in systems integration, website design and maintenance will be all but lost.

It is this uncertainty that has driven many financing houses into close alliances with vendors, argues Peter Gane, marketing director at GE Capital Equipment finance.

In the last two years we have seen a number of exclusive partnerships like this grow up between vendors and finance houses; other examples are Dell and Newcourt Credit of Canada, and Leasetec and Compaq.

"You could be funding these deals two or three years in advance. It’s not proven technology and it helps to have a close relationship with a vendor to understand what that technology will look like in three years’ time," said Gain.

For the time being, Sun and GE Capital are focusing these pay-per-use deals on large corporate accounts, like the risk-sharing deal with British Airways announced last month.