Leasing Industry Update The leasing industry seems to be recovering after some rocky economic times. At least that’s the contention of executives from CIT, Everbank, GE Capital, GreatAmerica Leasing, and U.S. Bancorp. We spoke with them for this issue about the state of their businesses, new programs and initiatives for dealers, and how they’re evolving to meet the needs of the managed print services dealer. Their responses paint a largely positive picture of the industry while also shedding light on how their businesses are changing to meet the needs of their dealer customers. CIT Ron Arrington Things are looking up at CIT as the economy creeps upward. “We’ve seen strong organic growth and overall improvement in our portfolio performance,” reports Ron Arrington, President of CIT Vendor Finance. “Improvements in customer losses and delinquencies are making it possible for us to extend credit to more potential customers. We’ve also seen solid volume levels. When compared with the last 24 months, we’ve actually achieved record volume levels for Q1 2011, demonstrating our success with, and continued commitment to, the office technology market.”    As the industry evolves so has CIT. With the incorporation of more elements into managed services solutions, there are a few areas the organization is focusing on to support their partners’ evolution to this model. Those include integration to ensure the exchange of information specific to assets, services, and other solution components, making the initial setup of contracts, as well as the exchange of information specific to recurring and variable billing for successfully servicing the customer relationship.  “Without systems integration, accomplishing this becomes exponentially more difficult,” says Arrington. “Without people surrounding the use of systems to ensure questions are answered and information is explained, the impact of system integration can be lost.” Flexibility is also key in that managed services solutions involving multiple assets and services on assets that may not be part of a traditional lease require more than traditional equipment leases in terms of billing, collecting, addressing adds, moves, changes, and servicing. CIT is addressing those expanded requirements. Finally it comes down to execution. “While the managed services model is one that is familiar to CIT and one we have supported in the technology sector for many years, it is a newer model to this industry,” states Arrington. “Execution on the billing, collecting, remittance, cash application, and other servicing elements is critical to customers embracing that model and our partner as the provider of this solution.”    Arrington acknowledges the similarities between the cost-per-copy model and MPS in that there are asset and service elements to the payment structure as well as variable components billed on a cost-per basis.   “One of the challenges in putting together MPS lease programs is understanding all of the elements included in the solution,” he says. “MPS solutions can also create unique challenges in contract structure. ‘No minimum’, cancellation for specific reasons, and a much higher frequency of asset moves or changes add new levels of complexity. All of these things make how we work together with the solution provider critical.”   CIT is broadening its services to their dealers and their dealer’s customers.  “Our goal is to help our dealers win and keep as many opportunities as they can,” says Arrington. “With the advent of managed print services and the evolving needs of many end users, the complexity of generating proposals has increased. In recognition of this fact and to provide better support to our vendors, we’ve created our Major Accounts Group. This group enhances our vendor’s sales efforts by providing them with 1-to-1 personal support on all aspects of the deal.”     Equally important to winning a new customer is retention and CIT has a Premier Client Services group that is responsible for providing 1-to-1 servicing to their major account leasing customers through one individual for the life of the lease. “We’ve also put a great deal of emphasis on providing automated access to account information for customers of all sizes,” adds Arrington. “So our Web portal access is not limited to just larger customers. We provide access to all customers.”  Everbank Frank Carollo Delinquencies and bad debt charge offs are as low as they’ve ever been at Everbank Commercial Finance, Inc., according to Fred Carollo, general manager, Office Products at EverBank. Additionally, approval percentages are on the rise with Carollo reporting that they’re probably double where Everbank was last year at this time. What’s changed? “I don’t think you’re seeing a lot of newer companies opening up so you’re not seeing a lot of those applications,” says Carollo. “And I think customers are looking to buy gear again. The companies with money that have stayed on the sidelines and have good credit are coming back in the market and buying.” One area that Everbank is paying particular attention to is MPS. “It’s at the top tier of our focus as a group moving forward strategically,” notes Carollo. “We’re looking for the dealers who understand MPS and are doing it right as opposed to the dealers who you have to teach about it.” Everbank is aggressive in going after those dealers, targeting them at trade shows and dealer meetings, such as Toshiba’s recent dealer meeting in May. They’re also growing their business through referrals and old-fashioned feet-on-the-street prospecting. “Our forté is truly partnering with dealers and having a limited number of dealers and doing a damn good job for them,” emphasizes Carollo. “We speak with some of the manufacturer reps about our programs and they recognize we have a better product in the MPS arena and they recommend us to their dealers.” As far as a move towards managed network services, it’s coming although Carollo doesn’t see it as that huge of a stretch from a leasing company or dealer perspective. “If you’re in the MPS arena, you talk about different tiers of solutions,” he notes. “There used to be three tiers, now there’s a fourth tier. It’s really just a pass-through item; it’s basically service/maintenance oriented, and it’s basically the outsourcing of the networked services. That’s something we do and understand.” While Everbank may not have as high a profile as some of the bigger leasing companies, Carollo feels they’re well-positioned to compete for a dealer’s business. “We have all the capabilities of the larger players, especially the larger bank-owned players, and we can fund any size transaction with extreme speed from a credit perspective. One of the advantages we have is we’re not as large as them so we can make changes or offer unique programs pretty quickly.” One burning issue he sees throughout the leasing industry is residual realization. More end users want to keep their equipment and aren’t interested in an upgrade, especially since the equipment lasts longer if serviced well. “With everybody trying to hold onto cash sometimes it doesn’t make sense to upgrade just to upgrade,” explains Carollo. “We’re working with our dealers to put in place some innovative end-of-term options that lets the dealer make money again on the same user and lets the user keep the gear and extend it for a period of time, and obviously from our position, help our residual realization.” Overall, Carollo feels good about the business. “Month over month we grow, grow, grow,” he says. “We’ve been growing for probably the last 14 months straight and our delinquencies continue to drop so everything is right in line. I’m quite bullish on the future. We’ve weathered the storm. What’s left is good and our group feels better than ever about what we have to offer the market.” GE Capital Glen Clark At GE Capital business is back on track. “We’re seeing decreases in delinquencies, and as portfolios are looking better, businesses in general are feeling better and doing better from an earnings perspective and that always helps as we’re trying to move some equipment,” notes Glen Clark, vice president of GE Capital’s office imaging business. “Certainly from a pent-up demand point of view, because there were a number of folks who made the decision in 2008 and 2009 to hold off on any equipment purchases, that seems like it’s driving some activity in the marketplace, particularly in the office equipment sector.” Like other leasing companies, GE Capital has found the managed print services movement is impacting their business even if there continues to be some confusion in the marketplace as to the definition of MPS. “When you think of managed print services, and you sit down with dealers, OEMs, and customers you can almost get a different definition from each constituency,” says Clark. “Oftentimes, it has to do with where they are in the process. We think of it at the customer level. The customer has always had and will have multiple devices—a multifunction device, printers, and they’re trying to get a better handle on what that fleet is costing them. When you look at MPS as consolidating the cost of operating that equipment under a single vendor, that adds more visibility to it and an opportunity to manage that cost, and that’s why you’re seeing customers open to the idea of pulling all these pieces together.” Is that changing the way GE Capital is writing leases or working with dealers? “When you think of the traditional CPC as the foundation for any managed print services engagement, that product hasn’t necessarily changed, but there are new tools that allow you to more efficiently manage a larger fleet in today’s environment and that’s an exciting development from a dealer perspective,” replies Clark. Clark expects to see more of GE Capital’s dealer customers take advantage of MPS, but he’s not about to provide a blanket endorsement to every dealer. “The future remains to be seen in terms of an evolution,” notes Clark. “I take it back to a traditional equipment seller in the marketplace transitioning towards cost per copy and I think that jump is the jump that’s probably facing a number of dealers in the marketplace. MPS is a little more daunting jump. If you’re already selling CPC, moving into managed print services is more of an adjustment than a complete shift. We’re seeing dealers struggle, for example if they haven’t switched to CPC, and perhaps are losing customers to those who have so they’re trying to make the jump from traditional equipment all the way to managed print services. That’s a pretty significant jump.” GE Capital’s history working in a CPC environment has them well positioned to meet the needs of the managed print services dealer. “We’ve developed some expertise that surround this cost-per-copy portfolio of being able to manage lease assets and major fleets of assets in the marketplace and being able to track and bill multiple meter reads,” explains Clark. “That works very well with us. From that standpoint we’re enjoying this renaissance as it relates to the equipment.” However, Clark sees an evolution on the horizon that might make things a tad more difficult for leasing companies in general. “There’s another side to MPS from a customer perspective that’s more daunting, where the customer says, ‘I don’t want to own equipment, I don’t want to commit to a lease, I just want to pay you per month per image.’ That’s a product we don’t have a solution for today simply because that isn’t truly a lease and there isn’t truly a commitment, so it will be interesting to see how that develops.” From a managed networked services perspective Clark isn’t surprised that this may be the next big evolution, especially with the merging of technology at the customer level and the greater involvement of IT on the output technology side. “It’s the merging of the two technologies that creates some challenges because generally they’re working with a different vendor who’s providing their overall network and maybe their financial accounting software to somebody who’s just providing the equipment associated with the printers and multifunction devices. I think we’ll continue to see some evolution there.” Even though the industry continues to evolve and GE Capital is evolving with it, there’s still no time like the present and Clark reports that approval rates are up as is their origination business, which grew by 50 percent in 2010 over 2009. The company’s delinquency rate also declined from ’09 levels and Clark remains optimistic for 2011. “Businesses are definitely reinvesting in people and equipment but we’re also positive about the industry in general,” he says. “As we move forward we’ll see a lot of improvement and we’ll continue to see it; it’s just a little unusual right now because in prior downturns you saw a big recovery quickly.” GreatAmerica Leasing David Pohlman What’s driving business of late at GreatAmerica Leasing according to David Pohlman, executive vice president and COO, is some of the same old, same old traditional office technology sales, but managed print is having an impact as well. “It’s not like it’s new, it’s certainly been out there and we’ve been fairly active with it for six or seven years,” states Pohlman. “It’s been more mainstream the past three years where you have dealers that have integrated it effectively in their standard go-to-market approach.” But the evolution towards managed print hasn’t changed the way GreatAmerica does business. “Our strength has always been in bundled billing, or what we refer to as single-invoice solutions,” says Pohlman. “That’s an area we’ve made tremendous investments in—our technology capabilities and integration capabilities with some of the ERP systems on the market, whether e-automate, Lacrosse, OMD—integrating with all of them. I think we try to make the dealers’ lives very simple when they’re managing a large number of meters.” Indeed, technology has become increasingly important throughout the leasing industry. “When you were just doing cost per copy on traditional copiers there were ways you could do that and allow for some amount of manual effort, but when you ramp up dramatically the quantity of devices and quantity of meters you’re trying to track and reconcile on a monthly basis, you can’t do it manually anymore,” says Pohlman. “Everything has to be highly automated and you have to have a lot of system-to-system connections to make it work well. There aren’t a lot of our competitors that can play there, and from our end it’s allowed us to elevate as a resource to dealers who desire to play in that world.” The biggest challenge of putting all those pieces together is the amount of time it takes to collaborate with all the different parties they need to integrate with to do this effectively. “You need to dedicate resources to those relationships to ensure you get the time and energy from those folks to build the connections and the systems and the integrations so things flow well,” says Pohlman. “The other piece is you need a systems group within your own organization that has a tremendous amount of ability to modify and adjust systems.” While managed print remains the industry’s mega buzzword, there’s a new opportunity looming on the horizon—managed network services. “Our more progressive dealers have almost evolved beyond managed print,” reveals Pohlman. “The next thing for them, and it was evident at ITEX, is managed networked services.” This will require the ability to create single-invoice solutions that allow dealers to bill a traditional copier on a per-page basis, managed print on a per-page basis, manage IT services on a per-seat, per-server or per-workstation basis, and the ability to integrate everything into a single invoice. “That’s part of the reason they’re selecting single-vendor providers because they want one source on all technology issues and not have finger pointing among different suppliers,” states Pohlman. As the industry evolves in this direction, GreatAmerica has created a managed network subsidiary, Collabrance, along with various tools, marketed as Collabrance to help dealers move down this path. “This is one way where we’re providing a path for a dealer to enter managed networked services at a fraction of the cost of what it would take if they built all the infrastructure and hired all the resources to create a network operations center and a full service desk to support the remote elements of remote monitoring and remote remediation,” notes Pohlman. “The name is based on the word collaborate and the thought is the dealer owns the customer relationship and he has the necessary onsite pieces in place and Collabrance provides through the dealer to their end customer all the remote aspects—remote monitoring, remote remediation, service/help desk, and network operations support.” GreatAmerica has built a full network operations center, staffed it, acquired all the software tools, provided all the training, and all the things to allow a dealer on a per-workstation or per-server basis to offer that out of the gate in a profitable way. That is one piece of the managed network services puzzle, but do managed network services really make sense to the dealer channel? “Over the really long haul who controls the network ultimately controls the customer,” says Pohlman. “So for very large dealers a lot of them are going to make these investments on their own and probably do it themselves, but for medium size and certainly smaller size dealers the economic investment it would take for them to be able to offer this product is almost out of their reach.” Pohlman admits doing this is cost prohibitive for many dealers. After all, for GreatAmerica, focusing on Collabrance and investing in the people, resources, software tools, network operations center, etc. was about a $1.5-million investment. “It may cost a dealer about a half million dollars [to do the same thing] but it’s still a pretty substantial investment before they sign their first contract,” acknowledges Pohlman. “We look at it and say if somebody wants to partner with us under Collabrance, their first contract could be profitable instead of waiting 5, 7, or 10 years to maybe never for payback. That approach is where we saw an opportunity to bring value to the market.” U.S. Bancorp David Verkinderen According to David Verkinderen, executive vice president, U.S. Bancorp Equipment Finance-Office Equipment and Manufacturing Vendor Services, the company’s overall office equipment business is very strong right now. “This business has remained healthy during this economic challenge and we are excited about the future and the many opportunities that continue to exist,” he says. “We do have concerns about the supply issue we seem to be hearing more about. The portfolio remains very healthy and we expect that to continue and ultimately create more opportunities for the business.” As technologies continue to converge Verkinderen says the finance product becomes more complicated, allowing leasing companies such as U.S. Bancorp to continue to add value. “This economic downturn has caused us to look at all parts of our business model and become better in certain areas,” notes Verkinderen. “Front-end automation has been an area we wanted to enhance and certainly that has happened as we all focus on the credit side of the business.” Of course, managed print services is a key area of focus for U.S. Bancorp. “We believe we have a great foundation that was built around the bundled solution that this industry has so successfully brought to the end users,” says Verkinderen. “The ability to document properly, invoice accurately, and report back to the dealer will continue to be critical to any MPS solution.” He acknowledges that MPS is similar in a lot of ways from the old CPC model and that U.S. Bancorp has been involved with an MPS strategy for several years. However, as the MPS concept continues to evolve, the company has found that understanding how to manage the residual part of the transaction and the different solutions providers involved is critical. “Another challenge will be the transition to a contract that is more and more based on usage and not as much based on the hardware solution,” opines Verkinderen. “Another important distinction is the ability to bill and remit revenue on equipment that may not be under lease. The end user wants a simplified billing process and we must provide that for them.” As technology and business models evolve expect to see an evolution in leasing programs. “Since we service all areas of this market we get an interesting perspective on what the various channels are doing to maintain their competitive advantages,” states Verkinderen. “Areas of opportunity exist around financing a true software solution as that has become a more important part of the transaction. We need to be able to help our clients sell these software solutions. More complicated and customized invoicing has certainly become more relevant and we continue to enhance our ability to provide solutions on the billing side of the equation.” Overall, he remains optimistic about the business and meeting the needs of the dealer community going forward. “Our business was built on the innovation that the dealer channel has created and executed and we expect that to continue. We certainly get exposed to many different dealerships across the country and it is amazing how these businesses are constantly changing and innovating to keep up with the changing environment around them. They challenge us every day to meet their needs and this constant pressure to provide a better solution is what allows us to become a more successful business. We believe the entrepreneurial spirit is alive and well in the office equipment space and look forward to providing a solution that is constantly changing.”