Over the course of the past quarter century, captive finance organizations have served as the cornerstone in helping businesses drive IT innovation in new directions. The Internet solidified its stronghold on the way we do business, and IT technology began evolving at a staggering pace. As such, captive finance organizations found themselves in a unique position to foster business growth given their close partnerships with original equipment manufacturers (OEMs).
These partnerships provide foresight into future technological roadmaps and access to the technology experts needed to help customers keep pace with competitors while consuming IT strategically — allowing them to pay for new technologies without the overhead of ownership or title and protecting them from the obsolescence of yesterday’s equipment.
While these benefits are still at the heart of the IT industry, emerging technologies and market transitions are driving captive finance organizations to reassess their financial models in order to provide customers with the flexibility and choice to pay for and manage emerging technologies so they are able to maintain a strong competitive advantage.
Changing IT Consumption Models
In this day and age, most tech-savvy organizations have deployed cloud or big data programs to improve their business in one form or another, shaping the way business is done in the 21st century. Now, a new trend is emerging, the Internet of Everything (IoE), and it is presenting a plethora of opportunities and challenges.
A major global opportunity to the tune of $19 trillion over the next decade, IoE is set to transform institutions from small, independent business to large government organizations. With that prospect comes a drastic change in the way we do business and every company — no matter the industry — is becoming a technology company. For example, the music industry saw a sweeping shift in the way listeners consume music with the advent of streaming services such as Spotify, forcing artists and record labels to adapt to the changing tide in order to attract fans via their preferred method. Now, companies are shifting how they do business, and captives need to adjust their models in order to help customers consume technology in a pervasive manner that best addresses business outcomes and value. Enabling innovation that can be achieved quickly and cost efficiently, however, is a major obstacle for many organizations.
With IoE, intelligent networks and infrastructures that are intuitive, secure, easy to use and manage, and able to adapt to the specific requirements of their applications are now required. To drive true business transformation, a new IT operating model is needed for the IoE era — a concept Cisco refers to as Fast IT. Fast IT looks to address common issues in today’s business environment such as increased technological complexity, new requirements to improve business agility and advanced security threats.
To adopt these new technology trends and stay competitive in their respective markets, businesses need flexibility and choice in how to buy and consume emerging IT that is customized to their budget and investment strategy. This is where captives play a crucial role given the close tie to their parent organizations and the product and solutions roadmaps they offer. As businesses and IT decision makers navigate through these market forces and technological advances, captives must also transition the way in which they do business to meet the changing needs of the industry.
Take smart connected cities for example. The governments of Chicago, Barcelona and Hamburg have all publicly committed to transforming into IT-centric organizations and are typically doing so on leaner budgets than normal. They are establishing more efficient ways to manage infrastructure, processes and citizen services — such as smart lighting, waste management and transportation — and as a result, the backbone infrastructures that traditionally supported these types of applications, tools and services are going through a period of transition. Service providers are bolstering their infrastructures to support increased network demands, and companies of all sizes are rapidly scaling and modifying their data center and network architectures to take advantage of this new wave in computing.
As countries or individual cities plan to bolster their networks, captive finance organizations should evolve their offerings to include advisory services on achieving the economics of a business plan. Additionally, captives will need to deliver innovative financing with longer-term payment programs to provide the capital needed to bring these projects to fruition, which is crucial to help customers stay current and adaptable.
Leading an Effective Transition
This new computing era fueled by IoE is shifting traditional captive finance models, transitioning from asset-backed lending to financing more intangible software and services-based solutions. This does not mean that common financing practices are going away, but the monetary benefits of financing alone won’t cut it. To evolve, captives must find a way to add new capabilities to their portfolio in order to best address customer business outcomes, including:
OEM Partnerships: Captives must leverage their partnerships with OEMs to provide customers with unmatched knowledge and expertise of the entire portfolio set and understanding of future product roadmaps. This intricate insight and partnership enables organizations to keep pace with IT innovation while managing budgets over a long period of time, helping them to develop a comprehensive, end-to-end lifecycle management strategy while increasing operational efficiency. This partnership also benefits captives by helping to manage risk as the intangible assets spawned by software-based solutions are harder to recover.
Balance Sheet and Asset Allocation: Captives can retain title of assets so customers don’t have to take on the overhead of these technologies. Similarly, customers are able to provide hybrid utilities in which the ownership of excess capacity is maintained by the captives.
Cash Flow Optimization: Pre-determined, routine payments for new IT allow organizations to manage cash flow effectively and reinvest in other areas of the business. For example, captives can help cloud providers delivering managed services monetize their contracts, which creates new revenue opportunities for the provider.
Technology Upgrades: Leveraging the OEM relationship, captives can work with customers to allow for a technology refresh as needed to keep pace with equipment innovations.
New Financing Offers: Introducing new financing offers to keep pace with IT innovation and new consumption trends is a crucial capability for captives. It’s important that customers work with a captive that continually re-examines its current suite of offers and adjusts as the market changes. For example, Cisco Capital just introduced Open Pay, a new variable consumption model that allows companies to receive equipment they need including capacity for future growth or to meet peak usage demand while paying only for what they use. By paying for variable capacity as it is needed, this structure allows companies to overcome the common challenge of meeting uncertain demands efficiently and better aligning future payments to actual usage.
Recap and Future Outlook
As the Internet of Everything continues to grow, the next generation of IT solutions will require more structured financing capabilities to be successfully developed. The role of captives will not only serve as a financial foundation but, maybe more importantly, will evolve to also become trusted advisors to organizations. Those that leverage their unique perspective to provide consultative services such as capitalization strategies, lifecycle management and monetization of new services will be the ones that thrive in the changing market – providing long-term strategy to deliver business outcomes for organizations.
Businesses and information technology are in the midst of a major transformation period, and so too is the captive financing industry. As consumption models shift to meet these new technological trends, captives that leverage their OEM relationships, embrace new capabilities, are engaged early on and become a trusted point of consultancy will be key in successfully navigating future transformations.
