In the early 1970s, Ken Steinback was working for Minneapolis-based Fabri-Tek, a core memory manufacturer for IBM compatibles, selling add-on memory for 360 model machines. While making his rounds, he’d encounter companies that were upgrading to the new 370s, and he’d be asked if his company bought old machines. Although Fabri-Tek didn’t purchase used computers, as Steinback explains, “I was smart enough to say, ‘Well, maybe I do.'”
Brokering a few machines on the side, he learned the market quickly. With the help of his boss at Fabri-Tek, the pair made a few deals in partnership, and within a year they left the company and started CSI as a brokerage business. “We didn’t know how to lease anything,” he explains.
From that humble start, CSI Leasing is now one of the largest privately held independent equipment leasing companies in the world, with 850 employees worldwide and customers in 36 countries. Majority owned by employees, Steinback leads CSI as chairman, with Bill Gillula as vice-chairman and CEO and Steve Hamilton as president and COO. In the 2013 Monitor 100, using 2012 data, CSI Leasing ranked 48th based on net assets of $1.24 billion and 41st based on new business volume of $763.2 million.
In October 2013, the company announced that new lease originations topped $829 million worldwide in fiscal year 2013, up nearly 15% from the previous fiscal year. Total assets were up 5.5% and net income was up 8.7% compared to the prior fiscal year ending June 30, 2013. CSI also added 80 new employees worldwide, an increase of more than 10%. The company serves the technology, healthcare, media & entertainment and government & education sectors.
“When we started CSI, we didn’t have any bank lines, we didn’t have any money. We started this little company. We said until we have $50,000 of equity built in the business, we’re not going to take a salary,” Steinback says.
Reflecting on his first lease deal, he explains that he got a call from a former customer at Honeywell offering him a chance to supply some equipment for an insurance company. Upon learning that the potential client wanted to lease the equipment, Steinback returned to his office, copied a Comdisco lease form, changed the names, added the machines and filled out the schedule. “I didn’t have a lawyer look at it. I didn’t understand it,” he adds. He figured out the lease rate by harkening back to an undergraduate accounting class, where he learned about factoring tables.
After the new customer signed the lease — without reading it — Steinback called on a banker friend to borrow money on the contract to pay for the machines. “When I told him who the lessee was, there was absolute silence. Then he said, ‘Kenny, that company has been indicted for insurance fraud in the state of Ohio, the president of the company is going to jail and there isn’t a bank in the country that will finance that deal.'”
Ultimately, the bank loaned Steinback the money on his personal guarantee, and he completed the deal. “I didn’t know that I needed to research the company and its credit history. I had my first lesson. The bank made a lot of money on the loan, and I tripled my money on the deal. That was my first step into the leasing business. It was like getting an MBA in a week,” Steinback says with a laugh.
The business grew steadily by leasing used equipment. Eventually, CSI engaged in joint ventures to provide equity for its deals, working with U.S. Leasing in San Francisco, Equilease in New York and the Bank of St. Louis. Steinback notes that the Department of Justice’s consent decree against IBM, which prevented it from monopolizing the market by requiring it to sell its computers instead of only renting them, gave companies like CSI the opportunity to finance that equipment. Also giving the company a boost was the Tax Reform Act of 1986, which eliminated certain tax-oriented transactions that CSI, as brokers, couldn’t utilize, leaving it unable to compete with the big banks.
“What really helped us is that after 1986, when you didn’t have those tax benefits out there anymore, we started investing our own money and getting away from the joint ventures. Even though it was a limited amount of money, we built up a little lease portfolio on our own. As we did that, it materialized into more and more equity. As more competitors departed from our industry for various reasons, our business began to expand, and our future looked very bright,” he explains.
As IDC’s Susan G. Middleton recently reported, four key technologies are collectively redefining the IT ecosystem — cloud computing, mobility, big data and social media (See: “IT Leasing & Financing Outlook: Disruptive Technologies Create Opportunities,” Monitor, Nov/Dec 2013).
She adds that these industry transformations will significantly impact IT leasing and financing markets and provide growth opportunities, as customers look for help managing this rapid pace of change.
Steinback concurs that the evolving nature of the IT industry has benefitted CSI, “We love technology changes because we take equipment out early when companies want to upgrade, which means we can remarket it earlier, and it’s worth more money earlier than later. We get the new technology on our books and get rid of the older technology. The more product we end up financing, the better off we are,” he explains.
One of CSI’s fundamental leasing principles is flexibility, because as technology changes, leasing changes. Steinback relates that years ago IT equipment used to cost many more times what it does today; therefore, CSI has to finance more to stay even. At one point, the company sold replacement parts to extend the life of the equipment, but current technologies are less upgradeable. “We like all of the constant changes because they result in more equipment, more financing and more companies in the IT business,” he adds.
CSI began its global expansion in 1995 by going into Canada, where it first operated without employees in the country. International growth began simply, but as CSI’s reach grew, so did inherent challenges. “If someone wanted to put 20 PCs in Canada, we’d do it in U.S. dollars, and it was easy. Once we started doing more than that, it got much more complicated. You actually have to be in those countries, do business in those currencies and be registered in those countries in order to function properly,” Steinback notes.
The company first entered Europe in 1999 by acquiring McKenzie Hughes in Sheffield, England, which was a brokerage company dealing in all types of technology equipment. Current COO Hamilton moved to the UK for several years to convert the company to fit CSI’s model. “That was the start of Europe. We then went into Spain, Germany, France, Italy, the Czech Republic, Slovakia , Poland. We send our own people, and build relationships using the same model and philosophy in every location. In most situations, we have had to remold these companies into the ‘CSI Model.’ It takes a lot of time and effort, and we still feel a little bit of the pain in the start-up locations. They aren’t all homeruns. It’s a challenge,” he explains.
Arnaldo Rodriguez, president of CSI’s International Division, joined the company in 2002 as managing director of CSI Latina Financial, a holding company for CSI’s Latin American subsidiaries. Prior to CSI, Rodriguez was managing director at El Camino Resources de America Latina. When El Camino went out of business in the U.S., Rodriguez and his colleagues called Steinback to ask if he would be interested in investing in a company that they wanted to launch in Latin America. They could secure an OPIC loan for $10 million, if they could get another $10 million investor. Steinback invited them to St. Louis to present their business plan. “We didn’t invest $10 million. We hired all of them and started CSI Latina and Mexico. Today we have about 70 people in Mexico, and it’s a big part of our business.”
CSI’s foray into Asia was just as unique. About ten years ago, the company hired an intern who hailed from China and was working on his MBA at Washington University in St. Louis. He wanted to learn the business and create a business plan for expanding CSI into China. Because his visa let him stay in the U.S. for one year after graduation, he spent that time with CSI, and he remains with the company today. Although Steinback says CSI might pull out of China due to the many obstacles of conducting business there, the company has found success in Malaysia, Singapore, Hong Kong, New Zealand and Australia.
CSI provides clients with ever-important data security and disposal logistics through EPC, its wholly owned subsidiary. CSI’s data security plan wipes hard drives according to the National Institute of Standards and Technology sanitization standards, and the de-manufacturing and recycling of hardware follow environmentally strict, zero-landfill procedures. CSI also offers a service that allows customers to track which of their leased equipment has been returned to its facilities. EPC provides remarketing services as well.
“The biggest expense in returning old equipment is transportation. We have our own trucks picking it up in almost every country. We have DDRVs — data destruction & recycling vehicles — that are self-contained mobile shredding devices. We go to the customers, shred their hard drives on site, while the client watches. There are no chain of custody issues. Everything is authenticated, certified and recorded, and it is all automated. And we do it all in house. It’s all our own employees. We don’t subcontract. It is all done the right way,” Steinback says.
He is quick to share the story of how he met Dan Fuller, EPC’s president. Fuller founded EPC in 1984 with a focus on buying and selling personal computers: “We had a gentleman who ran a little refurb center for us in St. Louis. He called me saying there is a guy that keeps coming to the shop in a pick-up truck and asks to buy PCs from us that have been sitting in our warehouse. He doesn’t have the money to buy them, but says if he can have a few machines, he’ll pay us when he gets paid. I said give the PCs to him. A few days later he comes back with a check. This happens five or six times over a month period. Then I get a call saying the guy wants to buy a couple of skids of PCs and is willing to give us $60,000 for them after he sells them. That was a ton of money for those machines. Within 15 days he comes back with a check for $60,000.”
Curious, Steinback wanted to see Fuller’s operation — a little storefront warehouse in a strip shopping center in north St. Louis where he was building IBM clone computers for resale and employed about 15 people. CSI bought Fuller’s company in 1998, which today has more than 250 employees around the world.
The key to CSI’s success is a relationship-focused model that hasn’t changed in more than 40 years. “We have customer relationships direct with our users, and we help them with their equipment needs, how to get rid of it, how to buy new, how to negotiate a fair price. We follow the same model with our banks, our attorneys, our accountants and all of our vendors. Everything is face to face. We don’t like dealing with people over the telephone. We don’t lease over the telephone. We don’t deal with brokers, like I did 40 years ago. It’s not our business. If we don’t get the relationship, we don’t do it,” he explains.
“I personally couldn’t have done this alone and don’t take responsibility. It was my good fortune to find the right people. It’s been a great 42 years, and I wouldn’t change a thing. Our customers are our best friends. They can always pick up a phone and call me. I am a humble guy and proud guy at the same time.”
Lisa M. Goetz is a Monitor contributor.
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