In an era of increased competition and regulation, many in the equipment leasing and finance industry are exploring the use of enhanced technology as a way to gain process efficiencies and improve performance. In a Monitor first, we hear from a group of technology leaders who specialize in leasing software and systems.
With shrinking margins and an increasingly competitive marketplace, top finance managers are continually forced to do more with less in order to keep business thriving. At a time when lease accounting changes are imminent, regulatory oversight is increasing and data security is threatened, the mandate to not only keep up but also surpass the competition can be daunting.
We talked to leaders of five technology software companies serving the equipment finance industry. Each company has its own approach to developing software solutions for today’s environment, but the overall message was clear. Now more than ever, businesses operating on decades-old legacy systems are going to have their hands full trying to keep up with the challenges of today and tomorrow.
Our panelists are Michael H. Campbell, chief executive officer at International Decision Systems; Clinton Dunlow, president and chief executive officer at Dominion Leasing Software; Madhu Natarajan, chief operating officer at Odessa Technologies; Richard Raistrick, global marketing manager at CHP Consulting; and Jeff Van Slyke, vice president of Business Development and Strategy at Lease Team.
There was a time when companies could delay a major investment in their software systems and let other priorities take precedence. The economic downturn didn’t help that situation, but according to our panelists, those days are over.
“The whole assessment of investment and value proposition has completely and utterly changed,” says Campbell, who recalls a time when new systems were considered a “nice to have” item that often gave way to projects that gave a bigger bang for the buck. “But now, when we are talking about compliance, security and federal regulation, the decision no longer follows the typical budgeting process. Businesses must do what it takes to be compliant within the given timeframe.”
“Return on investment is the essence of what we try to bring to the table,” reinforces Natarajan. “We generally find this to be the most impactful part of our implementations, because we tend to replace systems built 15, 20 and even 30 years ago. Some were built before the Internet existed and cannot possibly leverage what current technologies have to offer, much like your father’s 1980 station wagon couldn’t compete with the fuel economy of hybrid cars today.”
“Efficient workflow, achieved by configuring business processes within the system’s architecture, is a key concept of doing more with less,” explains Raistrick. “A few years ago, workers were pushing trolleys of folders around the leasing company, taking them to the people who processed the work. Now technology uses workflow and process automation to transfer work within the organization. The user sees an item of work come up on his screen, and the system guides him through the process. This allows work to move efficiently through the business, and lets the user focus on the customer’s needs.”
“Workflow becomes the fundamental building unit with qualitative and quantitative advantages,” adds Natarajan. “It is qualitative, because it helps with compliance, identifying bottlenecks, monitoring efficiencies and streamlining decision-making. It is quantitative, because you can reduce headcount and do more with less, especially when you apply it to your entire organization. Some of our clients, after switching to our system, have doubled their portfolio size within months of going live or enjoyed significant organic growth, all without increasing headcount.”
Lease Team’s most successful customers are focused on deploying technology as a differentiator to create a competitive advantage. “They are using business rules within the context of workflow and automation tools to push information and provide improved customer service to their various customers,” notes Jeff Van Slyke. “Leasing companies have many customers, including lessees, vendors, funding sources and internal customers such as a manager or the sales group. This underscores the importance of providing business critical information and excellent customer service across all relationships.”
Dominion Leasing uses familiar-looking Microsoft Development Tools to build processes that bundle mundane or complex tasks into “wizards.” “We encapsulate those processes, so the system can take in the entire scope of the requested change,” says Dunlow. “The wizard thinks ahead and anticipates issues that could be affected by that change and presents available options on screen. It shows the results ahead of time, so there are no surprises to the user who can see what is going to happen and then process that request with a single keystroke.”
“Consolidation takes some investment, but you can do more with less once you have that common platform,” advises Campbell. “You will get better visibility on your overall risk and your operations from a reporting perspective with fewer connection points. Asset finance back office systems typically have 20 to 100 connection points with other systems. Every time you add a connection, there are maintenance costs that need to be monitored and reworked in addition to reassessing, reconnecting and testing. With a single platform, everything becomes more manageable: security, compliance and risk reporting.”
Managing Regulatory Needs
The demand for improved efficiencies comes to a head in the originations and back office space where disparate systems can cause headaches. For example, a major bank may use an in-house legacy platform for certain portfolios while using another platform for European operations. “The situation has become more critical today because of the need to prove to regulators that you have a handle on your risks across all systems,” insists Campbell. “Another piece that adds costs is security. Financial systems seem to be under systemic attack by hackers, and there is a branch of governmental oversight that insists that banking systems build resistance to the onslaught. Doing penetration and vulnerability testing on multiple systems not only adds costs but can also add serious risk.”
“The system should be able to do a lot of automated processing,” instructs Raistrick. “For example, when a work item comes up, the system can automatically decide if a Canadian deal needs to be processed differently from an American deal. This is the type of thing systems do very well: simple, repeatable decision processing. Systems are also good at choosing the right document template, completing it automatically and sending it to the customer by email or paper. The user doesn’t have to get involved in choosing templates and typing in data. The system allows the human effort to focus on adding real value to the customer.”
Data inconsistencies are an important aspect of regulatory requirements. “If Process A enforces a certain rule, and Process B lets you bypass that rule, you create a situation for a potential regulatory issue,” speculates Dunlow. “If the second step in the software system doesn’t also enforce the initial rule and lock down the data while recognizing it as coming from a secure source, you’ve introduced an opportunity for someone to turn off an option they should not have been able to turn off, or turn on an option they should not have been able to turn on. Now you have an issue.”
“It is important to know who owns the data,” emphasizes Van Slyke. “This is critical, because it allows you to take the technology from simply being a processing system to becoming an information system with data that regulators can rely on. Auditing tools can be used to monitor critical data elements, track who made changes and send notifications to people who need to know that a critical data element has changed. Whether that change was an accident or was meant to be, it could eventually expose a hole in your security.”
Natarajan notes that an inherently integrated system built on a single platform, on the same technology and on a single database, goes a long way towards reducing the administrative overhead for compliance. “We built our system with a services-oriented architecture that assumes that all incoming data is corrupt, even from its own user interface. Our UI [user interface] is unintelligent and serves merely as a conduit to get information. The business logic layer is where all the heavy lifting and number crunching happens, and its output gets pushed down to the database layer. The beauty of this set-up is revealed when we want to expose the system’s services and functionality to an outside system to consume. When we do this, we are simply substituting our UI with an outside data source. Everything else in the system remains untouched, and so the question of data integrity does not even apply.”
“It’s easy to say that consolidating to a single platform will make your life easier,” remarks Campbell. “Of course, it will! Where the rubber meets the road is when you implement and roll out something that also supports your business model. You must have a common platform that allows regions and lines of business to have different, local strategies. The way you go to market in your western European small ticket business will be very different from your U.S. large ticket business. Your system must support both and ultimately draw the data in to undergo common reporting, risk assessment and security threat awareness.”
Lease Accounting Changes Ahead
The discussion turned to the latest exposure drafts circulated by the IASB and FASB and what the outcome might mean for equipment leasing and finance companies.
“Start thinking about how to carry out the changes and how your systems can handle them,” suggests Natarajan. “Logistically, you should also think about how your technology vendors are going to assist you. An older system will require more time and effort and therefore a bigger bandwidth of commitment from the vendor. You’ll want to be absolutely sure your vendor has the resources to help and that you are going to be a priority, especially if you’re still driving your father’s station wagon!”
Van Slyke says businesses need to understand the vendor’s plan as it relates to the accounting change. Is it simply an approach to the accounting change or are they looking at the full life cycle impact of what the accounting change may mean to the business? “The impact to the leasing business will go beyond simply debits and credits. The accounting change will have impact across the organization, including sales, credit and portfolio management. I also encourage leasing companies to talk to their customers about the impending changes to get a better understanding of their concerns and how your systems might serve them.”
“If the lease accounting changes become active in 2017, system changes are not that far away,” says Raistrick. “Any leases active in 2015 will have to be restated using the new standards and this can affect leases written today. You have to think now about what additional data needs to be held, how leases are going to be classified and how they will manage through the transition. Lessors may want to start their own dual reporting approach prior to 2017, so they can see how it is going to work out in the future.”
“Ask how the software vendor plans to deal with the new regulation,” proposes Dunlow. “If we lose the benefit of off-balance sheet accounting, leasing companies will have to consider alternatives for serving their customers and staying in business. Loans are one alternative, so lessors will want to make sure their system can support loans. They must also consider whether their software system can support creative financing options such as principal-plus loans, interest-only loans, skip or step payment loans, or weekly and biweekly loans.”
Van Slyke put forth the idea that the regulators need to consider a longer transition period in order to effectively implement the changes. “There is a tremendous amount of system testing needed to ensure compliance, from booking a transaction to all the accounting entries that can possibly happen throughout its life cycle. From a systems perspective, the accounting change is similar to adding another financial product. There is quite a bit of work ahead!”
Looking Into the Crystal Ball
At the rate technology has been transforming, there is no doubt that more change is ahead. To keep pace with their dynamic business environment, software companies must keep an eye on the future and be ready for whatever comes next.
“Asset finance businesses want to differentiate themselves from their competition by making changes to their business model,” comments Campbell. “Businesses want to be known for full service leasing, hardware as a service, usage tracking or other benefits. This requires software that does all these things to protect the business in addition to enabling changes to the business model. And all of it must be done proactively, because you can’t announce a capability and then say, ‘We’ll have that in 18 months after the software is implemented to support it.’ The business must have a strong relationship with its tech vendor so both can work together to see what’s ahead and plan for it.”
“Unfortunately, the leasing industry is still lulled into an ‘if it ain’t broke’ mindset,” laments Natarajan. “Technology is typically looked at as being supportive of the core business rather than as an enabler of the leasing company’s growth, brand and mission. Technology is the advantage that can help distinguish a leasing company from its competitors.”
“Customer demands are going to continue to increase,” predicts Van Slyke. “Anytime-anywhere access to information and interacting with your organization will continue to proliferate across multiple devices. The need for self-service capabilities that are so prevalent in business-to-consumer relationships will continue to make its way into the business-to-business world. This is going to drive technologies to provide increasing efficiency to the leasing organization while also providing tools to ensure more quality information is presented as customers dig deeper and deeper into the system, requiring more and more access in their interactions with you.”
“We see a movement away from PCs toward mobile devices,” cites Dunlow. “This presents a lot of challenges. For one, the software is diverse — with mobile devices you are dealing with iOS, Android and other systems. Another challenge is the user interface. When you trade in a 22-inch flat panel monitor for a smartphone, you have a lot less real estate to work with, so design of the user experience is important.”
Raistrick thinks there will be more integration of technology within the asset itself. “Telematic devices will help lessors understand how the equipment is being operated, or perhaps a car will have an application that allows the driver/lessee to do investigatory research on trading up to a new car.”
“The evolution of the cloud is very much in its infancy and will have a huge impact,” states Van Slyke. “Rather than systems being deployed in house, most software systems will be deployed within the cloud. There are many benefits to utilizing systems within the cloud, but its proliferation will cause an explosion in data security requirements.”
“Another aspect of technology is the potential for better data mining and analytics,” says Raistrick. “Leasing companies have databases filled with financial and business data, but getting at the meaning of the data is not always easy. If you have a collections problem, for example, it could be in a particular equipment class, a region of the country or a particular customer or other factors. Better reporting and analysis of data are going to be important.”
Finding the Right Tech Partner
When seeking out a tech vendor, the finance company must have a good understanding of its current and future needs. “The customers who have the most success are the ones who have a very clear vision of what they want a systems project to achieve,” urges Raistrick. “It is not just about replacing their system; it is about knowing what they want the business to look like in a few years’ time, and then understanding the system’s role as a key enabler.”
Natarajan says you should ask yourself how old is your technology and on what fundamental technology paradigm is your system built? “The answer to this question will dictate how businesses can leverage today’s technology and benefit from it. It will also dictate how well the business is positioned for whatever new advances and changes that come down the pike five to ten years from now.”
“You should regularly reassess and align your business with your systems in order to get the most out of them,” affirms Van Slyke. “If you tweak your system on a regular basis, you will find that you have a system that provides improved efficiency and aligns with strategic growth objectives now and in the future.”
“You must be able to describe your problem and ask the vendor to show you how he will solve it,” relates Campbell. “They have to get it right the first time, because there is no more patience — from businesses or regulators — for going back to fix it, and it can get very expensive.”
Dunlow recommends extensive reference checking. “Does the vendor deliver what it promised on time for the price quoted? Are there numerous time and material charges that might get out of hand? You want a system that conforms to how you do things, and you want a vendor relationship that fits your business culture. How is customer service — not just in the first year or two, but five or ten years down the road? Does the vendor continue to grow the product as part of regular maintenance, or do you have to purchase these updates? Asking the right questions of the references will tell you more about how a vendor does business than anything that vendor can show you in a demo or site visit.”
“The devil is in the details, and there are a mind-numbing number of details in this space, so a 30-minute overview of software just isn’t going to do it,” says Campbell. “You need a vendor who can do what you need to do to be compliant as well as guide you toward what is coming tomorrow. The rate and pace of change is only accelerating, so you need a vendor partner who can help lead the way rather than follow the charge.”
“Today’s leasing software systems can offer incredible functionality that can make a big difference in customer satisfaction, efficiency and the ability to step forward into the next decade,” concludes Raistrick. “The technology needs to be chosen very carefully to make sure it is reliable and scales well with the existing landscape. That is the tough thing to get right. Look for a partner you can work with in the long term, with a track record of delivering similar projects and that will be around a long time.”
Lisa A. Miller is a regular Monitor contributor who has worked in the equipment financing industry for more than 15 years.
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