Digital technology continues to advance as a way for equipment financiers and lessors to enhance their businesses. Kristine Snow examines some of the trends Cisco Capital has observed over the last few years and predicts where 2020 might be headed.
The closing of each year is a time to reflect. As the industry has evolved in 2019, the solutions for IT equipment leasing and financing have also changed to accommodate the inevitable disruption ahead in 2020. We’ve experienced eight trends that have captured the IT financing industry in recent years and have identified things that we expect to occur as we approach 2020.
The demand for flexible consumption models and solutions-based financing will outgrow hardware-only financing
As innovation cycles turn faster than before, companies need to quickly adopt to the latest technologies to be successful. Customers need flexible consumption models — scalable solution-based financing options — versus hardware-only financing, which is less adaptable. Flexible consumption models enable easier upgrades, such as moving between license tiers, and benefit customers who need to refresh their networks and modernize their businesses in a cost-effective way. Cisco’s Full Stack Subscription is one such example and although it is unique to Cisco, we anticipate similar flexible consumption models to become the norm in 2020 and beyond.
Risk-sharing models continue to evolve
Risk sharing models continue to evolve and have recently included models that allow customers to pay as their businesses grow or pay as they consume service offerings. In response to this trend, we’ve introduced a flexible consumption-based model that allows businesses to pay for Cisco products and services based on usage. This model ensures Cisco takes on the financial risk, which gives companies the opportunity to scale their business based on their own client demands. Similar financial models have the capability to enable growth, reduce time to satisfy capacity requirements and minimize risk associated with add-ons and upgrades. The benefits of a flexible consumption-based model are endless for IT. To give one example, it can transform infrastructure to support as-a-service platforms and test temporary infrastructure requirements for companies to succeed in today’s ever-changing technology environment.
Financing lessee will shift from the end-user to managed service providers
The financing lessee is shifting from end-users to managed service providers. Managed services provide a single contract with the customer and a single invoice for the full solution, protecting their balance sheets and cash flow by paying upfront for investments needed. At Cisco Capital, this transfers the credit risk of potential performance or non-payment situations. By shifting from the end-user to the managed service provider, companies have higher potential for immediate profitability, increased ability to meet customer demands and overall accelerated business growth. Working with a managed service provider also eliminates the burden of customer premises equipment ownership. Partners can focus on matching expenses with cash flows and revenues, manage the equipment lifecycle and maintain full control throughout the customer relationship lifecycle.
Shifts in regulation will have impacts on the IT industry
Government regulation affects financial services in many ways, although the specific impact depends on the nature of the regulation. When the corporate tax rate was lowered in 2018 from 35% to 21%, companies suddenly had more resources to invest in their businesses. Because companies had stronger cash flow, purchasing and leasing new equipment became more attractive to grow their businesses. We anticipate that there may be continuing shifts in government regulation and tax laws in 2020, which will undoubtedly affect the IT industry.
Financing will be further integrated into go-to-market efforts by manufacturers instead of existing as a separate selling notion
Financing as a separate selling notion has been successful in the past, but it also underserves the technology market overall. Customers often lack choices, including limited in-house IT skills, budgets and financing options. To address this, companies are starting to shift focus to a new on-premise IT-as-a-service model, an integrated portfolio of subscriptions, pay-per-use and consumption-driven models. As companies fully embrace the age of digital transformation, an as-a-service model will provide customers with the right tools to help them reach new market segments and use cases. This is the next stage in the evolution of the IT industry, where customers are empowered with choice, flexibility, control and speed to market via a robust as-a-service portfolio. We expect to see higher integration of solution portfolios in the immediate future and predict that the industry will fully transition to as-a-service models by 2025.
Continued importance of channel partners and innovation within captive financing companies to address partner needs
Manufacturer financing companies, sometimes known as financing captives, provide great value by directly addressing partner needs. At Cisco, approximately 90% of our revenue goes through this channel, which brings unique skills, capabilities and differentiation to the table on behalf of our joint customers. In 2020 and beyond, we anticipate continued innovation from financing captives that will directly target partner needs, fuel new recurring revenue streams and open new growth potential.
Digitization and the use of technology
Digitization has changed the way organizations across industries conduct business and has changed the way customers buy and use products. There continues to be movement towards the digitization of data, utilization of e-documents, AI and machine learning, predictive analytics and more in support of an enhanced customer experience and operational efficiency. Financing and leasing companies will evolve with the Internet and digital technologies to provide a seamless, customized and omnichannel user experience for all customers. It is expected that by 2020, 85% of a customer’s brand experience will occur without any human interaction. We anticipate that the entire buying journey for many will likely transition to entirely digital experiences soon. Digitization efforts surrounding operations will deliver a richer customer experience, and this transformation will provide greater efficiency gains for both customers and partners.
Impact of digitization on fraud, data protection and security
While the onset of digitization helps streamline operations, optimize productivity and reduce costs for customers of IT financing, it has increased the volume of digital-based fraud and the constant need for data protection and IT security. As financing and leasing companies evolve with digital technologies, we see the need to develop new business models that can meet the demands of the technological evolution, ensuring that it is creating smarter, better and, most importantly, secure solutions for all businesses.
2020 is going to usher in an even more agile age for channel customers and partners everywhere. Major players in the enterprise are responding with simple, secure and differentiated solutions that support flexible buying choices for customers as technological offerings for business create new demands. •
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