Asset Finance: Next-Generation Technology Systems Critical to New Business Model

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1 White Paper 06_16_2005 by Andrew Denton Director CHP Consulting Asset Finance: Next-Generation Technology Systems Critical to New Business Model CHP Consulting bringing proven ALFA Systems platform to North America Dynamic Changes in the Marketplace Spurred by increasing customer demands, new competitive pressures and regulatory changes, the North America equipment leasing industry is undergoing dynamic change. It will affect how lessors conduct business for years to come, with companies feverishly developing new products, income streams and distribution channels, while still seeking further operational efficiencies. Emerging from these efforts is a new business model for the industry. Its success depends on organizations embracing fundamental changes to their operations and integrating next-generation technology systems that better align with today s business requirements and act as an enabler to growth. A number of business software providers, led by CHP Consulting Ltd., are positioning themselves to support the North American marketplace. Those leasing and finance organizations that successfully adapt in this evolving market will survive and flourish; those that cannot will undoubtedly struggle. Evolution of the Industry Surveying the competitive landscape, it is clear the days of lessors only offering lease financing to customers may be drawing to a close. This is because leasing does not have the emotional resonance it once did and, more importantly, it may not actually be the best option today for a company trying to acquire a critical piece of equipment. There are other financing tools available that may make more sense to a business, from traditional loans to conditional sales, not to mention the convenience of credit cards for some transactions. Consequently, a growing number of banks and finance companies in North America and elsewhere, are embracing what is best described as a solution-selling strategy that offers a multitude of financing products and services. Lease financing may still meet all the needs of some companies, but there are a growing number of customers who want other options for securing equipment and these companies are able to provide them.

2 This consultative approach also helps defuse the potential impact of the commoditization of lease financing, a real concern of both large and small lessors during the past several years. With so many finance companies competing on price alone, profits have been driven down across the entire industry. Solution selling may provide the relief needed for the industry to reinvent itself. Nobody wants to compete for business solely on price if they do not have to do so. Speed, Flexibility and Choices Keys to Success In the current environment, finance companies also must bring products to market faster. This is really challenging for organizations with entrenched products and business processes. They may be really good at one thing, but struggle when a customer asks them to do something else. The goal is to become more flexible in the types of products and services offered, but still maintain operational efficiency. Improved business processes are particularly critical today, with cost-income ratios under extreme pressure. This is forcing everyone to operate much more efficiently than in the past. These improved processes, however, must not come at the expense of customer service a key differentiator in the market. Traditional leasing companies also are looking for additional income streams in this competitive market. Consequently, many firms are taking a closer look at the assets they are leasing and how to maximize value over their lifecycles. Some lessors think the only real difference between a loan and a lease is the tax treatment. But a growing number are considering opportunities to generate additional revenues from the asset through insurance, maintenance, consumables, disposal and related opportunities. In these situations, the profit margin on the lease financing is just a small part portion of the overall revenues. Another change impacting the finance market is the gradual movement away from direct to introduced sales channels. More business activity, especially pure financing, is now being generated through intermediaries such as vendors and brokers. The better service provided to such channels, the greater chance of securing longterm business even if a firm s rates are not the lowest. Such a focus on introduced sales necessitates new systems and business process requirements. 2 Emergence of New Business Model The combined impact of all these changes has prompted a growing number of leasing organizations to consider a new business model. They are evaluating the benefits of moving away from being strictly leasing operations and repositioning themselves as asset finance providers.

3 The Equipment Leasing Association (ELA) sees this accelerating trend among its members, as well. In its 2005 Industry Future Council Report, the ELA states that by 2010, this industry may not even be known as Leasing. Rather, leasing will just become part of a bigger solution. The goal is to offer a multitude of products and services through multiple channels to help organizations acquire equipment. A consultative approach, or solution selling, is best aligned with this asset finance model. Success relies on the elimination of product and market silos throughout the business and, as mentioned earlier, extending the boundaries of the operation to include new distribution channels. Early adopters of this new business model in North America now openly promote the fact they offer asset finance rather than just traditional lease financing. RBS Lombard, for example, barely references leasing on its North American Web site and prefers to showcase its asset finance capabilities. This transition away from exclusively offering lease financing has just begun but, if these trailblazers are successful, bank-owned finance companies and third-party lessors in North America will surely follow. Some financing arms of equipment manufacturers Textron Financial for example also have adapted this model, offering a variety of financial products through multiple channels. Accepting Change Not Easy, but Imperative There undoubtedly will be some organizations in North America that cannot migrate to this new business model, due in part to the costs and resources necessary to make it happen. Organizational change does not come cheap. This model may also conflict with the business culture. Some firms simply are more interested in making money in the short term without having to change, rather than investing the necessary time to embrace solution selling and asset finance. 3 However, those finance companies that do not change could run the risk of losing market share or, worse yet, fail to optimize relationships with existing customers. A transaction-oriented firm, working in product silos, misses opportunities to cross-sell products and services. The bottom line: when a company focuses solely on closing transactions and bases its relationships with customers strictly on price, somebody else with better rates can snatch a customer away. From an industry perspective, the asset finance business model is firmly in place in parts of Europe, Australia and other overseas markets. Led by the firms mentioned earlier, the transition to the new business model in these regions took about ten years to complete. The process in North America, however, has really just begun. Successful change management strategies are being executed by these organizations so associates understand the rationale behind the new asset finance business model and their roles in it. Finance generalists actually may become more appealing than leasing experts, although leasing expertise must still be available

4 when required. From a systems perspective, a company also must understand where business processes must be unique and focused, and where they can be centralized. This often necessitates some tough decisions. At the end of the day, however, the result is a new business model that can handle constant change without jeopardizing operational excellence. Critical Need for Flexible Technology Platform In order for the asset finance business model to work, technology systems must be in place that can support a myriad of products and distribution channels, facilitate faster speed to market and foster cross selling through effective customer relationship management. These systems must also optimize partner relationship management. A big mistake companies often make when selecting a technology platform is their failure to think ahead. Their only focus is what works for the business now, which is okay in a market that is not moving. In one that is changing quickly, however, system flexibility is the key. A technology platform must be able to handle the ebb-and-flow of products that may be popular one year and passé the next. The vast majority of current technology systems in place throughout the lease finance industry today fall far short of meeting the requirements of the emerging asset finance business model. They typically support one finance product or type of equipment and nothing else, making them incompatible with the new model. They also do not easily facilitate the development and launch of new financial products to market. These systems cannot be customized easily for specific business requirements. In addition, critical functions, such as origination, pricing, credit checking, processing, billing and asset management are not seamlessly linked, hindering workflow efficiency. When a new product is launched, significant changes need to be made to the business processes in each function and this takes time. In such situations, a company s systems can actually be an inhibitor to the development and launch of innovative finance products that meet changing customer needs. Technology systems need to be an enabler of change letting finance companies evolve their product mix, rather than handcuff them. 4

5 Now Available: ALFA Systems Technology Next-generation technology platforms that support the asset finance business model are now available in North America. The ideal system features a core platform that enables asset finance companies to mix-and-match products easily and launch new ones efficiently. Some are much better than others at living up to their promises. The ALFA Systems platform by CHP Consulting is unique in its proven track record of success. It is in place at more than 30 customer locations in the United Kingdom, Europe and Australasia, including top banks, equipment manufacturers with captive-finance programs and third-party finance companies. The ALFA Systems platform features integrated front- and back-end office capabilities, facilitating a seamless approach to lease origination, management and asset disposal. Other software providers rely on multiple systems that do not always integrate easily and often cost more to operate. The end-to-end capability provided by ALFA Systems improves the efficiency of the finance process, enabling customers to conduct more business than ever before with less costs, while enhancing their customer relationships. From the asset finance company s perspective, the ALFA Systems platform features several key competitive attributes, including a common workflow between front- and back-office operations, facilitating communications between the sales organization, credit and lease administration personnel. This product also features a common accounting engine, assuring pricing and evaluation processes are based on the same financial parameters as those used by the back office personnel, helping eliminate mistakes. Other key features include a common database, linking all important transaction information between the front- and back-office personnel, and common timing cues to alert the sales team of repeat lease sales opportunities and other chances to build stronger ties with lessees. ALFA Systems benefits: Packaged solution configured to fit your business All the benefits of a package, configured to work exactly as you need it to. 5 Full lifecycle support All your asset finance requirements in a single system. No costly, discontinuous interfaces between pricing, front office and middle office. Bullet-proof accounting engine We see this as Job No. 1. The financial rigor of the ALFA Systems platform provides the ideal solution for the finance team. Ease of reconciliation and powerful reporting come standard. Efficient, streamlined business processes ALFA Systems builds your way of working into the software, facilitating collaboration between the sales organization, credit and lease administration personnel. Rapid product time to market The ALFA Systems platform enables your busi-

6 ALFA Systems benefits: ness to innovate and launch new financial products without the need for timeconsuming systems development. Packaged solution configured to fit your business All the Overseas customers using the ALFA Systems technology benefits Multiple sales of a package, channel support configured Using to work ALFA exactly Systems, as you there are platform more ways have of experienced significant operational improvements: network sales, bringing need it to. your product to market via brokers, vendors, direct web, field sales and mobile channels. Full lifecycle support All your asset finance requirements Up to 15 percent increase in new business volume with 20 Business a single ownership system. No of costly, solution discontinuous Business and interfaces IT personnel take full percent ownership reduction in fraudulent applications. of between the ALFA pricing, Systems front platform office and during middle the office. implementation process, reducing ongoing consultancy costs. An average percent reduction in customer service Bullet-proof accounting engine We see this as Job No. 1. process times. The Ease financial of integrating rigor of with the existing ALFA Systems systems platform Industry provides standard integration with other ideal organizations solution for via the XML finance gateway. team. Ease of reconciliation and powerful reporting come standard. Up to 30 percent improvement in repeat business. Multi-currency, multi-lingual, multi-regulatory The global experience Typical and deliv-percenery Efficient, capability streamlined of CHP business Consulting processes removes geographic ALFA Systems boundaries. cies. reduction in early stage delinquen- builds your way of working into the software, facilitating collaboration between the sales organization, credit and lease administration personnel. Measurable Results Overseas Rapid product customers time using to market the ALFA The Systems ALFA Systems technology plat-platforform significant enables your operational business improvements: to innovate and launch new have experienced financial products without the need for time- consuming systems Up to 15 development. percent increase in new business volume with 20 percent reduction in fraudulent applications. Multiple sales channel support Using ALFA Systems, there An average are more ways percent of bringing reduction your in product customer market service via process times. brokers, vendors, direct web, network sales, field sales and mobile Up to 30 channels. percent improvement in repeat business. Typical Business ownership percent of reduction solution in Business early stage and delinquencies. IT personnel take full ownership of the ALFA Systems platform during the implementation process, reducing on-going consultancy costs. Measurable Results Ease of integrating with existing systems Industry standard integration with other organizations via XML gateway. Multi-currency, multi-lingual, multi-regulatory The global experience and delivery capability of CHP Consulting removes geographic boundaries. 6

7 Even Greater Flexibility in the Future Within the next couple of years, there will be an influx of technology systems that feature even greater flexibility. CHP Consulting already has systems with customizable workflow capabilities that cater to a business s specific needs. As a firm s product mix evolves, it will be able to configure the system as needed without having to call on the vendor for assistance, which often takes time to schedule and costs extra. The faster systems changes can be made, the faster the finance provider can launch new products or react to changing market dynamics. Also coming will be technology systems that are event-driven. That is, over the course of an asset s lifecycle, whether a leased vehicle, computer or other piece of equipment, the technology system will trigger notices to the finance provider when it is time to engage them. For example, if a lessee requests a termination quote, there is a good chance they are looking for new financing elsewhere. At that moment, the system could evaluate their credit history, determine if it makes sense to keep them as a customer and then alert their salesperson to immediately contact them. With the emerging asset finance business model gains traction in North America, technology systems providers are scrambling to fill the current functionality gap in the market. It will take more brainpower, however, than simply asking what financial products are available today that a technology system can help sell. Technology providers who want to provide real value will introduce systems that lay the building blocks for companies to develop new, innovative financial products helping the traditional lease finance industry reinvent itself. 7

8 For further information on the full range of services offered by CHP Consulting, or to arrange a demonstration of ALFA Systems, please contact either Andrew Denton or Steve Taplin. tel: +44 (0) fax: +44 (0) [email protected] [email protected] website: