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Getting ROI through an ARO

The business benefits offered through asset rental options (ARO) are manifold, but realising a return on investment (ROI) is trickier than it might appear.
By Fay Humphries, Events programme director
Johannesburg, 16 Aug 2004

Rent or buy? It`s a question being faced by many South African companies looking to squeeze as big a return as possible out of their ICT investments. At the outset it seems a fairly easy decision - but only at the outset. Because making an informed decision on buying versus renting involves having a handle on what assets you already have. And therein lies the problem.

IT research house Meta Group indicates that few corporates know exactly what they have on their asset registers, and local vendors are quick to agree.

Says Poena le Roux, CEO of Web-based applications developer Webintellect: "No one is in a good position to make a 'rent or buy` decision, because they don`t know what it is they already own."

Jose De Nobrega, new business development manager at Ilayo Software Solutions, which represents the Peregrine range of asset and service management solutions in Africa, concurs. "A lot of companies will tell you they know what they have in terms of their IT infrastructure (when they actually don`t), while others will admit they only have an idea."

Stuart Lewis, GM of sales at rental solutions provider Rentworks, has a slightly different take on the situation. He says that when Rentworks goes into discussions around existing infrastructure to ascertain what organisations already have on hand, "many companies don`t know what they have but don`t want us to do an audit. You`re basically asking the IT team to admit that they don`t know what they`re doing.

"Probably the trickiest situation of all is when they have already handed over the management of their infrastructure to an outsourcing party. Neither grouping here wants to admit that the asset register isn`t up to date," says Lewis.

Companies not clear on exactly what their ICT infrastructure comprises are in a relatively sticky situation. Meta points out that these organisations are unable to effectively forecast and monitor the use of their assets, and lack a strong negotiating position when approaching vendors to acquire new equipment. In addition, they will find it extremely difficult to allocate IT costs to different business units, making accurate predictions on the relationship between revenue streams and cost centres impossible.

Meta says that during the past decade most enterprises have substantially increased their IT investment. As an example, says the research house, data centre budgets grew by an average of 8% last year, and the relevant operating budgets here are reaching 75% of overall IT budgets in some companies. Its research also indicates that many Unix or Windows servers systems are used for less than 25% of a 24-hour day due to poor IT asset management.

Similar research has been done by other international IT research companies, indicating that there is a considerable amount of under-utilised and unregistered ICT equipment sitting on company networks. Much of this wastage can be attributed to management teams having lost control of their asset registers.

Out of control

Losing control over a company`s infrastructure is so easy that it`s actually rather scary. Says Stuart Lewis, sales manager at rental solutions provider Rentworks: "Companies that edge over the 100 PCs mark will quickly start losing control of their infrastructure. All you need is two guys starting work at a company as one leaves, swaps taking place as remaining staff grab the best equipment during the move, and the company is already losing control of its asset register."

So, what are South African businesses that want to get the best out of their ICT infrastructures, from both a financial and operational perspective, to do?

Opting to get involved in a rental agreement might well prove the answer for some, particularly where sizable deals are involved, as there are rental companies out there that will take over the management of companies` asset registers.

Take RentWorks as an example. This vendor-independent company - which will rent anything from furniture to IT equipment to forklifts - typically does a hardware asset audit at a prospective client, pays it the higher of either book or market value based on the audit`s outcomes, and then rents the equipment back to the customer, says Lewis. "Should the deal be large enough, we could negotiate absorbing the cost of the audit, and include software and networks as well."

Lewis says Rentworks interacts with both financial and IT representatives during this phase, with the IT representatives being assumed to have a good idea of their end-users` requirements. This ensures that rental schedules within contracts can be tailored to fit different user groups with an organisation, from both an equipment and required upgrade period point of view.

"In understanding our customers," says Lewis, "we break down requirements across user groups within companies."

Rentworks has an online contract management programme available to customers to allow them to record configurations across the range of equipment covered in the deal. It also has a software program available to customers to run across their networks and keep track of physical locations. "Traditional" assets such as PCs are generally covered by a 36-month contract, while larger items such as high-end servers are managed over a 60-month period.

Contractual issues

Kumaran Padayachee, CEO of Spartan Technology Rentals, says his company employs similar contract periods, and also tailors upgrades and the equipment supplied to suit different user groups within an organisation.

"Across companies, there are certain pockets of users that will require leading-edge equipment, so regular upgrades (at least every two to three years) are necessary. Yet in other business units within the same company, users can comfortably use the same assets for up to five or even six years," he says.

"Each contract entered into by an IT rental company and a client can, and should be, customised for the specific user group requirements. For some customers it is not necessary for every person in the company to have access to a PC all the time, so PCs going down in these organisations without a backup plan - as in a company-wide loan policy - are not necessarily a mission-critical issue at all.

"But at larger companies with around 1 000 different PCs, if even 5% are under repair at any given time and no swap-out policy is in place with their chosen rental organisation, this can have a big impact on productivity," Padayachee points out.

Le Roux says that, generally speaking, an ICT asset audit at a company with between 2 000 and 3 000 PCs will "take about three weeks. Often data will have to be drawn from various sources, and then mapped against the company`s human resources records - which often reside inside an enterprise resource planning system. This 'mix and match` of data takes up much of the time involved here.

"There needs to be a recognition from both the company and the supplier that this is an ongoing process - as the market changes and the company`s staff members change, this information gathered during this audit will need to be constantly updated."

He points out that the negotiating parties within an organisation often have a very different take on the value of ICT assets. "Financial directors are generally only interested in the balance sheet, while IT managers attach a different value to assets. For example, an IT manager might decide to install a new hard drive on a PC to extend its life for another three years, while the financial director may have decided to depreciate that asset over three years."

These different value perceptions have to be taken into account when contracts are negotiated, and both the customer and the supplier need to ensure input is received from the end-user community as well.

The level of control required in the contract also needs to be specified during this consultative process. Service level agreements around maintenance and support should be put in place, and companies need to determine exactly what type of information they require suppliers to provide. Rental periods, upgrade options, configurations, financing and interest rates, tracking physical location of devices, insurance, warranties, asset depreciation and software licensing management are among the issues that should be discussed.

Padayachee recommends a consultative approach by procurement, financial and IT representatives within the company to ensure end-user requirements are scoped and addressed, and that all potential conflict areas are covered. In many instances, customers and suppliers have bumped heads because often the person that eventually signs the contract and takes responsibility for the financial outlay is not the person who is required to manage it.

Unhappiness over poorly negotiated and badly managed contracts is the main reason behind the business relationship between IT rental organisation and their customers breaking down.

"The sticky issue with most contracts is the fine print. Companies have to be mindful of all the conditions under which they get involved in rental contracts," says Padayachee. "They must remain vigilant through the drawing up of their contracts, while rental companies should be transparent when it comes to exactly what it is they are offering. If not, companies will quickly become frustrated with their rental experience."

The independent option

Le Roux says he has never "come across any company that has been satisfied with its rental experience". He`s all for corporates putting themselves in a position where they can manage their own assets rather than relying on a rental company to do so for them. He cites an example of just how out of control an ill-informed decision to outsource asset management can get.

"We were approached by a company in the financial sector to take a look at their asset register for them. It was paying an outsourcing partner to support and maintain 80 000 assets a month, but only had 60 000 on its asset register."

While this is clearly not a typical scenario, it`s not an exception either. De Nobrega gives an example of a large company based overseas that "saved millions simply through putting itself in a position where it could manage its telephone infrastructure correctly, and get rid of unused lines".

And no one is safe when it comes to this type of situation. All companies - large and small - incur expenses due to their ICT infrastructure not being managed efficiently. "It could be a direct, relatively small cost associated with a PC having a malfunctioning printer port. Each call may only amount to an internal technician investing as little as R30 in terms of his time. But once that minor problem has occurred on the same machine several times - due to this ongoing maintenance issue not being correctly identified and addressed over a period of time - that cost begins to mount up," says Le Roux.

Apart from the costs incurred in a situation like this, that same technician could be getting called away from more urgent and important tasks, where his cost per time spent could result in a far greater drop in productivity.

Says Le Roux: "Companies need to know in what capacity a person is using his or her IT assets in order to make a rent or buy decision. They must have a good idea of who their power users are, what they can expect from them, and what their recurring problems are as far as their IT assets are concerned. It is critical to set up benchmarks within your own company before making a rent or buy decision, as you need to be able to make a real comparison between internal support and maintenance costs, against the cost of the asset.

He says Webintellect`s software offerings will allow companies to track and manage their assets effectively, logging their configurations and their physical locations. These software applications can be accessed via the Web, or companies can choose to run them across their own networks.

De Nobrega also advocates self-management of assets, believing equally in the importance of not being completely dependent on a rental company to do so.

Business benefits

Whether companies decide to let their rental partners manage their assets for them, or employ solutions from a third-party to do so, the benefits of a well-managed asset register are manifold.

No one is in a good position to make a 'rent or buy` decision, because they don`t know what it is they already own.

Poena le Roux, CEO, Webintellect

Says De Nobrega: "There are still many companies that are not aware of the need for, and benefits of, a well-implemented asset management programme. Those that have taken asset management seriously have realised a lot of benefits. For example, mergers and acquisitions become far simpler when the companies involved have a clear idea of what their assets are, and who uses what within a company. Also, companies taking on new contracts can quickly ascertain whether they need more infrastructure or not, if their asset registers are up to date. Allocating costs to ongoing projects is also far simpler.

"There are real-life examples showing that a return can be achieved as quickly as in six months to a year," he says.

De Nobrega adds that asset disposal is an oft-forgotten component of asset management. "Many companies lose money when it comes to disposing of assets. They need to ask themselves why they want to dispose of the asset in the first place, and what they want to dispose of.

"For example, they may no longer want to use certain PCs. But have they thought about the fact that, if the situation is not handled carefully, they may see themselves disposing of PCs to charities and losing the licences to the software loaded on them, or continuing to pay for the licences without having access to that software anymore? Asset disposal is a discipline all on it own."

Padayachee says about 65% of Spartan`s client base comprises governmental and parastatal customers, 30% of its customers are listed and non-listed corporates, and the remaining 5% is made up of small to medium enterprises (SMEs).

He believes that as SMEs are starting to depend more heavily on IT systems, asset rental options are now something these firms are starting to pay more attention to. "They are starting to see that renting equipment can offer them real benefits from a management, time and available resources point of view."

He foresees growth across Spartan`s customer base. "SMEs are beginning to rely more heavily on IT, while the larger companies are sourcing more equipment as part of their normal refresh cycles. Rental is a growing area, with companies extending their use of rented assets."

Johan Basson, MD of procurement and rental company Ivolve, also predicts an overall growth in the local ICT rental market as "many corporates are now into their refresh cycle after updating equipment in the build-up to Y2K".

He also thinks future demand from SMEs will be significant. "Many are young companies and don`t yet have a good risk profile, so the rental market is a good financial option for them."

In addition, he believes more and more companies are using rental solution providers as a tool to standardise the acquisition of ICT assets across their enterprises.

While asset management may be the first step towards getting involved in a rental solution, and is almost guaranteed to be a tricky process, companies can only find themselves in a better position to do business after taking the plunge.

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