Strategic IT Decisions: The Backroom Brawl

There have been, literally, stacks of books written describing how to establish an IT strategy, the process to be followed, methodologies, and organizational hurdles. Additionally, who knows how many trees have been sacrificed conveying these strategic findings to management?

Since the topic of how to develop an IT strategy has been thoroughly addressed elsewhere, this article discusses the business issues and challenges that are driving the need for lessors to reassess their IT strategy and approach. The focus of this discussion is on the factors management should consider as it examines the company's IT strategy for core leasing operations, i.e., front-end and back-end systems.

The Environment

Lessors today are operating in what has become a mature industry. Products are becoming more standardized and inching ever closer to loans and other straight financing vehicles as the leasing industry continues to move away from its original sustaining model of creating product differentiation by assuming asset risk.

A mature industry is not the only factor affecting lessors' IT decisions, however. Other drivers include:

• Margin compression;
• Shifts in the accounting paradigm;
• Perceived shortcomings of existing systems; and
• Transactional considerations.

Margin Compression. Offering loan products has put lessors in direct competition with the banks, which are stiff competitors, particularly when it comes to rate and relationships. This competition, coupled with high liquidity (prior to the subprime meltdown), has put pressure on profitability. The upshot of this competitive environment is that margins have been squeezed significantly over the past several years and have continued to shrink.

These shrinking spreads have placed pressure on management to find ways to cut costs. And cut they have. There can only be so many benefits eliminated, headcount reduced, and expense accounts purged, however, so, as a result, the cost-cutting search parties have been forced to explore ever deeper into the organization in order to discover cost-saving opportunities. Although it only was a matter of time, these searchers finally have arrived at what I refer to as the back room (or IT shop).

Armed with the knowledge that even a 10 basis point reduction in expenses translates into roughly 60 basis points of ROE, the search parties have examined every angle of backroom operations. TCF Equipment Finance, the 2007 ELFA Operations and Technology Excellence Award winner, for instance, identified its front-end process as a source of potentially significant cost savings. Working together with CapiitalStream, TCF created a seamless work flow and integrated information path from vendors and sales representatives all the way through credit, equipment management, pricing, documentation, funding, booking, and servicing.

Shifts in the accounting paradigm. There is no doubt that the convergence of FAS 13 with the international lease accounting standard is the accounting change that grabs everyone's attention. In spite of the potential impact on the market, however, convergence will not play a significant role in lessors' IT decisions. Instead, it is the fundamental shifts in accounting approach that are occurring that will directly impact IT decisions, in particular those regarding the lease management, or back-end accounting, system. Foremost among these shifts is fair value accounting.

Although leasing has received a temporary reprieve from FAS 157 regarding fair market value measurements, this accounting pronouncement, when combined with other regulatory guidelines such as Sarbanes-Oxley (SOX), has intensified the need for asset level accounting. Lessors need the ability to track their assets, both prospectively and historically under this guidance in order to properly value residuals. For many lessors, this will mean achieving a level of detail not currently available.

The remedies in this regard are not pretty and involve implementing a new system, creating workarounds, modifying existing systems, or a combination of the above. It is interesting to note that, while in the midst of trying to achieve operational efficiency from a systems perspective, lessors are being forced into incurring additional costs. This situation does, however, point out the need for an integrated IT strategy that considers all sides of the issue.

Perceived shortcomings of existing systems. TCF, in the prior example, elected to keep its legacy lease management system in place as part of its strategic plan (A legacy system is defined as an old or outdated system that, while still functional, does not work as well as newer, up-to-date systems). Other lessors, however, are examining their competitive situation relative to the lease management, or back-end, application. These lessors are looking at back-end systems to make certain they are operationally efficient, properly aligned with the business they support, and are fully utilized from a capabilities standpoint.

It is at this point that the search for efficiency has turned into a backroom brawl as management wrestles with issues such as asset-based applications, legacy systems, and ASPs, while IT departments vigorously defend their turf. This problem is further exacerbated by the range of systems being offered, in terms of both vendors and approaches. It should be noted that there are many available lease applications, all of which function well in the space for which they are intended. I have avoided mentioning them, to the extent possible, since I do not want to appear to be endorsing any one product or, by omission, denigrating any product. Interested readers can access the full spectrum of available software providers at the ELFA Web site, www.elfaonline.org/ind/MbrDirs/software/.

The major IT decision for most lessors today, at least from a lease processing perspective, is whether to stay with the existing legacy system or move to a new platform. This decision has been made moot for some, as their parent has decided to push down an enterprise relationship, with an Oracle or SAP, into the leasing space. Unfortunately, it is not an easy decision, as there are valid pros and cons to both sides.

The advantage to the legacy system is that it already is in place, has organizational roots and, although not perceived as being perfect, is functioning adequately. Those considering changing typically complain that the legacy system just doesn't do what they need it to. This can be a tricky situation, though, and begs the question, 'Is it the application that is not capable, or is it a utilization issue?

There are several very robust legacy systems that have capabilities well beyond those perceived. My experience, and that of others, is that the intellectual capital (i.e., well-trained personnel) to take advantage of these capabilities either: 1) are moved to other areas of the company; or 2) leave the company to accept another position.

This creates what I refer to as a defenestration of system capabilities. Only a portion of the knowledge and experience of the original user is passed on to the newcomers ' the rest goes out the window. System effectiveness, as a result, is diminished. Management needs to consider whether an in-depth training initiative might accomplish the same result as a new application, at a fraction of the cost and without the disruption in operations.

Those vendors offering 'up-to-date' systems have differing viewpoints. These vendors would argue that the problem goes beyond one of utilization and that it is an issue of relevance. One vendor stated that 'While existing legacy systems
may be adequate for some organizations now, their useful lives are, by definition, assuredly waning. It is inevitable that new, more demanding business requirements are going to force firms to convert and retire systems at some point in time.'

Transactional considerations. As pointed out, another consideration in establishing the leasing IT strategy is the demands of the business. Will the existing platform meet the realities of the shifting accounting paradigm? Perhaps so, perhaps not. More importantly, is this even an issue for the company, based on its target market and product mix?

There has been a lot of buzz generated around the absolute need for asset-based lease management systems over the past several years ' what were referred to as the 'wave of the future.' According to the conventional wisdom at the time, an asset-based application would eliminate many of the problems associated with upgrades, asset splits, and partial returns, to name but a few. This approach to maintaining lease data also would push the accounting down to the asset/serial number level, a result that puts the lessor in more technical compliance with FAS 13.

These all are strong arguments, but they assume that the business is an asset-based business. If the lessor is doing primarily conditional sales agreements, or 10% buyout deals, an asset-based approach does not make a whole lot of sense, and a traditional contract-based application is adequate. For a lessor with an active, residual-based business, however, the benefits of a true, asset-based application can be substantial.

Choosing the Approach

The bulk of the debate about the efficacy of various systems has revolved around whether to stay with the legacy system or implement a new platform. As mentioned, there are positives and negatives to both alternatives. A third alternative, and one which is gaining traction in the marketplace, is to outsource the lease processing and utilize an ASP.

The benefits of doing so are the traditional ones associated with any outsourcing initiative ' let someone else perform non-core functions at a lower cost. Opposition to outsourcing generally revolves around lessor sensitivity to the confidentiality and protection of their customers. Essentially, 'We do not want to give up the contact and intimate knowledge that we have with our customers.'

This is an interesting argument, but one that does not match up with other lessor practices such as syndication, or even the everyday experiences in our personal lives. One has to wonder if CIT, for example, who is operating multiple platforms, and in the process of shedding non-core activities, might not be better off by utilizing an ASP.

As a final consideration for those formulating an IT strategy, lessors should consider the impact on operations if their vendor is acquired by another entity or actually goes out of business. Although oftentimes relegated to the sourcing department in the company, the issue of vendor viability is one that must be addressed in some form by the C-level user.

Conclusion

There currently is quite a bit of bustle around leasing applications, some of which actually is resulting in system acquisitions and implementations. By the same token, there is a fair amount of inertia due to accounting uncertainties, spectacular cost overruns on new implementations, and, quite frankly, a desire to not rock the corporate boat in some cases.

Irrespective of whether the lessor chooses to remain with its legacy system, implement a new application, or outsource operations to an ASP, management must develop its IT strategy in the context of the business environment. At the end of the day, if the application does not, or cannot, support the company's business goals, there will be no cost savings.

Shawn Halladay is a principal with The Alta Group and also manages its Professional Development Division, the training and education subsidiary. More information on The Alta Group is at www.thealtagroup.com.

There have been, literally, stacks of books written describing how to establish an IT strategy, the process to be followed, methodologies, and organizational hurdles. Additionally, who knows how many trees have been sacrificed conveying these strategic findings to management?

Since the topic of how to develop an IT strategy has been thoroughly addressed elsewhere, this article discusses the business issues and challenges that are driving the need for lessors to reassess their IT strategy and approach. The focus of this discussion is on the factors management should consider as it examines the company's IT strategy for core leasing operations, i.e., front-end and back-end systems.

The Environment

Lessors today are operating in what has become a mature industry. Products are becoming more standardized and inching ever closer to loans and other straight financing vehicles as the leasing industry continues to move away from its original sustaining model of creating product differentiation by assuming asset risk.

A mature industry is not the only factor affecting lessors' IT decisions, however. Other drivers include:

• Margin compression;
• Shifts in the accounting paradigm;
• Perceived shortcomings of existing systems; and
• Transactional considerations.

Margin Compression. Offering loan products has put lessors in direct competition with the banks, which are stiff competitors, particularly when it comes to rate and relationships. This competition, coupled with high liquidity (prior to the subprime meltdown), has put pressure on profitability. The upshot of this competitive environment is that margins have been squeezed significantly over the past several years and have continued to shrink.

These shrinking spreads have placed pressure on management to find ways to cut costs. And cut they have. There can only be so many benefits eliminated, headcount reduced, and expense accounts purged, however, so, as a result, the cost-cutting search parties have been forced to explore ever deeper into the organization in order to discover cost-saving opportunities. Although it only was a matter of time, these searchers finally have arrived at what I refer to as the back room (or IT shop).

Armed with the knowledge that even a 10 basis point reduction in expenses translates into roughly 60 basis points of ROE, the search parties have examined every angle of backroom operations. TCF Equipment Finance, the 2007 ELFA Operations and Technology Excellence Award winner, for instance, identified its front-end process as a source of potentially significant cost savings. Working together with CapiitalStream, TCF created a seamless work flow and integrated information path from vendors and sales representatives all the way through credit, equipment management, pricing, documentation, funding, booking, and servicing.

Shifts in the accounting paradigm. There is no doubt that the convergence of FAS 13 with the international lease accounting standard is the accounting change that grabs everyone's attention. In spite of the potential impact on the market, however, convergence will not play a significant role in lessors' IT decisions. Instead, it is the fundamental shifts in accounting approach that are occurring that will directly impact IT decisions, in particular those regarding the lease management, or back-end accounting, system. Foremost among these shifts is fair value accounting.

Although leasing has received a temporary reprieve from FAS 157 regarding fair market value measurements, this accounting pronouncement, when combined with other regulatory guidelines such as Sarbanes-Oxley (SOX), has intensified the need for asset level accounting. Lessors need the ability to track their assets, both prospectively and historically under this guidance in order to properly value residuals. For many lessors, this will mean achieving a level of detail not currently available.

The remedies in this regard are not pretty and involve implementing a new system, creating workarounds, modifying existing systems, or a combination of the above. It is interesting to note that, while in the midst of trying to achieve operational efficiency from a systems perspective, lessors are being forced into incurring additional costs. This situation does, however, point out the need for an integrated IT strategy that considers all sides of the issue.

Perceived shortcomings of existing systems. TCF, in the prior example, elected to keep its legacy lease management system in place as part of its strategic plan (A legacy system is defined as an old or outdated system that, while still functional, does not work as well as newer, up-to-date systems). Other lessors, however, are examining their competitive situation relative to the lease management, or back-end, application. These lessors are looking at back-end systems to make certain they are operationally efficient, properly aligned with the business they support, and are fully utilized from a capabilities standpoint.

It is at this point that the search for efficiency has turned into a backroom brawl as management wrestles with issues such as asset-based applications, legacy systems, and ASPs, while IT departments vigorously defend their turf. This problem is further exacerbated by the range of systems being offered, in terms of both vendors and approaches. It should be noted that there are many available lease applications, all of which function well in the space for which they are intended. I have avoided mentioning them, to the extent possible, since I do not want to appear to be endorsing any one product or, by omission, denigrating any product. Interested readers can access the full spectrum of available software providers at the ELFA Web site, www.elfaonline.org/ind/MbrDirs/software/.

The major IT decision for most lessors today, at least from a lease processing perspective, is whether to stay with the existing legacy system or move to a new platform. This decision has been made moot for some, as their parent has decided to push down an enterprise relationship, with an Oracle or SAP, into the leasing space. Unfortunately, it is not an easy decision, as there are valid pros and cons to both sides.

The advantage to the legacy system is that it already is in place, has organizational roots and, although not perceived as being perfect, is functioning adequately. Those considering changing typically complain that the legacy system just doesn't do what they need it to. This can be a tricky situation, though, and begs the question, 'Is it the application that is not capable, or is it a utilization issue?

There are several very robust legacy systems that have capabilities well beyond those perceived. My experience, and that of others, is that the intellectual capital (i.e., well-trained personnel) to take advantage of these capabilities either: 1) are moved to other areas of the company; or 2) leave the company to accept another position.

This creates what I refer to as a defenestration of system capabilities. Only a portion of the knowledge and experience of the original user is passed on to the newcomers ' the rest goes out the window. System effectiveness, as a result, is diminished. Management needs to consider whether an in-depth training initiative might accomplish the same result as a new application, at a fraction of the cost and without the disruption in operations.

Those vendors offering 'up-to-date' systems have differing viewpoints. These vendors would argue that the problem goes beyond one of utilization and that it is an issue of relevance. One vendor stated that 'While existing legacy systems
may be adequate for some organizations now, their useful lives are, by definition, assuredly waning. It is inevitable that new, more demanding business requirements are going to force firms to convert and retire systems at some point in time.'

Transactional considerations. As pointed out, another consideration in establishing the leasing IT strategy is the demands of the business. Will the existing platform meet the realities of the shifting accounting paradigm? Perhaps so, perhaps not. More importantly, is this even an issue for the company, based on its target market and product mix?

There has been a lot of buzz generated around the absolute need for asset-based lease management systems over the past several years ' what were referred to as the 'wave of the future.' According to the conventional wisdom at the time, an asset-based application would eliminate many of the problems associated with upgrades, asset splits, and partial returns, to name but a few. This approach to maintaining lease data also would push the accounting down to the asset/serial number level, a result that puts the lessor in more technical compliance with FAS 13.

These all are strong arguments, but they assume that the business is an asset-based business. If the lessor is doing primarily conditional sales agreements, or 10% buyout deals, an asset-based approach does not make a whole lot of sense, and a traditional contract-based application is adequate. For a lessor with an active, residual-based business, however, the benefits of a true, asset-based application can be substantial.

Choosing the Approach

The bulk of the debate about the efficacy of various systems has revolved around whether to stay with the legacy system or implement a new platform. As mentioned, there are positives and negatives to both alternatives. A third alternative, and one which is gaining traction in the marketplace, is to outsource the lease processing and utilize an ASP.

The benefits of doing so are the traditional ones associated with any outsourcing initiative ' let someone else perform non-core functions at a lower cost. Opposition to outsourcing generally revolves around lessor sensitivity to the confidentiality and protection of their customers. Essentially, 'We do not want to give up the contact and intimate knowledge that we have with our customers.'

This is an interesting argument, but one that does not match up with other lessor practices such as syndication, or even the everyday experiences in our personal lives. One has to wonder if CIT, for example, who is operating multiple platforms, and in the process of shedding non-core activities, might not be better off by utilizing an ASP.

As a final consideration for those formulating an IT strategy, lessors should consider the impact on operations if their vendor is acquired by another entity or actually goes out of business. Although oftentimes relegated to the sourcing department in the company, the issue of vendor viability is one that must be addressed in some form by the C-level user.

Conclusion

There currently is quite a bit of bustle around leasing applications, some of which actually is resulting in system acquisitions and implementations. By the same token, there is a fair amount of inertia due to accounting uncertainties, spectacular cost overruns on new implementations, and, quite frankly, a desire to not rock the corporate boat in some cases.

Irrespective of whether the lessor chooses to remain with its legacy system, implement a new application, or outsource operations to an ASP, management must develop its IT strategy in the context of the business environment. At the end of the day, if the application does not, or cannot, support the company's business goals, there will be no cost savings.

Shawn Halladay is a principal with The Alta Group and also manages its Professional Development Division, the training and education subsidiary. More information on The Alta Group is at www.thealtagroup.com.