IT Replacement Strategies Maintaining Momentum say Siemens

Despite a deep recession and credit crisis in Europe, companies appear determined to maintain their IT and office equipment replacement policies and periods, reveals a new piece of research from Siemens Financial Services. The study was conducted amongst over 1,500 firms across three countries. Businesses in the UK, France and Germany appear determined to fight back against recessionary pressures and not extend replacement periods for equipment that is essential to their competitiveness. However, too few firms are utilising asset finance to acquire that equipment and remain stuck in the cash purchasing trap. As a result, although companies remain committed to continued equipment investment, a proportion are not managing to access sufficient finance – further fuelling the current downturn in business investment across all three countries studied.

UK firms replace their IT and office technology more frequently than German and French companies. However, German and French companies – especially medium sized organisations with between 250 and 2499 employees – take more advantage of asset finance techniques such as leasing to enable their acquisition of new and replacement IT hardware and software, than their UK counterparts. Overall, when it comes to office equipment replacement and acquisition, medium-sized and larger firms are the most enthusiastic users of asset finance.

The new research from Siemens Financial Services investigated three main subjects, pertinent to the capital investment in office technology in a recessionary period. First, the research looked at average replacement periods for office technology – specifically, IT hardware, software and office equipment (such as photocopiers and vending machines). Second, respondents were asked about their preferred financing methods for each of these types of office technology. Finally, respondents were quizzed about their main motivations for replacing equipment and software in these three categories.

In terms of replacement periods, the average across all three equipment categories in each country – UK (34 months), Germany (37 months) and France (38 months) – were found to be virtually unchanged since three years ago. This main finding implies that firms are fighting to maintain their equipment replacement policies, despite the impact of the current recession. This finding is corroborated by another Siemens Financial Services study published earlier this year which revealed a significant proportion of companies in these three countries are continuing to emphasise the need to continue capital equipment investment to maintain competitive edge. It would also explain the current confusion between ICT market analysts, some of whom predict 2009 to be a year of continued growth in this €420bn sector, compared with others predicting an unprecedented downturn.

Interestingly, replacement cycles were revealed to be shorter amongst medium-sized UK firms (31 months), but also amongst larger (2500+ employees) German and French companies. In Germany and France, medium-sized companies tended to hold on to their equipment assets longer than small and large companies. This may reflect the fact that some smaller companies are growing proportionately more aggressively, and therefore outgrowing their equipment capabilities. In the case of large firms, well-established replacement policies ensure regular change. In medium-sized companies, however, policies are often less consistent across the sector, resulting in somewhat longer average replacement periods; however, this average may well hide a polarity of standards on the issue.

On average, 24% of European companies are looking to various forms of leasing and asset finance to help them acquire essential replacement equipment, so that they can spread the cost via regular, fixed monthly or quarterly payments across the financing term in a period when standard lines of bank credit have been remorselessly squeezed. Other research published this year also confirms global growth in the use of asset finance and leasing for IT hardware and software. This latest survey reveals an enthusiasm for the use of asset finance techniques in the three primary areas of office technology broadly comparable across Germany (28% IT Hardware, 26% Software, 39% Office Equipment), the UK (17% IT Hardware, 16% Software, 32% Office Equipment) and France (20% IT Hardware, 12% Software, 30% Office Equipment). However, when it comes to medium-sized companies, with 250-2499 employees, the similarities are strongest between Germany (36% IT Hardware, 34% Software, 54% Office Equipment) and France (33% IT Hardware, 31% Software, 47% Office Equipment). In all countries, however, the proportion of firms utilising asset finance techniques is significant.

Nevertheless, this survey also highlights the fact that too few companies across the board are using asset finance and leasing techniques to fund equipment acquisitions and replacements that are critical to their competitive positioning and edge. Asset finance and leasing is certainly mainstream, being the preferred financing method for 21.8% of firms in the UK, 20.4% in France and 30.8% in Germany. However, the corollary finding is that 76.8% of British companies, 75.6% of French firms and 67.5% of German businesses are still relying on cash (drawn from working capital or other sources) to fund equipment acquisition. Clearly, there is considerable room for extended use of asset financing techniques to improve the efficiency of working capital management in UK, German and French businesses, rather than tying up scarce cash in capital equipment investments.

What, then, are the main motivations for equipment replacement in the three countries studied? Across all three countries, aside from the equipment having reached the end of its useful life, respondents also highlighted two key drivers fort equipment replacement: (1) “to obtain greater capabilities and functionality from the equipment” and (2) “to improve business efficiency”. Clearly, companies in Europe’s main economies remain committed to equipment replacement that can somehow improve and enhance their competitive advantage. In Germany, for all sizes of company, the third motivation is universally is specifically “to improve customer service”. Interestingly, customer service improvements also displace business efficiency improvements in British and French medium-sized companies (250-2499 employees).

Derek Ryan, Sales Director, Siemens Financial Services UK comments, “It is heartening to see that, despite the recession, companies of all sizes are still recognising the need to acquire the essential equipment they need to be competitive in their markets. They are fighting back against recessionary pressures in order to make those investments, as the need to deliver added value & service to customers becomes even more important as markets contract. As standard lines of bank credit have become more costly and less available in the last year, a significant proportion of companies are turning to asset finance techniques as an alternative means of financing such essential acquisitions.

“However, this proportion still represents too few companies making the most of asset financing techniques; all firms could be accessing the finance necessary to support essential investment in a financially efficient way. We know that when equipment vendors offer financing as an integrated part of their proposition, take-up rates increase.

“There is huge potential in Europe’s main economies for financial managers to make more use of leasing and asset finance, freeing up currently ‘frozen’ working capital to deploy it more effectively on business initiatives and new business expansion.”