by David Pohlman on Friday, April 29, 2011
Reprinted with Permission from Monitor, May/June Issue Vol. 38, Number 3 p. 28
The last few years of market and credit swings have been enough to make even the most seasoned observer a bit seasick. Manufacturer and vendor programs that have thrived have done so by strengthening their sales models and refining the financial components required to facilitate sales. Those successful with these transitions have sent many of their competitors running for the ship rail, and the new leaders are effecting a sea change in the economics of their industry.
The timing is perfect. This change comes as financial service providers are increasingly specialized in what they can deliver, and manufacturers/vendors are becoming more adept at identifying niche financial players that complement their business model. A few approaches have emerged as frontrunners in adaptation.
Third Party Financing: Refined Capabilities to Match Specific Markets
The most successful leasing companies have focused on niche markets. There is no longer a “one size fits all” model as lessors have learned to grow with their partners and offer innovative, channel-specific solutions that help keep their customers ahead of competitors. In today’s market, vendors and manufacturers should expect customized, not commoditized treatment and demand more value out of the lessor relationship. This may include billing services, supplies, or other related items in conjunction with the financed item.
On the customer-facing side, a lessor’s deep knowledge of their partner’s space has added tremendous value by understanding the manufacturer/vendor’s customer life cycle. As a consequence, customized financing programs can be developed that dovetail into the vendor’s vision of lifetime customer ownership. This includes like-minded cultural values when handling customers on the front and back end of transactions (private label/non-private label), excellent customer service, and effective technology to help manage programs.
The downside to third party financing can be an inability to handle credit exposures or varying credit profiles. This often results in a need for multiple funding sources, which can lead to a cascading series of issues associated with non-uniform transaction treatment, billing, reporting, and tracking. There are examples where multiple funding sources can be supported under a single platform, resulting in consistent administration of billing and reporting on the aggregate portfolio. Few lessors have had experience with these types of arrangements.
Capitves are Outsourcing
Many captives are outsourcing their portfolio management without relinquishing control of their customer base. Selecting the right servicer means taking a close look at front and back-end operations, business continuity planning, and financial stability. Knowing that it’s much more costly to find a new customer than to keep an existing one, a manufacturer/vendor’s most immediate concern is relationship consistency. The right portfolio servicer should be able to provide evidence of business culture that will treat its partner’s customer set as if it was its own.
The servicer should also have an operational model that can readily adapt to the nuances of each captive relationship. By focusing less time on administering a portfolio, captive lessors are able to direct more attention to business development and providing superior service levels within their origination process.
Joint Venture: Shared Risk for Greater Economic Benefit
Perhaps the most underutilized path due to its complexity, this arrangement allows the manufacturer/vendor and funding source to share in the risks and rewards of originating and administrating a portfolio. This only works when the scale of the opportunity justifies the expenses associated with program set-up. Though not a panacea of all things leasing, it’s a concept that can have multiple benefits.
When making decisions on the best approach for your situation, take a good look at where you want to invest your time and resources. A good barometer would be an analysis that determines your core strengths so you can outsource lesser abilities. Work with organizations that don’t have a vested interest in taking you in a single direction, especially when they only have the ability to offer limited options. A more neutral and trusted advisor may be most useful in helping you successfully navigate uncharted waters to arrive at your desired destination.