When Will the Nightmare End for So Many in the Industry?
By Joe Nachbin and Mike Fleming
Today’s Business Reality
With many companies postponing or cancelling equipment orders during the past year, restless nights were undoubtedly the norm for many lessors.
Unfortunately, as we begin 2010, sleep is still not coming easy for equipment leasing and finance companies.
When will the nightmare end for so many in the industry?
There were signs of the recession’s demise as of late December, but most economists are still forecasting slow increases in employment. There is, however, an expectation that companies will spend more today for equipment that provides income-producing opportunities.
Capital, nevertheless, remains an invaluable resource. Those who have it are not anxious to invest or lend it, while those who need capital can only secure it for the best quality opportunities.
Fortunately, the performance of most equipment leasing portfolios has remained good, especially compared to real property finance portfolios. Furthermore, the business that is being done today is of better quality.
But, while margins have strengthened, they are still at levels that do not tolerate underwriting mistakes. Interest rates remain low, although most agree it is only a matter of time until they begin an upward creep.
Companies also are facing tremendous cost pressures. There is no room for inefficiency: in how people are organized and integrated for work, or the systems they use each day.
Consequently, in this environment equipment leasing and finance companies are spending more time on transactions with either minimum creditworthiness or, when approved, have lower booking rates than in the past three years.
Given the above market realities, the latest ELFA studies indicate companies in our industry have reduced staff sizes. This and other organizational changes reflect the need to examine every aspect of a company’s operations, from how business sourced through completion of the transaction.
No executives with whom Alta consults believe that business will be easier one, two or even five years from now. Better, yes. But not easier.
Selective Staff Changes
Where did equipment finance companies most likely increase their staffs in 2009?
The three most prominent opportunities for expanding staff focused on:
- Business developers with proven sources of business. Vendor business developers are especially high on many organizations’ target lists.
- Collectors with or without commercial collection experience are still in demand, even though delinquencies appear to be stabilizing.
- Workout/asset managers also are in demand. The significant increase in charge-offs during the last three years assures a need for this skill set in 2010 and possibly beyond.
Value of an Operations Review
Alert, forward-thinking companies are considering the value of operations reviews, based on indicators of an expected turnaround in 2010-11. They seemingly are in touch with reality and want to assure their companies’ operations are optimized for the new economic realities.
The most common reasons given for either conducting or exploring operations reviews at this time include:
- Expectation of improved new business opportunities in 2010-11.
- Need to improve the efficiency of support services.
- Confirmation that the organization is following industry best practices.
- Right-sizing of organization for future expected growth.
- Evaluating the ability of current management information reports to provide real-time performance data and “early warnings” for each functional area.
Operations reviews are customized for each organization’s needs and focus on one or all of the areas below. The list is not meant to be all encompassing, but presents an excellent start.
- How the sales process interfaces with credit and other support services.
- Do sales force compensation programs, including what is incented and rewarded, tell management the right things?
- Are the current staff and systems in place capable of efficiently processing the expected volume growth in next 2-5 years? This review is especially important for organizations that have downsized in recent years.
- How do the organization’s benchmarks of select or all processes compare against industry best practices?
- Do internal functional management reports provide critical information needed by managers to manage their operations on a daily and monthly basis?
- Do external reports provided to your organization’s various audiences meet their requirements?
- Do credit policies and procedures compare well against industry best practices?
- Do collection and workout processes and performance lead to reduced losses?
- Do asset management processes verify best practices are in place and performed?
- Are internal controls for various functions including accounting policies, cash application, billing, customer service and documentation optimized?
- Do support services incentive plan payments relate to performance desired and achieved.
Summary
Based on an organization’s current portfolio performance, funding availability and growth expectations, an operations review may be of value in positioning your organization for the New Normal of 2010 and beyond.
An operations review can be performed using internal talent or selecting an outside organization that is completely objective and has a broad knowledge of the equipment leasing and finance industry.
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