Why businesses need to rethink how they fund technology

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JIMMY MOYAHA: In the ever-changing world of business, it is important to maintain a competitive advantage wherever possible, and sometimes that competitive advantage is in the form of the unique technologies that we make use of.

But with the cost of technologies, it’s always a trade-off between whether or not you can actually afford the technology and how much of that your business actually needs.

We’re going to be taking a look at this from a slightly different perspective with the team at Merchant West. I’m joined on the line by the head of technology finance at Merchant West, Shane van der Merwe, to see what we make of this. Shane, lovely having you on the show. Thanks so much for taking the time.

Where did we start to view technology as an asset from a business perspective, and how is that changing in today’s landscape?

SHANE VAN DER MERWE: Hello Jimmy, thank you very much for including me. Technology, I think, is very much the topic of discussion, especially when it comes to deploying your capital.

Historically, especially as South Africans, we’ve always wanted to own our assets, and that hasn’t been a bad thing.

But just the rapid growth of technology is raising questions as to, are our funding models of the past still relevant today?

We’re noticing a significantly widening gap between the age of technology and how quickly it evolves, and just how difficult it is to redeploy capital.

So locking in capital in technology assets isn’t necessarily the best form of ownership, given just the speed of technology evolution.

JIMMY MOYAHA: Shane, when you say technology evolution, what do you mean by that in terms of what is out there in the market? Are we saying that technology is advancing at a rate at which businesses are unable to keep up? Or are we simply saying that there is so much technology out there that businesses have to make more discretionary decisions around what technology they choose?

SHANE VAN DER MERWE: I think it’s a combination of both of them, Jimmy. Firstly, technology is absolutely evolving faster than it ever has before.

We’re living in the cutting edge of AI [artificial intelligence] and innovation, and it’s making business decisions for leaders harder to make – do I invest in this technology?

It’s not a question of whether you invest in the technology, because I think all business leaders would agree that they need to stay abreast of the technology curve, as well as what their competitors are doing.

The question is, how do we maximise the access to that technology as efficiently as possible while staying agile?

Hence, the question regarding capital deployment.

JIMMY MOYAHA: Speaking of that capital deployment, Shane, many businesses put in a lot of money from a capex [capital expenditure] perspective into IT [information technology] strategies.

Some do it from a rental basis, some do it from an ownership perspective. Is there a right way to go about this from an investment perspective if you’re investing in technology?

SHANE VAN DER MERWE: That’s the question I think that most business leaders are facing. Our view is simply that the businesses must look at their evolving landscape and where the opportunity costs become a critical management decision.

So for one, when technology is acquired as a capital asset, that’s fantastic.

That business then commits the capital towards that asset – but that’s capital that could otherwise have been deployed into other growth opportunities such as customer experiences and so on.

Whereas when accessing technology, either on a subscription basis or as a service basis, does give you the flexibility and the agility to adapt as the technology evolves, but then you don’t own that technology stack.

So you’ve got to find the right balance between owning your technology and using the technology as efficiently as possible.

JIMMY MOYAHA: Sorry, Shane, the accountant in me can’t help but wonder what about the tax implications? If I own something that has a completely different set of taxable implications at financial year-end, as opposed to if I’m renting something or if I’m on a subscription kind of basis, I’m thinking about things like wear and tear, taxable allowances and those sorts of things.

Is that a factor as well? Is it a big enough factor from a technology point of view because tech typically is quite capital intensive?

SHANE VAN DER MERWE: For sure. We always hope that tax doesn’t drive commercial decisions [but] it certainly is a factor that most organisations need to be cognisant of, and we have got the mechanisms to structure the deals according to our client’s requirements.

So if the customer needs assets on balance sheet, we can structure it as such. If they need it off balance sheet, we can do that as well.

But instead of looking at tax as the decision [maker], one needs to look at the commercial aspects of that. Cash remains available for strategic priorities when it’s structured off balance sheet.

When it’s structured on balance sheet, you’re building your asset base. But is that the best return on your assets? Could that cash be deployed to other investments that could possibly yield you better returns?

JIMMY MOYAHA: Speaking of better returns, Shane, before I let you go, I want to take a look at how it is that you then approach the arrangements or the agreements in technological conversations – especially when we’re looking at software that we’re going to be using, there’s often multi-year licensing, multi-year leasing.

That, for me, feels as though it limits the flexibility that you touched on earlier and the mobility or agility that it gives to an organisation.

Is there room in that respect to perhaps have different conversations and say, yes, we do need the technology, but we also want the option to try out newer technologies as technology evolves.

SHANE VAN DER MERWE: And that’s exactly what operating expenditure does allow you to do. It doesn’t allow you to commit capital, where as a shareholder, you want a return on your assets, and you want to see those assets being maximised.

The benefit of a rental does give you that flexibility, where you’ve got access to the technology that you need for today. But if that technology changes, you have the flexibility of changing your mind and flowing and moving to the next range of technology assets, wherever that market may lead.

I think that that’s the challenge that AI and the pace of innovation is presenting to most business leaders, is just where do you invest your capital and where do you stay flexible?

Finding that right balance is efficient. And yeah, we’ve got the tools that are required to be able to allow customers to navigate the complexities of ownership and agility.

We always ask the question, is technology an asset that you want to build on your balance sheet and own? Should you not just stick to your knitting, if you’re not a tech company, should you be investing in tech?

Ultimately you want to use the tech; you don’t necessarily need to own it to use it.

JIMMY MOYAHA: You don’t need to own the technology to benefit from it. Those are the sorts of important business decisions that entrepreneurs and business owners need to ensure that they realise the most value out of their limited capital.

We’ll have to leave the conversation on that note. Head of technology finance at Merchant West, Shane van der Merwe, joining us to take a look at investing in technology and how it is that you should potentially think about doing it from a business perspective.

Brought to you by Merchant West.

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