Still an Imperfect Business

by Michael J. Fleming, CAE

President, Equipment Leasing Association

ELTnews

So much has been written over the past several years regarding how imperfections have been diminished in the marketplace and limited our opportunities. Some of this reduction of imperfection is attributed to growing transparency. We may be accepting the observation as dogma. But is it true?

What is an imperfection? It is a mismatch which creates an opportunity for one party offering a transaction or a product to another party that manages the imperfection for value.

The first question we should ask is what imperfections have been diminished.

*Tax arbitration - rates are lower. The value of tax incentives such as deferral mechanisms are worth less. ITC is long gone and is not on the horizon as tax reform initiatives are primarily in terms of a broader, flatter and simpler system.
*Interest rates - rates are lower and liquidity is currently high. Lessees have more and more options and lease - buy analysis is more difficult.
*Financial accounting - there is a slow but constant move to greater capitalization and consolidation. The culmination will be a lease accounting project in the next year or two.
*Customer knowledge - customers are smarter about leasing as the leasing industry and its products have matured.
*Channels - the use of technology has opened up how business is conducted and the general access of customers to more leasing companies and competing alternatives.
*Equipment leasing as an unregulated industry - while the industry is still unregulated, there is creeping regulation to limit structures and practices.

We could add to this list, but the point is made. There may be fewer imperfection based opportunities. But look again. Imperfections come is three types - rules based, market structure based and value based. Remember, imperfections are mismatches to be managed. Several of the above imperfections are rules based and there reduction does change things. But market structure imperfections always are emerging as issues such as consolidation, concentrations, liquidity, corporate cultures, changing strategies and product attributes occur.

A customer may be knowledgeable, consider alternatives and still value what you can provide better than any alternative. That is how we manage the value imperfection. The customer has an itch that needs a scratch. You have the scratch that manages the imperfection - that is what the customer cares about. Both parties understand this "imperfection" and how an action can solve it. Win - win! We have to work to identify these value imperfections.

We will always have an imperfect market if we focus on the value imperfections. Growth based on imperfections is still available, but the nature of the imperfections and how we think about them needs to change.