“The Computer Guys” Principles for Success

April 24, 2010 Interview with Kenneth B. Steinback

The Chairman of CSI Leasing, Inc., the largest IT leasing company in the United States, speaks about how he got his start in the IT equipment brokerage and leasing industry, how important ethics and basic business principles have always been, and how he interacts and treats all customers, partners, vendors and employees with dignity, respect and courtesy, the same way he would always like to be treated.

In this interview conducted by Bob Rinaldi, Ken Steinback discusses lessons learned, his business principles, and what he recommends for the next generation of executives considering equipment leasing and finance. This interview is also for people in the industry who are looking for new leasing avenues.

Video Excerpt

Video is an excerpt. The entire interview is included in the transcript below.

Full Text of Interview

Q: What would you say were your greatest triumphs in your career?

Ken: CSI’s success is due to our profitability, our ethics and our industry wide reputation. For 38 years, since CSI’s inception, we have been profitable. Our lenders, suppliers, vendors have worked with us for many of those years. The tenure of our employee base is incredible–41 current employees have worked at CSI more than 20 years. We hardly employed 41 people 20 years ago! In the beginning, i.e., early 1970’s, our business was entirely brokerage; meaning we bought and sold used equipment. Some was to end users and some was with other brokers. You established a relationship with other brokers and trusted them to deliver. Those relationships were invaluable to me because when I started in the business I had no capital and needed other people/firms to back stop me. Even though most of these brokers/firms are not in business today, I am still in contact with many of those early relationships. We were all members of the CDLA (Computer Dealers and Lessors Association) and would meet twice a year at conventions. I knew who I could and couldn’t trust!

Our industry reputation has given us some opportunities–such as the expansion into Mexico and Latin America. We were approached by the management team that was responsible for Mexico and Latin American for El Camino Resources when they had their financial meltdown. The entire group of employees stuck together for a few months while the original management team tried to find money to continue independently. CSI hired everyone and funded their operation. This undertaking was a huge risk, but now–some 7-8 years later–has proven to be a great success. If we didn’t have the reputation in the industry, I am not sure these professionals would have joined CSI. Today, we are the largest independent leasing company in Mexico and Latin America.

Our ethics are second to none. We stand behind our employees and follow through on all our commitments. We are not perfect, but we stand up and do what we say we will do.

Q: In your opinion, what would you say were positive and negative developments in the industry over the past decade?

Ken: During the past ten years, our industry has changed in many ways–in both positive and negative ways. The unit price of hardware has decreased which means firms like CSI have to lease more IT volume to just stay even. The IT leasing business has evolved into an “operating lease” structure with virtually no tax benefits for either the lessee or lessor. Our profit on a deal by deal basis is derived from the equipment’s residual value which is our investment in each transaction. We now deal with multiple vendors, i.e., HP, IBM, DELL, EMC, etc., not to mention the number of serial numbers and features we must keep track of and provide on-line access to this information to our lessees. As lessor we must provide all the “backend services” to maintain our “green” status. Such services as data destruction, hard drive wipes, shredding, E-Scrap procedures, etc. We do not outsource any of these services. We provide these services through our wholly-owned subsidiary, EPC, who employs 210 people with offices in the USA and Canada. We are an international company now and that allows our lessors to lease their equipment in their various countries.

Due to the continued downward pressure on new equipment pricing to the end user and the decreased percentage of the whole IT equipment budget, the leasing activities for our type of assets are typically handled by the IT personnel or the CFO/Treasurer. Our average transaction size ($500,000 or less) usually doesn’t hit the radar screen in large corporations like it did in the early days of the industry.

Credit quality is a very important aspect of our business model. In the early years we had no investment in the lease; so, if we could get non-recourse debt, we never worried about the credit quality of the lessee. Today we maintain up-to-date credit files and company credit reports for every active lessee.

The real bad parts of business today are the frauds and the companies that have folded. For example, Comdisco and El Camino were good businesses. Every time that happens, it hurts people and companies like CSI. I regularly hear, “are you next?” It hurts our industry when you see CIT and GE getting in and out of our industry.

The business today is tough to get into as a new player. The little guys just confuse the market. I am not in favor of these guys with no financing coming in and trying to broker a deal. Margins have decreased and they cut our price when they don’t even have any backing. We tell our clients to do business with us because we have financial clout and most other’s do not! If you do business with XYZ, it could be a one-man company who doesn’t have financial backing. How do you know he will be there for the life of the transaction? How will your lease be serviced? They are here for a quick nickel and not for a slow dime.

The captives (HP, IBM, DELL,. etc.,) still want to discount to themselves internally to keep control of the account as opposed to selling the equipment at a higher price to a leasing company like CSI. This sector is our biggest competitor, as is outright purchase. I understand purchase sometimes, but I have never understood the captives approach!

Q: What is the single most important lesson learned during your business career from your experience, or from those leaders you admire?

Ken: To treat everyone the way I want to be treated. I try not to criticize anyone publically and I know how to keep quiet if I know something confidential.

Q: Would you encourage people to enter the industry today? If not, why not?

Ken: Our industry is a great place to work; however, I definitely would not start an IT leasing company from scratch. It is a great profession, but to start up another CSI….I don’t think it would be in their best interest with bank financing the way it is today and also finding the right people to hire. So many leasing companies, including the captives, have relationships with customers and it is hard to unseat them. In fact, it’s next to impossible. We are probably looking to hire another MBA this year to learn the business. I am active with my alma mater and the way we hire is through that channel. It is our relationship with professors that enables us to find the right students. The problem is that leasing is not taught in classes so they don’t know anything about leasing. They don’t know about companies in our industry and they are scared of our business. They think we are pawnbrokers.

Q: What were some obstacles to growth that you faced during the earliest days?

Ken: The biggest challenge in building our business was hiring the right people because we were looked at like a used car lot of equipment. When we went out to recruit, the prospective hires couldn’t find any reason to leave the big banks, Comdisco, or other competitors to come work for us. Comdisco was the big guerilla. Our challenge was building a sales force. Some companies succeeded by marketing differently. In 1993, we bought Neptune Computer, a company headed by Steve Chaleff. He was a talented person, but he never put on a tie and went out and made face-to-face sales calls on end users. Everything was done over the phone. He bought deals from CSI and other lessors, but he didn’t have an end-user sales force. We built our company by hiring belly-to-belly sales people, and we didn’t buy deals from other lessors. We did sell a few deals to third parties because we didn’t have the capital or we didn’t like the pricing enough to hold it ourselves. We built relationships between our sales people and our end-users. That, in the end, is one of our success stories. Over the years, people in our industry decided to get into other businesses. They went in different directions for different reasons.

Since our beginning, we have been very fortunate to have had–and still have–great, long and short term funding relationships with banks that have supported us from day one. If we didn’t have these banks supporting us, we would have been extremely challenged.

Q: What is your involvement in the industry today?

Ken: These days I am not active in the industry like I was in the 80’s or early 90’s when I chaired CDLA for two years and did a few things for ELFA. I am, however, still active at CSI. Although I love the action, I am not involved in day-to-day deals or operations….only acquisitions and expansion–and certainly transactions. I love going out on sales calls, and still do when necessary.

Q: What do you think this industry will look like in five years?

Ken: I believe the IT side will be about what it is today….there will be some consolidation, and firms like us will pick up more small companies in our industry. We will also expand into other markets such as medical, alternative energy and media–not IT only. To continue success we have to diversify our IT portfolio and not be completely dependent on IT equipment.

Q: What about bank leasing companies?

Ken: I have a warped opinion because I don’t think they accomplish much. It is just another way of loaning money. They will stick around in the same way they operate today, but with some of the restrictions and legislation, I think they will take less risk–potentially taking a step backward. They will continue to work with lessors like CSI to be able to lease IT equipment to their customers.

Q: Captives?

Ken: They will grow if they can continue to perform as they have in the past, but if equipment margins continue to be squeezed or if balance sheets are negatively affected by all the debt they are piling on, it could change their willingness to continue.

Q: Independents?

Ken: With a good end-user customer base, a good end-user sales force, and good relationships as well as good financing and adequate capital, they should do just fine. The IT business volume might continue to be a bit flat for a few more years, so they need to expand into other areas. Most deals include more costs for services and fewer costs for equipment; therefore, financing is more difficult because less collateral is involved.

Q: What universal truths in conducting business or in life have you embraced or do you recommend to the next generation of leaders?

Ken:

1. I don’t ever lie–I don’t even know how. One must be truthful and upfront with your bankers, lawyers and accountants, not to mention employees and customers.
2. You have to support your employees. Sometimes you must step up and do things to keep everyone happy and motivated.
3. Sounds trite, but I treat people the way I would want them to treat me.
4. I don’t wait to get 100 percent of the info to make a decision; if I did, I would be waiting years to make decisions. That’s sort of the entrepreneurial spirit.

Since 1972, CSI Leasing, based in St. Louis, Missouri, has been helping companies implement leasing solutions that reduce the costs, risks and hassles of using technology equipment. Success as a leasing company is due, in part, to CSI’s ability to process off-lease equipment. All returns are processed by our wholly-owned subsidiary, EPC. www.csileasing.com