Banking

Managing IT costs through leasing


Network infrastructure equipment, desktop computers, servers and more.  During your time as the IT leader at any organization, you'll need to replace aging equipment.  When you do so, you face the choice of either buying equipment outright or leasing equipment and renting it, thus paying for it over a number of years.  In this posting, I'll talk about some of the pros and cons to each method.  I'm not going to get into the differences between capital leases and operating leases, but will do so in a future posting.  For this post, I'll focus on some of the reasons that I do what I do in my own environment.

First off, leasing is not a new idea.  It's been around for a very long time and a ton of organizations use leases to better manage their IT investments and purchases.  When you lease equipment, you essentially rent it from a leasing company for the term of the lease.  At the end of the lease, you generally have the option to buy the equipment or to ship it back to the leasing company for disposal.  Under a lease, the leasing company actually owns the equipment.  In fact, they often simply buy your specified equipment up front in their own name, ship the equipment to you, pay the invoice to the vendor, after which the leasing company starts to send you bills.

Now, you might be asking yourself where the value proposition comes into play.  After all, anytime you borrow money or rent equipment, or whatever, you're incurring a finance charge of some sort.  In the case of a lease, this cost of money is called the lease factor rate.  So, in essence, you're paying the leasing company interest while you pay them back for the purchase.

Personally, at Westminster College where I am the CIO, I lease... everything reasonable.  For the rest of this posting, I'll outline my reasons for doing so and will explain where I see the benefits of this approach.  I'll also describe some of the downside.

Larger projects become feasible and a lifecycle replacement is built in.  When I arrived at Westminster College, our network equipment was in dire need of replacement.  Most equipment was hitting end of life and was failing semi-regularly.  An unstable network infrastructure does not inspire confidence in the capabilty of the IT organization, nor does it meet the needs of the overall organization.  Thus, something had to be done.  Instead of working on a multiyear, phase-in approach to replacing our network equipment, which simply would not have been adequate, we analyzed the IT budget and decided to reallocate the Cisco Smartnet maintenance line, along with a little other money earmarked for a wireless rollout, to a five year lease for HP Procurve networking equipment.  Besides a much lower initial cost, the Procurve equipment also carries a lifetime replacement warranty, so there was no need to have a Smartnet line in the budget anymore.  We were able to replace 100% of the networking equipment, including our core switch, and install the infrastructure and tools for a full wireless network, consisting of 100 wireless access points.  The end results:
  •  
    • All new network equipment.
    • A stable infrastructure--critical for an organziation that relies on IT.
    • A campus-wide wireless network.
    • No ongoing maintenance costs.  All funds are used to improve the infrastructure, not maintain it.  And, by the way, my lease costs stay the same for the duration of the lease.  No more double-digit increases in annual maintenance costs.
    • An annual, permanent budget line earmarked for network infrastructure.  When the 5 year lease is up, we can either sell the existing gear or ship it back to the leasing company.  Either way, we have another five years worth of funds to spend on new network equipment.  This is built-in replacement! 
The end of budget peaks and valleys.  CFOs hate unexpected things, particularly in lean times.  Had I gone to the CFO or to the rest of the executive team to make a case for $250,000 to replace the network, the likelihood of success would have been somewhat low.  Sure, after a couple of major failures, the purse strings probably would have loosened, and it's possible that I would have been able to convince the right people up front that special funding was needed.  But, I want to do a job once and get it done and try to make the process as sustainable as possible.  I don't want to make the same plea again in five years when the existing equipment is ready to be retired.  By leasing all of my network equipment, I have a single, steady budget item with a very clear purpose -- to support the network infrastructure.  In 5 years, at the end of the lease, new equipment again! The cost isn't always higher.  Sure, by leasing, I do incur something akin to finance charges.  But, in some instances, the cost is a wash.  By establishing what's called a fair market value lease, I can often end up paying just what I would had I purchased the equipment outright, but I don't have to worry at all about what to do with the equipment once the lease is up.  And, I still get the benefit of the lease payments being spread out over a number of years, thus keeping my budget consistent.  I'll explain the different leasing options in a future post.

Often, organziations lease equipment for tax benefits.  As a non-profit organization, we don't enjoy that benefit but, then again, we don't pay taxes, either!

The biggest downsides to leasing are:

  • The cost of the lease.  Some leases are really, really expensive.  I've worked out a fantastic arrangement with my leasing company and we're in it for the long haul, though.  And, they know it and have been extremely fair with me, even going to far as to forgive rental charges for a period of time.  I never lease through a vendor's leasing arm, since many are more expensive than my provider.  That said, many vendors do have fair arrangements, so shop around.  On the issue of the cost of the leases, this is, to me, the cost of running my IT organization in what I consider to be the most responsible, sustainable manner.  The ability to avoid peaks and valleys in the budget is well worth it.
  • Categorizing the lease.  Leases come in a couple of types and it can sometimes be hard to pigeonhole which one fits a particular lease.  Although not always that important to the CIO, the accountant, CFO and auditors are very concerned with the lease categorization since it directly affects the bottom line and how much is paid in taxes.
  • Tracking equipment.  If you buy your own equipment, you can (but shouldn't be!) somewhat lax on your inventory.  Not so with a lease.  Remember, you don't own the equipment!  And, depending on the lease, you may have to give it back at some point, so make sure you know where everything is.
  • Insurance.  Many leasing companies will insist that your insurance covers the cost of the equipment that they own.  This is only good business on their part.

Overall, I've been extremely pleased with the leasing arrangements we've undertaken at Westminster College.  They have allowed us to react very quickly to shore up a failing infrastructure and to undertake important campus initiatives that would have otherwise not been able to be funded.

About

Since 1994, Scott Lowe has been providing technology solutions to a variety of organizations. After spending 10 years in multiple CIO roles, Scott is now an independent consultant, blogger, author, owner of The 1610 Group, and a Senior IT Executive w...

20 comments
No User
No User

It's hard to believe that you can actually lease equipment at below cost. They may be able to get a volume discount that you can't but it wont be that much. That said they are going to make a profit from the lease so in the end it will cost you more to lease over the expected lifetime of the equipment. I could see doing it where Taxes and or Accounting book cooking are involved. I would think that if you could not pay for all the equipment at once and could make monthly payments via the lease that would certainly be a good thing for some folks. Another reason would be that the time you would keep the equipment was so short that it made no sense to purchase. Normally you want to keep Workstations, Servers and Networking equipment at least 5 years so if you had a special need that was say months to 3 years then a lease could be a smart money saving move to make. One last option would be the demand to upgrade short term was so fierce that it made no sense to purchase so say you swapped out PC's every 2-3 years then it would make sense to lease instead of purchase. Other then some hard luck or special case scenario it would be very hard to justify a lease over purchase.

nmgauna
nmgauna

Our financial department uses straight-line depreciation on all fixed asset purchases for 3 - 5 years. So a $15000 purchase only shows up as $3000/yr for 5 years. When I performed my lease analysis for computers and networking equipment, the lease was always more expensive per year than the cost on the books for the same year. The only issues I thankfully have to deal with are selling or disposal at end of life but I've found a good partner for the disposal. Now I just need to find a real company like "We Sell Your Stuff on eBay".

Forum Surfer
Forum Surfer

I recently spoke with Dell, HP and other vendors about leasing options. On four year terms, none of them offered any significant advantage on a 3-4 year lease of 400 units. In one case (HP) the lease financing worked out to be more expensive than the actual outright purchase. Granted, you have to factor in initial payments, quarterly payments or financing terms. My company has the ability to float the cash up front, so leasing wasn't favorable in this case. If the difference is under 5-10 thousand dollars for 500 units (assuming the lease option is cheaper) it made no sense for me to lease. All that money and equipment is gone after the term is up. If I approve the outright purchase of the units, at least I will have them to sell or distribute out to other departments within the company. With Cisco equipment, I'm all about the lease though. With those guys, you're investing more in the IOS and rights than the actual equipment. Negotiate the contract carefully and it makes upgrades within 2-3 years more economical and feasible. Since we do all configs in house, we avoid the biggest expenditure of all...outsourcing network configurations. That leaves us to deal with what cool new hardware we want next. In my case, it allowed me to provide a very strong backbone and core, along with gig to the desktop in most areas. Just my 2 cents... :) Edit: One more point. Suppose I lease 500 pc's. Suppose my lease runs up 6 months from now. Suppose new management comes in and questions the lease. Now I'm stuck in mangerial quagmire which may lead to paying penalties for keeping the lease a bit too long, or the leaseing company repossesing 500 units. Lol, then I'm stuck passing out 500 notepads and 500 pens because 1/4th of my organization has no pc's. :)

TooOldToRemember
TooOldToRemember

Our lease costs come out less than purchase costs for the laptops and deskotps we have. We currently lease everything for 36 months (but are shifting to 48 for desktops) and replace a third of all systems every year. By working with the lease company to define the residual value of the hardware we have actually ended up paying less, in total cash outlay, through a lease than we would through a purchase. I also recommend that when you look at leasing you include the finance or accounting department in the negotiations to review the actual cash cost and value perspective. They appreciate being included and there is nothing like having their support when you present a large lease contract to the CEO or Board. Good topic. I would love to see other thoughts on the operating vs. capital leasing topic.

tjohnston
tjohnston

The state agency I work for Leases all of our workstation PCs. We enjoy many of the benefits you mentioned, particularly the flat line budget, as asking for more funds can literally take an act of (state) congress. I think one of the downsides to this approach is having to replace all of the equipment at once. You touched on it a bit that you got/had to replace all of the inferior equipment at once, but sometimes that has its costs too. Replacing aging PCs in waves insures that only some users are impacted at once. Replacing all of the PCs at once and running across any unexpected issues can put everybody down, instead of a select few. That being said, our agency does lease in 2 lots, with a small test group first, and the lions share in a single lot. But there are ALWAYS unexpected changes. Many Vendors change components every other week. Getting a different NIC card, Mother Board, or Hard Drive can cause problems if you've got software already developed and tested for another component.

Jaqui
Jaqui

everywhere. Ive yet to see any lease opportunities that have any chance of coming in equal to purchase cost, they usually go quite a bit more than that. You say insurance is a drawback of a lease agreement? I do not agree, since you should have full replacement value coverage for owned equipment anyway. A fire destroys the office, if you don't have insurance on the hardware you most likely will not get the funds from the insurance coverage on the office to replace it. it's always a sound policy to cover the investment in every way possible to protect the company against loss. This does also apply to a non-profit.

robert.cadenhead
robert.cadenhead

We have been unsuccessful in finding someone to purchase our old Cisco networking hardware. It still has some value and could be used by someone. Any ideas on who to contact would be appreciated.

Scott Lowe
Scott Lowe

You raise a great point. Sometimes, when everything hits at once, there are simply not enough bodies to handle the deluge. We've attempted to, as best we can, stagger our leases. For our desktop replacement, we do an annual replacement of 1/4 (or so) of our desktops each year to avoid the potential pitfall that you mentioned. For our network equipment, we set the lease up as a $1 buyout so that we're not forced to upgrade all at once. The value at the end of the lease will not be huge and we can always sell the old stuff on our own if we like. Scott

boxfiddler
boxfiddler

what you lease. Which makes what you lease a 'false asset' that can be yanked out from under you at any moment. Leasing is rarely a good idea. IMO.

rob
rob

The schools of thought over the lease vs. purchase options must also take into account the OS platform used. We use Mac/Unix with xServer eMacs, Macbooks etc and Mac-happy peripherals (all leased) - over a not-for-profit educational organisation, with (New Zealand) national coverage. The advantages are huge but one is obvious - there is no huge, dedicated, IT team. We suffer no peaks and troughs in expenses ... allowing on-going development to proceed that much easier.

Scott Lowe
Scott Lowe

We do insure all of our equipment, whether purchased or leased. That actually does apply to a non-profit like a college. I'm going to remove that from the posting...

Scott Lowe
Scott Lowe

With excellent results. CXtec (www.cxtec.com) in Syracuse NY in one outfit www.networkhardware.com is another. Scott

nmgauna
nmgauna

I do not know anybody specifically who'd buy used Cisco equipment. There has to a company out there and there's always selling it privately, eBay, or through a "middle-man". I know our Cisco vendor will buy back our equipment when we buy something new. In my previous post, I was referring to literal disposal. We send Retire-IT equipment that is fully depreciated, not worth trying to resell, and needs to be disposed of per EPA standards. They will do data destruction as well and will take boxes of misc IT junk like cables, keyboards, etc.

WiseITOne
WiseITOne

I still don't think it makes business sense. Your paying out the nose to save time? It seem more of a hands off approach to your inventory and by the time five years is up can you really sell the equipment? I would like to hear how much was made vs. the cost of the lease and then compare real numbers to the cost of buying and owning the equipment. I doubt you need to swap out equipment every 5 years for switches and other systems, PC's perhaps but not switches. What I am saying is life of equipment can be longer and if IT really wants to conserve instead of always having the latest and greatest with minimal improvements a five year life span is short and shouldn't be applied to all systems - a problem with leasing. Please provide real numbers because the "savings" just don't add up and the reasons don't seem justified. IT should be integrated with business so is it really that hard every five years to request the equipment is replaced and does it REALLY need replaced. Just trying to play the devil's advocate and look at the other side of owning rather than leasing -- feedback is great.

hschuren
hschuren

I have to agree with Scott on this topic. In my company we are currently negotiating a master lease agreement which operates with quarterly schedules which spread the load even more. Certainly in case of replacements this works as a charm since we only replace 1/12 to 1/16 of our current hardware park at once. You'll have to look for a company who supports this method but if you look well you can find some.

Scott Lowe
Scott Lowe

I'm not sure I'd consider the OS platform as a basis for a lease/buy decision, but would consider the OS platform on technical merits instead.

BTreahy
BTreahy

While these threads are interesting, and I'll admit that I'm just getting into them, one issue I have yet to see surface is that in the case of Windows, Microsoft is known for breaking application software,. Yes, high-volume shrink-wrap apps get recertified on the latest OS's quickly but high-expense (ie 5 & 6 figure design tools) do not and may require older versions of Windows. If you have everything on a forced refresh, you can get into a situation where you have some machines simply cannot be refreshed -- at least not immediately.

tjohnston
tjohnston

In response to the guys that roll out workstations 1/4 each year, or something to that effect, that opens up the possibility of compaitbility problems between the different era software. Thanks to a new version of Windows (and Office, and tons of other apps) being released every 3 years or so, its quite likely you won't be able to put New software on the old hardware. By upgrading relatively at once (1 small lot and the rest in the span of 2 months), we're able to coincide our software roll outs for each hardware distribution. This way if there's a new version of Office or Windows we can insure that all our users will play together nicely. Granted there are all kinds of backwards compatible soultions, but is definitely easier to have everybody using the same stuff. Not to mention the support ramifications of having multiple software packages deployed. As for the dollar amounts on the lease versus buying out right, it really comes out close to the same. The monthly payment is roughly the price of the PCs divided over 36 months. The leasing company makes the money by the residual value of the PCs. They actually sell them to our employees for a reasonable amount ($270 for a complete workstation). For the ones they don't sell they have arrangements with Dell to buy them back to be refurb'd and sold internationally to schools and governments. While we could continue to use the 36 month old PCs for some time, the ability to "finanace" them for 36 months with no major interest charges is well worth it.

Scott Lowe
Scott Lowe

I indicated that there is not really a savings to be had by going this route, particularly since we're a non profit, so we don't get the tax advantages. On the 5 year front, we initiated a $1 buyout lease for our network gear so we can make the determination at the end of 5 years as to whether or not we simply pay the leasing company $1 for the gear and keep it around longer or if we need to upgrade at that point. We still maintain a ton of flexibility. All of our leases (our non-$1, or fair market value leases) include a "cherry picking" option, so, at the end of the lease, we can pick and choose individual items from the lease that we want to buy and keep versus those that we want to send back. Every environment will be different and there will be those that feel that leasing is not the right way to go. Those organizations will simply continue to buy equipment in the traditional way. However, for the goals (both project goals and budgetary goals) in my organization, leasing has been, and will continue to be, our best bet.

loran
loran

I love this kind of topic and would like to share with you other points : laptops and desktops are leased in my company. laptops replaced every 2 years make managers and travellers happy to get the latest h/w. desktops every 3 years ensure we have the same performances accros our organisation and makes big projects easier (XP/Vista or big s/w requirements). By leasing, we're also generating hidden savings : IT support is easier, they spend less time on old PCs or printers (we lease printers as well). By buying extended warranty, our hardware is always supported by providers and we don't need anymore maintenance contract. And one of my favorite advantage, as IT manager is the following : by replacing every PC an a regular basis, I ensure that there's no "forgotten PC" (you know, the old NT stuff in the factory) and that my IT team knows how to install and therefore support all specific softwares. Their knowledge is refreshed regularily and makes support easier !