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...

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