Companies use leasing as a means of acquiring business
items for everything from photocopiers to cars. Some firms remain
sceptical, however, about the benefits of leasing their PCs. Now
the options are even greater - you can lease not only your desktop
machines and servers, but your entire technology
solution.
Due to the speed at which technology changes, and the burden on
companies to keep up with the competition and have the most
efficient IT infrastructure, leasing is becoming increasingly
attractive.
Recent research undertaken by Siemens, which interviewed 400
finance directors across Germany, the UK, France and the US, showed
that the replacement period for PCs is becoming shorter, a fact
many IT directors will be aware of.
The research also highlighted that finance directors now believe
under-investment in IT can lead to a competitive disadvantage. In
addition, harnessing the latest IT was often cited as a fast route
to enabling business advantages such as mobile working.
While many companies want the latest technology, it is clear it
comes at a price. Traditional bank loans or finance agreements can
prove restrictive, with limitations on what can be financed, and a
tendency to attempt to treat IT equipment like any other company
asset.
This has lead to increasing competition from specialist IT
finance companies, and new financing methods are emerging as a
result. Research shows that leasing has now overtaken bank
borrowing in popularity as a means of financing technology
investments.
From the financial perspective, leasing rather than obtaining
funding through loans maintains existing credit lines. And
depending on the type of lease, it is possible for leasing payments
to be offset against taxable profits or counted as an operating
expense. Finance companies tend to offer flexibility in payments,
which can also be arranged to suit customer cashflow, such as
seasonal changes.
Arguably the greatest incentive for leasing is having access to
capital that would otherwise be tied up in hardware that will
depreciate. This capital can be used to greater effect in other
areas of the organisation, without degrading the IT solution that
is best suited for the business.
From a technology perspective, the flexibility of being able to
change or upgrade the hardware before the end of its natural
lifecycle is still an attractive argument for leasing.
In addition, it may be possible for the amount of equipment
acquired to be increased through choosing a lease over an outright
purchase. Not only do you get to spread the cost of the equipment
over time, but you also have the ability to upgrade, swap out or
trade in items during the life of the lease.
At the end of the lease agreement unwanted equipment is returned
to the finance company, which can ease the burden of disposal costs
and also the issues that IT departments face in disposing of old
computer equipment. Of course, there are those companies that would
prefer to own the items, and gain from any residual worth they may
have. Alternatively, companies may wish to keep certain items of
equipment for a nominal cost.
Increasingly, hardware manufacturers including Dell, HP,
Fujitsu, Siemens and IBM are offering leasing as an option to
acquiring their desktop computers. The leasing of printers, servers
and additional hardware items has also become commonplace.
Whether you choose to lease your computers and other IT
equipment directly from the hardware manufacturer or go through
another finance company will depend on what you want to lease.
Although it has many benefits, leasing on the whole can be more
expensive than purchasing equipment in terms of overall financial
outlay.
In a paper written last year, analyst firm Gartner noted that
for years the industry average lease term has been 36 months for
desktop equipment and 24 months for notebook equipment. This
closely matched the technology refresh cycles of many
enterprises.
Today, however, hardware technology continues to outpace
software requirements, which has caused many enterprises to extend
their technology refresh cycles, Gartner said. Many enterprises
have now moved to a four-year refresh cycle for desktops and a
three-year refresh cycle for notebooks.
Gartner research vice-president, Frances O'Brien, who wrote the
paper, said, "This longer refresh cycle for PC equipment is at odds
with the economics of obtaining an operating lease, because PCs are
generally not worth 10% of their original cost after 36 months. As
a result, operating lease treatment for PC equipment is not
generally available beyond 36 months."
If you choose a plan that does no more than allow you to spread
the cost of your purchase over the term and leaves you with no
capital assets at the end, then you are purely paying out money,
even if this is tax efficient. However, the sum of money and the
business benefits and flexibility mentioned earlier must be weighed
up against the outlay for purchasing the equipment outright.
If you choose a leasing plan that gives you some ownership of
the assets at the end of the term, it can be less costly. How the
costs will appear in the business accounts, and what costs can be
offset against taxable profits will depend on the type of lease you
choose.
Traditionally, when looking for finance to cover an entire IT
implementation, businesses would turn to banks or other finance
companies to provide loans. However, leasing has grown into an
expert area of finance, and specialist IT finance companies such as
Syscap and Siemens can cover an entire technology programme through
a leasing contract.
However, many leasing firms find that their customers still need
to be convinced about the benefits of the leasing model, especially
when it comes to encompassing all their technology needs. In
particular, Philip White, sales director at independent leasing
company Syscap, feels there is a need to understand why companies
should pay up front, rather than view their IT purchases as an
ongoing expense.
He said, "If you are going to purchase a sophisticated accounts
programme then you may also hire an experienced accountant to use
it. When you hire that person you would not pay them three years'
salary up front.
"Why pay for your systems up front when the benefit you will get
from them will be spread over time? Companies need to consider
paying for their technology over the timespan in which they will be
getting the benefits."
Leasing from specialist IT finance companies that will cover an
entire technology roll-out has additional benefits. Companies are
not tied in to the hardware they purchase and, depending on the
lease agreement, can upgrade at a time that suits their IT strategy
rather than at a time dictated by the financial situation.
If you decide that leasing is the route to take, you should
remember that at the end of the lease period you will have to find
all of the items that were leased if you intend to return them
rather than continue to use them. This will involve some form of
reliable asset management, and is all the more important if new IT
or security policies have come into force within the company during
the life of the lease.
IT departments should be wary of making changes to lease
equipment if there are no procedures to record those changes. It
is, for example, not unheard of for CD drives to have been removed
over the lease period due to new security measures, and then for
problems to arise when they need to be traced and returned.
Recovered lease hardware, desktops in particular, is
re-manufactured and sold to brokers. IBM alone manages 22,000
assets a week returned from leasing customers worldwide.
Kevin Taws, partner financing manager at IBM (UKISA), said, "If
you rent a television and send it back without the remote control
you would be charged. Companies have to remember that the assets
are the property of the financing company."
When it comes to the end of a lease, companies should remember
that all the equipment received at the beginning of the lease will
be expected to be returned and this includes cables, carry cases,
all external peripherals, and in the case of software, certificates
of authenticity may have been supplied and may also need to be
returned.
However, for customers that cannot trace leased equipment, IBM
has the unusual policy of allowing customers to return hardware on
a "like-for-like" basis. If a PC is unable to be traced, rather
than be charged for that item it may be possible for customers to
return a PC of the same specification, even if it is a different
model.
Tim Clements, head of Global Asset Recovery Services at IBM
(UKISA), said it is vital there is a good communication channel
between customer and finance company. "We would stress that if
there is likely to be a problem with any of the return items at the
end of a lease, customers should notify the finance company as soon
as possible."
Also, make sure you know who is responsible for payment of
shipping back the lease items, and who is responsible for the
insurance during transit.
The benefits of leasing are many, and there is now a lot of
competition in the technology financing arena, with a wide range of
leasing options. By shopping around you should be able to get the
terms and conditions that are right for your company.
Points to note when leasing equipment
- Ensure you will have clear notification for the expiry of lease
equipment 90 to 120 days before the date due
- Ensure you are clear as to the costs and terms of continuing to
hold equipment after the end of the lease date, whether you intend
to continue leasing the equipment, or due to unforeseen
circumstances cannot return items on the date stated
- Ensure there are procedures for tracking lease equipment and
assets within your company, including peripherals
- Ensure there are procedures for storing licences and manuals
that will need to be returned
- Have a clear understanding which party is responsible for data
removal on returning those items affected by legislation
- Be clear on what condition equipment must be returned in, and
what "fair wear and tear" will cover
- Be clear on which party will pay for the return of leased
equipment
- Negotiate flexible renewal terms that include fair market
value, or reduced renewal rates
- Ensure a clear understanding of how fair market value will be
calculated, especially in the event of purchasing equipment at the
end of a lease
- Ensure a clear understanding of the terms of any
upgrades.