Feature

Balancing the benefits and drawbacks of leasing IT infrastructure is essential

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.

 


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This was first published in November 2005

 

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