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Emtec Adviser - A New Lease on IT Life

When money is tight, IT leasing helps reduce costs, conserve capital and maintain effectiveness.
 

Volatility in world financial markets is impacting IT spending. In tough economic times, budgets are under unprecedented pressure and access to bank funding is limited — particularly for small to midsize businesses (SMBs).

In a poll of 426 small-business owners, the Federal Reserve Bank of New York’s Office of Community Affairs found that 63 percent of those SMBs that applied for a business line of credit from a bank were denied. This tightening of the money supply is having profoundly negative effects on IT initiatives.

According to a recent Wakefield Research survey of more than 500 SMB IT managers, 93 percent say their companies have placed cost concerns above the best IT solutions, leading 89 percent of those companies to experience IT-related problems. The top three IT problems reported by cost-conscious companies are low-performing hardware (46 percent), out-of-date hardware (37 percent) and unreliable hardware (23 percent), leading to suboptimal computing efficiency and an overall loss of productivity.

Under such conditions, the IT equipment leasing option becomes extremely attractive.

Many Benefits

According to the Equipment Leasing and Finance Association, first-quarter financing by U.S. businesses for capital purchases increased 34.5 percent over the same period last year. Overall, business financing has increased 44 percent over the previous year.

That’s because the operational, financial and strategic advantages of IT leasing are numerous. The ability to conserve capital, shift costs between capital and expense budgets, and access incremental capital are all important reasons to lease. Leasing also provides protection against obsolescence, helps maintain technology refresh cycles and can shift the burden of environmentally friendly disposal to the lessor.

Of course, leasing is not a complete no-brainer. When considering technology leasing, it's important to look at the total cost of ownership (TCO) associated with the equipment. After all, the initial purchase price is generally less than half of that total cost. Maintenance, support, training, upgrades and the ultimate disposal of the equipment make up the remainder. As with any technology procurement decision, these factors impact the value of leasing.

It All Adds Up

Unfortunately, the typical lease-versus-buy analysis remains a ”spreadsheet” exercise that attempts to measure small differences in capital expenditures while glossing over TCO. By failing to integrate operational cost/performance data into lifecycle planning and "lease-versus-buy" models, IT organizations may be incurring a 20.5 percent cost premium to acquire, manage and decommission their IT equipment, according to IDC.

"Although many IT professionals recognize the opportunity shorter lifecycles present intuitively, most organizations continue to struggle with translating this into an analytic analysis,” said Joseph C. Pucciarelli, program director for IDC’s Technology Financing and Management Strategies.

On the other hand, leasing not only eliminates the up-front cash outlay but can also include provisions for complete lifecycle management. This reduces TCO and eases migrations and upgrades. A fixed monthly budget amount also gives the IT manager more flexibility when it comes to the deployment of new applications.

There are other solid financial reasons to lease IT equipment. Many leases include flexible end-of-term options that reduce the legal and environmental costs associated with equipment disposal. There may also be tax benefits. When considering the entire IT lifecycle — procurement, deployment, support and disposal — the cost of leasing will likely be comparable to that of other financing options.

Where's the Real Value?

Given the popularity of IT leasing, many technology providers now offer leasing services. A primary benefit of partnering with a technology provider rather than buying direct from a vendor is the ability to get best-of-breed equipment at competitive rates. This benefit extends to the leasing transaction.

Technology providers may be able to leverage volume purchasing and vendor relationships to garner special pricing and rebates. Customers who lease all of their equipment through the technology provider may thus be able to negotiate better deals than if they went direct.

More importantly, customers who lease from a technology provider benefit from a relationship with a partner who will keep their business, technology and financial needs in mind. The leasing business is a mature industry with very few differences in basic terms. Thus, the overall business relationship is a key consideration when choosing a leasing provider.

Companies lease IT equipment for different reasons. Smaller firms may be most interested in avoiding major cash outlays. IT managers at larger companies may need to keep equipment purchases out of their quarterly budgets. Either way, leasing helps the finance department by preserving capital and assisting in balance sheet management. It helps the IT department in standardizing platforms, planning regular equipment rotations and speeding new deployments. In today’s volatile financial environment, that’s a real win-win.