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Gary Audin
Gary Audin is the President of Delphi, Inc. He has more than 40 years of computer, communications and security...
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Gary Audin | February 05, 2016 |

 
   

Why Leasing Makes Sense

Why Leasing Makes Sense If you need new UC&C-related gear, consider the opportunities leasing could afford your organization.

If you need new UC&C-related gear, consider the opportunities leasing could afford your organization.

You may have an on-premises system, use a cloud service, or have a hybrid solution. No matter what UC&C deployment option you've chosen, you will have some hardware in your implementation -- even if it is only IP phones. That begs the question, should you buy the hardware or lease it?

Technology Keeps Evolving
Incessantly changing technology offerings produce difficult situations for IT organizations. Products go through a rapid life cycle that seems to get shorter every day:

  • Product announced
  • Product shipped to the first customer
  • Updated, more capable product announced
  • End-of-sale date established for earlier product
  • End-of-maintenance date (especially for software) set for the earlier product
  • End-of support date put into place for earlier product
  • Total elapsed time: 30 to 60 months

The pricing half-life for storage systems is about 15 months, and for servers about 36 months -- and it continues to decrease. New products eclipse current model desktop PCs, network routers, and switches every two to three years. This encourages enterprises to consider faster replacement cycles, often facilitated through leases rather than purchases.

Technology refresh programs are common in many enterprises. Leasing allows a fixed monthly payment while delivering proactive technology replacement.

The CIO Talks to the CFO
"We have the cash, so why lease? It will cost us money to lease that we can save by buying the IT technologies." This makes sense. It is, however, a simplistic point of view. The CFO has to ensure that the cash is there when needed and not tied up in a technology purchase that cannot be changed.

Not having to pay interest and finance charges can be very attractive. Depositing money in a bank pays interest to the enterprise. Leasing costs the enterprise interest. Cash, however, is not really free money to spend. It is a limited asset that an enterprise can apply to many areas. The CFO may have better, more profitable uses for cash on hand than buying IT technology.

Financing IT
Arranging financing can take time when an enterprise wants to take advantage of a business opportunity or business climate change that requires fast action. No cash on hand, then no opportunity and no flexibility to respond to the changes. The CFO may see the value of leasing and keeping the cash on hand for investments that would return a higher profit than the interest cost of the lease.

Leasing can come with tax advantages that are not available with technology purchases. The residual value of the IT technology is what the lessor can expect to recover from the sale of the technology at the end of the lease period. The residual value will contribute to a reduced lease cost. Further, the residual value of the IT products will reduce the total cost of ownership (TCO) for the enterprise.

Capital Vs. Expense Dollars
An enterprise runs on cash and borrowed money; the better the cash flow, the less the borrowing. When cash flow decreases, no matter how much money the enterprise owes, it may have to operate temporarily on credit. Cash flow is the responsibility of the CFO, who has to determine how to allocate the incoming cash and outgoing enterprise expenses -- something about which the IT organization will have little knowledge or experience. The CFO has to balance the cash flow and credit to provide a stable financial platform for the enterprise.

Technology Influences on Financial Decisions
The IT decision maker may think that "keeping the technology for four years makes purchase more sensible." IT technology continues to improve, obsolescing systems fast.

When an enterprise makes an older technology purchase just before the emerging technology becomes available, the IT purchaser is locked into the older technology for many years. This lock-in can damage the profitability of the enterprise or the enterprise has to scrap the older technology before its capitalized end of life, a financial loss. With a three-year lease, however, the IT organization gains the flexibility to change technology systems as needed -- to keep pace or be in advance of competitors, for example.

Sarbanes-Oxley (SOX) and other industry-specific compliance and regulations require attention to financial reporting and asset management. The enterprise is at risk for audits and fines even for minor infractions. SOX calls for internal controls and internal information accuracy, as well as information about the enterprises' IT infrastructure. The enterprise has to provide information about its financial exposures.

The constant change of IT technology makes staying compliant difficult to do. The vast majority of IT organizations will experience some change within the project life of the IT systems. Technology leasing can bring discipline to these issues and make compliance accurate and effective.

A major shift has occurred in IT towards greener operations. Older equipment, because it's not as energy efficient as new technology, will cost more to operate. Leasing allows IT to replace power-hungry equipment with energy-efficient alternatives. Replacing inefficient equipment can reduce power consumption by as much as 25%. This will more than pay the interest charges on the lease.

The end result of leasing is that the IT operation becomes more flexible. A lack of flexibility will cost more in the end than leasing equipment.

In my next post I'll discuss what you should buy, and why.





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