OPERATIONAL OBJECTIVES
The enterprise has to assess and deliver on its operational objectives while controlling the risks and responding to business and technology challenges. The CFO will also have objectives that will influence, and may restrict, the communications organization and its operations, in order to minimize and control the financial risks.
The communications technologist has to deal with:
* Recurring obsolescence of both information and communications technologies.
* Taking advantage of upgrade options and investment protection offered by many vendors.
* Removing technology that no longer satisfies the enterprise’s goals.
* Asset management.
* Economies of scale acquisition.
* Flexibility in timing acquisitions.
* Controlling the vendor of the technology.
The CFO is looking for:
* Flexible financing and payment options.
* Controllable and predictable cost.
* Cash flow control.
* Reciprocity of tax benefits (i.e., the lessor gets the depreciation that reduces the cost of the lease).
* Lease payment deductibility.
* Avoiding sales tax.
* Avoiding stranded assets.
* Improved financial ratios.
* Financial reporting ease (lessor does most of the work).
* Reducing administration
THE BUY DECISION
The outright purchase of the communications technology may look favorable if the enterprise has cash on hand or unused bank lines of credit and does not anticipate any new business opportunities to surface that would require technology changes before the lifespan of the purchase is complete. This attitude, in today’s business climate, is probably not realistic. Buying will not disappear, but leasing will become equally considered rather than ignored.
When businesses grew organically but did not have the political, economic and societal demands we have today, ignoring the lease option could be acceptable. It was acceptable because there was stability in the business competition and financial sectors. Financial institutions and their consistent ability to provide credit have changed; stability is less common today. An enterprise does not know if their market, competition and government regulations will be the same next year as this year. In fact, the safe assumption is that they will not.
What happens when an enterprise makes an older technology purchase just before the emerging technology becomes available? The communications purchaser is locked into the older technology for many years. Enterprises have been cautious about buying the latest technology until it demonstrates field success. However this can take one or two years. Many network products only have a four year product life. Buying after two years means that the purchased technology will be obsolete only two to three years after the purchase. This lock-in may eventually damage the profitability of the enterprise, or the enterprise may have to scrap the older technology before its capitalized end-of-life. This then will be wasted cash and a charge to the P&L. In contrast, a three year lease allows flexibility for the communications organization to change technology systems sooner to keep pace with or stay ahead of its competitors.
Buying communications technology constrains the flexibility of the C level executives to respond to unanticipated and sometimes unprecedented market forces. An alternative to expending the cash on the communications procurement is to finance the acquisition through a lease-purchase arrangement. But this option has few of the advantages of leasing and all the limitations of a purchase arrangement.
Leasing (True Lease)
Leasing is the preferred option if:
* Technology replacement according to industry life cycles is needed.
* There is a business need for rapid technological change.
* The enterprise is undergoing downsizing or reorganizing.
* There is a business need for quick adoption of new technologies.
* The flexibility of spreading out payments and using operating funds (rather than capital funds) would be beneficial.
A true lease, also referred to as an operating lease, does not involve the lessee (customer) obtaining ownership of the equipment. The lessor retains ownership, and the lessee obtains the use of the technology for a specific amount of time. It is recommended that an operating lease should meet the following requirements:
* The lease term should not be for more than 75% of the useful life of the equipment.
* If the enterprise leasing the technology wishes to purchase it at the end of the lease, the organization must pay fair market price for the hardware and software.
* The lease cannot automatically transfer ownership of the property to the lessee by or at the end of the lease term.
If these requirements are not met, the lease is considered a capital lease and the assets must be capitalized.
