VideoMany companies lease or buy enough gear to handle peak loads, but a usage-based system lets them avoid that kind of overbuying yet still have the capacity they need. Kim Norby, vice president of information services, estimates that the company will save 20 percent, or about $200,000, over three years compared with the older lease. Norby says Wells' will use the pay-per-use model for other systems because of the added flexibility. "There really are no drawbacks to this," he says. "It allows us to make better use of the products." Over the past five years, the company has moved away from buying toward leasing because the price is right, the nagging question of how to dispose of old equipment becomes someone else's problem, and three-year lease cycles keep the company current with technology improvements.
With computers as its lifeblood, Alabanza Corp., a Web hosting provider in Baltimore, says leasing servers from Dell under its deferred payment plan provides an economical way to keep technology up-to-date while it copes with high growth. Alabanza typically leases 40 servers and related pieces of equipment a month, using 36-month, fair-market-value operating leases.
By leasing, "we minimize the risk of obsolescence on the equipment," says Alabanza CFO Andy Fleischer. "And it helps us to straight-line the costs of the technology. In the past, we bought large blocks of servers up front. But by spreading out the payment terms over 36 months, we can match the expected useful life of the equipment with the payment stream. It [also] frees up cash." Fleischer estimates that Alabanza acquires about $1 million worth of IT hardware each year, so the available cash flow is significant. Hungry for bargains, the company does buy some hardware in the secondhand market, typically from failed dot-coms, but it now leases 80 percent of its hardware, up from 60 percent a year ago.
While vendors have sought to make leasing more attractive, experts caution that companies must stay on top of lease agreements and manage IT assets to ensure that equipment is not being underused or retired before its usefulness has expired. "In light of the ever-more-rapid rate of change in the IT world, it also makes sense to stay abreast of the latest FAS 13—qualified lease structures," says Robb Aldridge, president of Leasing Ideas, a Newport, Oregon, consulting firm that specializes in leasing. As flexible as leases are, companies still sacrifice some level of control: gear acquired in a great three-year lease (no interest, flexible terms, or what have you) that's no longer needed still has to be paid for, or a lease could expire on equipment that is still of lasting value and would have been smarter to buy up front. Notes Aldridge: "Technology-refresh and early-termination clauses can mitigate these risks somewhat, but they are seldom without cost." The key, experts say, is to devote some time to IT asset management rather than lease (or buy) and forget.
After a lease is signed and in place, organizations should continually monitor equipment usage, the organization's changing needs, whether equipment can be rolled into new leases with more-favorable terms, and what's available in the marketplace in terms of alternatives (upgrades, replacement with new or used equipment, and disposition) that impact the overall alignment of the installed infrastructure, says Dan Flagstad, co-CEO of Relational Funding Corp., an independent lessor in Rolling Meadows, Illinois, that helps organizations understand the financial impact of hardware acquisitions. "Most companies are making lease decisions based on price but are not monitoring" IT assets to optimize the utility and economic return on equipment investments that leads to reduced or contained IT spending, says Flagstad.
Experts also point out that slower IT sales have made outright purchases more appealing, especially for products that are relatively low in price and will meet a company's needs for several years or more. But better terms, increased flexibility, and the continuance of off-balance-sheet accounting may make leasing more appealing than ever. As Aldridge says, "Provided their companies are creditworthy, CFOs and CIOs are in the driver's seat. They can ask for more-flexible terms and options, and usually get them."
Bob Violino is a freelance writer in Massapequa, New York.
One Month at a Time
Hardware companies aren't the only players in IT that are looking for new ways to move the merchandise. Software companies now offer an expanding array of alternatives to traditional one-time, perpetual licensing, notably with subscription-based fees and "software as a service" payment models.
While this shift began several years ago, it is accelerating as customers show more interest in absorbing such expenses monthly versus taking a hit to the capital budget. Jeff Melton, vice president and partner at Bain & Co. in San Francisco, says another advantage is that customers don't have to guess how many licenses (or seats) will be needed over a period of time. And whereas companies used to "pay for the software up front but take years to see the benefits," Melton says, the pay-as-you-go schemes shorten the return-on-investment period.
As with smart leasing, management savvy is important. Motorola buys certain complex engineering-software programs that can list for as much as $1 million per copy, so the company is keen to buy only what it needs. It uses software from Macrovision, combined with some homegrown applications, to manage the contracts it has with a pool of approved software vendors. Dan Griffith, senior engineering manager at Motorola, says the company believes it has saved tens of millions of dollars over the past five years by improving the management and utilization of the software it licenses.
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