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November 6, 2009
• Vol.31 Issue 27
Page(s) 44 in print issue
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Leasing Data Center Equipment
Greater Financing Freedom For Strapped IT Shops
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| Key Points
• Instead of tying up scarce cash in purchasing or financing technology assets, companies that lease can instead use these resources for other business needs.
• Lessors provide cradle-to-grave assistance, ranging from sourcing, ordering, and delivering new equipment onsite to managing the asset through its life span and orchestrating its disposal and replacement.
• Cost-conscious finance departments and CFOs often appreciate business cases based on the simplified financial arrangements available through leasing. Greater visibility into these transactions is an added bonus. | As IT organizations put the finishing touches on their 2010 data center budgets, many of them are looking more closely at leasing as an alternative way of acquiring, financing, managing, and ultimately disposing of their assets. As with any other IT-focused initiative, decision-makers must first do their homework.
“In many cases, business owners will find lease financing very advantageous for their needs because they just can’t afford to purchase capital assets for IT,” says Ralph Petta, interim president of the ELFA (Equipment Leasing and Finance Association). “Because they’re looking to pay their people, have operating capital, and manage their cash flow, leasing is a terrific way of acquiring this stuff without having to go into debt or use hard-earned cash that could be otherwise used in other aspects of the business.”
 The Economy’s Ongoing Influence
Recession-struck companies have become much more careful about how they finance their technology initiatives. Stewart Buchanan, research director with Gartner’s IT asset management and procurement research team, says leasing wasn’t immune from the economic downturn.
"During the pinnacle of the credit crunch in the autumn of 2008, we saw that getting credit and signing a lease was becoming more expensive for many of our clients," says Buchanan. "The gap between bank base rate and lease rate or lease factor jumped to about 6%, and only recently has started falling below 3%.”
Buchanan says as access to credit improves, companies are increasingly looking to leasing as a vehicle for driving agile, cost-effective technology implementation. And as they move ahead with post-recessionary roadmaps, CFOs and other financial decision-makers are becoming more involved than ever in these decisions. Ultimately, business needs must drive IT’s plans.
“The most successful business cases for leasing come about from IT organizations that have their finger on the pulse of the business,” says Buchanan. “And the most successful business cases for reinvestment at the moment are very much in line with the business strategy for returning to growth.”
Focus On Both Tech & Finance
Companies making a lease vs. buy decision must consider two key aspects—technological and financial—before they make the call. Tim White, managing director and head of commercial markets for Bank of America Leasing & Capital Group, says getting the best deal is a great place to start.
“IT lessors do provide very cost-effective capital that is very often less-expensive financing than the lessees themselves can obtain directly from their bank,” says White. “Beyond that, it usually does come down to the additional services that they provide.”
White says these lessor-provided services include the following:
• Ordering equipment and managing its delivery.
• Paying for equipment as it arrives on the customer site and allowing the customer to avoid significant upfront payments.
• Rolling up payments into a defined lease schedule to simplify budgeting for the customer.
• Tracking assets in customer-accessible Web-enabled databases.
• Disposing of assets at the end of the lease and wiping hard drives to remove data and ensure compliance.
“Experienced lessors allow you to take advantage of their built-in software applications and competencies so that you can very easily manage your overall costs,” says White. “There’s an ease and simplicity in IT leasing that has value beyond the financial cost.”
That value can extend to the initial approval, as well. Gartner’s Buchanan says leasing can simplify spending, which makes it easier to get CFOs and other financial decision-makers on board.
“Some companies have been extending life cycles quite aggressively over the last 18 months because of the economy,” he says. “So if you want to do a major capital refresh because you’ve been holding on to your existing technology, you’ll want help to manage the rollout. If you can bundle that into a leasing service agreement, it can be much easier to get that final figure approved than as a separate line item.”
Buchanan says ongoing IT operations are also boosted by the lessor’s asset management competencies, something many IT departments often lack the resources to effectively execute. This also gives the organization greater visibility into what’s being spent and what value is being returned.
End Of Lease, Top Of Mind
The end of the leasing period is a critical milestone that’s often overlooked. Organizations can typically decide to extend the lease, purchase it outright, return the equipment and exchange it for updated technology, or end the relationship entirely. IT must plan well enough in advance to minimize or eliminate interruption to the business.
“The customer needs to determine whether or not the current equipment is doing the job,” says the ELFA’s Petta. “Because it’s easier to keep an existing customer than find a new one, leasing companies will be very flexible at this point in terms of working with the customer and understanding their needs going forward.”
In many cases, the flexibility of leasing allows companies to grow their capacity without adversely affecting their cash flow. It can also make it easier to drive the business forward.
“I’ve seen many situations where a company that has a monthly payment on older, larger equipment trades up to newer equipment that has faster response times, takes up less room, and reduces their payments, as well,” says Bank of America’s White. “This is why the relationship with the lessor is so critical, so that you can be aware of these opportunities.
“It’s important to know who you’re dealing with,” adds White. “You want to be with somebody who will keep you informed, who will be on your side of the argument all the time, and who will always be looking for ways to make your life easier.” 
by Carmi Levy
Best Practices In Evaluating Different Leasing Options
Evaluate each lease proposal on its merit. Different types of assets may be more suitable for leasing than others. For example, assets with short life cycles may be better candidates for leasing than those with longer durability.
Explore software and services financing. Although leasing has traditionally been used for hardware acquisitions, companies should also ask their software vendors about financing options. Traditional financing or SaaS arrangements offer many of the benefits of leasing.
Consider independent lessors and OEM-specific ones. Know what kind of equipment you want and be prepared to shop around for it before you make a final decision. Independent lessors can simplify sourcing equipment from multiple vendors. Using neutral financiers can also facilitate greater flexibility around platform changes down the road.
SOURCE: BACK TO BASICS: WHY IT LEASING MAKES SENSE IN THE ECONOMIC MELTDOWN. SUDIN APTE, FORRESTER RESEARCH, 2009. |
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