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IT leasing frees up cash for infrastructure upgrades

Nothing saps productivity and increases risk more than outdated technology equipment. From servers that age past their warranty period to desktops that take ages to boot and even longer to perform basic operations as software complexity increases, keeping up with technology turnover can be a challenge in the best of times. Instituting a complete IT lifecycle replacement program is a challenging but ultimately valuable way to maintain high efficiency standards and acceptable levels of availability risk through regular equipment replacement.

Scott Lowe

Even with the economy in shambles -- maybe even especially because of this fact -- companies need to remain competitive and agile while keeping a laser focus on the bottom line. In this environment, identifying funding for significant technology turnover is difficult for many organizations, but the implementation or continuation of an existing IT lifecycle management program does not have to have an immediate cash flow impact. The seemingly opposite goals of obtaining equipment while preserving capital can be accomplished through

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IT leasing.

While there are definite downsides to the smart, strategic use of IT equipment leasing as a vehicle for financing technology turnover, there are also major upsides that can allow organizations to meet financial targets while also acquiring necessary technology.

 At Westminster College, where I am the CIO, we faced a number of challenges very early on in my employment, including:

  • An aging, failing and unreliable infrastructure.
  • Major demands, such as the implementation of a campus-wide wireless network.
  • No formally budgeted recurring funds for desktop computer replacement.
  • Aging computer labs.
  • Limited capacity for budget expansion.

Obviously, with limited ability to add funds, obtaining enough money to meet the growing demands all at once was simply not an option, so I turned to IT leasing as a vehicle through which we could undertake a number of major projects all at once.

To get started, we were able to obtain a modest amount of "new money" in the budget. In choosing the type of IT lease to use, I worked with the chief financial officer (CFO) to make sure that the leasing option was allowed and he was comfortable with it.

I also took a very hard look at what we were running and, in order to make ends meet, I changed our approach from a "best of breed" mentality to "gets the job done" and procured equipment with no or lower ongoing maintenance costs.

As a result of this change, Westminster College has moved from being a Cisco/Nortel shop for voice/data, respectively, to being an HP ProCurve shop on the data side and Toshiba on the telephony side -- neither vendor charges annual maintenance for its product, since the full warranty is built into the up-front price. This new approach freed up money that was previously being spent on Cisco SmartNet Service and Nortel private branch exchange (PBX) maintenance. These dollars were then rolled into an IT lease for the purchase of new equipment and the lease schedule was configured to match the IT lifecycle of the equipment. We now have a fully funded replacement cycle for our entire network infrastructure, including the wireless network and our PBX.

I took a similar approach with our servers and desktop computers. As funding has become available through other means, including elimination of long-distance circuits in favor of inexpensive Session Initiation Protocol trunks, I've used the saved dollars to establish new lease lines to replace the computers in almost all of our computer labs. Further, almost all of our servers are relatively new and I was able to procure a storage area network and other hardware and software necessary to implement a fully virtualized server infrastructure that will yield further savings, as well as provide us with a great deal of flexibility.

Of course, nothing is perfect, and IT equipment leasing is no exception. There are some IT leasing pitfalls:

Property tax implications. A few states add to their coffers through the use of a personal property tax. Depending on your state and the structure of your lease, you may be on the hook to pay property tax for leased equipment, even if you're a tax-exempt, nonprofit organization. The reason: You don't own the equipment; the leasing company does, and it is almost certainly a for-profit taxable entity. From personal experience, I can tell you that you want to know about these kinds of gotchas up front. I did not know about this pitfall when I started the IT leasing program and was very surprised to open a tax bill late in the fiscal year.

Overall cost will often be higher than an outright purchase. In many cases, IT equipment leasing will result in higher overall actual costs when the lease factor rate (read: interest) is considered. Bear in mind that a lease is basically a rental agreement; the leasing company owns the equipment, which you rent. For Westminster College, I've compared our total costs, including the lease factor rate (interest) and property tax, against loan rates available from the local bank and have found that our leasing company is providing us with a very competitive rate that still beats the bank, even when both the lease factor rate and property taxes are taken into consideration. Do bear in mind that, just like you'd do with a bank, you'll pay a few percentage points in interest to cover the cost of the lease. This is often cited as one reason to skip leases and move to outright buys, but make sure you talk to your CFO about the "opportunity cost of money" before dismissing leasing because of interest rates.

The seemingly opposite goals of obtaining equipment while preserving capital can be accomplished through IT leasing.

Breaking the IT lease can be expensive. Suppose you're two years into a four-year lease and you need to replace the original equipment. Unless you're working with a particularly flexible IT leasing company, you will either be stuck with the original equipment or have to pay for the balance of the lease before you are able to truly replace the equipment. Of course, had you purchased the equipment outright, you would be in a pretty similar position. We've already been in one position in which we had to break an IT lease for good reasons that were unforeseeable when the lease was initiated. The leasing company did work with us, but there was added expense as a result of breaking the agreement.

Understand that you will pay a deposit up front on a new IT lease line. This is basically the first and last month's rent in most cases, but if you don't know it's coming, that bill can be unpleasant.

Make sure you have meticulous records. If your asset records aren't in order, get things in order. Remember, this equipment isn't yours and you might have to return it to the IT leasing company at the end of the lease term.

Perhaps my most important takeaway: Take your time and find a leasing partner. There are a number of companies out there that will finance technology equipment, but finding that company that really seems to care is extremely difficult. I've been extremely fortunate in this department as our leasing company truly understands our needs, works with us and helps at every turn.

As you might be able to guess, I'm a big fan of IT equipment leasing. As a result of this approach:

  • We have brand new network hardware, servers, computer labs, voice equipment and more. Better yet, that budget money stays there for the next replacement.
  • My CFO and board are delighted that IT is no longer asking for hundreds of thousands of dollars. Now, I might ask for a $25,000 bump so that I can establish a new lease.
  • My budget is predictable.
  • We've undertaken massive projects that would have otherwise taken years to complete.

Scott Lowe is CIO of Westminster College in Salt Lake City. Write to him at editor@searchcio-midmarket.com.

This was first published in December 2009

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