Maximising the return on IT investment: The Lease vs Buy Debate

Sponsored by HP In the interest of SMEs

Faced with intensifying price competition and customer demands for faster turnaround, large numbers of small and medium businesses (SMBs) are becoming increasingly reliant on information technology.

For SMBs, it's no longer about using technology just to keep up. Now SMBs are becoming more focused on their Return on IT Investment (RoIT). They are making IT investments to increase productivity so they can gain a competitive advantage.

George Du Plessis, HP Small and Medium Business Manager, says it is, however, vital for SMBs to consider the way they invest. "These days every business decision - entering new markets, reorganising, forging new partnerships - is linked to an IT ramification, making it critical to invest in systems agile enough to accommodate change. Many companies are finding that using industry standard equipment is one way to achieve that agility. The question they now ask is: what's the best way to invest in that technology so they're sure to get the most from their investment?"

According to Frances O'Brien, a Research Vice President for Gartner's Equipment Asset Management Group, in considering leasing versus buying options, there are three factors that must be considered when evaluating the lease versus purchase option.

First, companies must understand their true motivation for leasing - keeping in mind that different departments within the enterprise can and do have different business issues they are trying to solve. The IS department may look at leasing as the way to accelerate new technology acquisitions, minimise the impact of technology obsolescence and manage the lifecycle of those assets. Finance and accounting may be looking at leasing as the way to manage cash flows, or override budgetary concerns. The purchasing group may look at leasing as a way to reduce costs.

By understanding a company's motivations for leasing they will be able to structure the most appropriate deal and lease structure.

The second factor they need to consider - and this goes hand in hand with the structure of the lease - what is the length of time that they expect to use the equipment? Leasing works best when you match the term of the lease to the amount of time you expect to use the equipment. By having a good idea of how long a company expects to use that equipment, they will be able to select the most appropriate lease length.

The third factor that must be considered is which department will manage the lease and whether or not they have the asset management practices and routines in place to allow them to effectively manage the lease transactions. Successful lease programs have been implemented by companies that have instituted appropriate asset management routines and practices that will provide them with the capability to track the physical asset, as well as the financial and the contractual aspects associated with those assets.

Sound asset management practices will allow companies to track their specific lease-end notification periods while also allowing them the time to plan their next procurement and manage the lease return process.

Du Plessis says, "Based on these factors, once a company has decided that leasing is the best option for their business, it is safe to say that leasing IT equipment brings huge rewards at every stage of the lifecycle. The old, wise business saying, 'buy what appreciates, rent what depreciates,' makes sense for most companies. So it's no surprise that leasing is growing in popularity."

He continues, "There's something comforting about ownership. Ownership definitely has its psychological, as well as its practical rewards.

But the ownership of technology is not the same as the ownership of your first house, for example. While you can be certain that your house will always be there to give you the security you need, it's only a matter of time - and a relatively short time at that - before your IT equipment becomes virtually worthless. Technology advances so rapidly, depreciates so quickly, and often has such a small residual value, that it makes sense to lease it."

Du Plessis says leasing has psychological benefits too. Agreeing to a R4 000 per month payment for a system that you know you'll have to replace in a few short years, just feels better than writing a cheque upfront for R120,000.

He adds that for CFOs, leasing technology can be an attractive proposition, especially when interest rates are low. Leasing preserves cash reserves, smoothes cash flows, can reduce assets on the company books and improves return on assets (ROA). It's also a great way of overcoming capital budgeting constraints. Lease payments are also 100 per cent tax deductible, providing a further incentive to CFOs.

"Another customer benefit of leasing is that "soft costs" - that is, shipping, technical support, maintenance, and other services - can be wrapped into one monthly payment. On the other hand, with a loan, it's likely you will have to dip into your cash to cover them. Leasing offers IT managers a cost-effective way of keeping up with the technological curve and provides a more flexible refresh strategy. Mid-term refresh options reduce obsolescence and provide a more disciplined approach to IT lifecycle management. This can be especially important in server environments, where the life of the asset can be unclear at the time of purchase," Du Plessis says.

Asset disposal is another area where there are benefits to leasing. With security, environmental, and legal issues to consider, disposing of obsolete hardware can be expensive and problematic. According to Meta Group, as much as five per cent of the original hardware cost of systems can be spent on disposal, making leasing an even more attractive option. When your company leases, you can simply choose to return your equipment at the end of the lease term and leave the headaches of disposal to the leasing company.

"At the end of the day, however, even with all the benefits that leasing brings, buying will still always hold its own advantages," Du Plessis concludes. "Over time, purchasing can be less expensive than leasing, particularly if you buy at a discounted price. Also, you can maintain purchased equipment at your company's discretion rather than following lease requirements. Buying equipment also involves less paperwork, as lessors often require detailed information about how and where you will deploy equipment."

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