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Looking at Leasing
October 5, 2009 12:00 PM

Searching for bottom line benefits, many companies are leasing instead of purchasing IT systems. Finding the right leasing partner is key.

By Ned Covic
Ned Covic
President of Sysix Financial
Sysix Technologies, LLC

It is no secret that companies of all sizes can reap significant financial and risk management benefits when considering financial options such as leasing versus purchasing business-critical information systems. Today’s tough economy is driving information technology executives to demonstrate that their IT investments are prudent and will pay a measurable return, often within a short window of time.

There are several trends driving the IT leasing market today.  IT managers are under increasing pressure to justify new projects or updates. The 2000s are very different from the free-spending 1990s, when double-digit increases in IT investments were based on Y2K concerns and the “gold rush” into e-business. Today, those outsized projects are past history, and every technology initiative faces increased scrutiny. Companies cannot afford to spend blindly on technology—yet they still must spend wisely to meet the growing needs of their organizations.

IT financial considerations are also being driven by the “technology curve.” For example, if a company plans to have an IT system in place for two or three years before replacing or refreshing it, they can often manage that time frame more effectively by leasing instead of purchasing.

Finally, extensive consolidation is reshaping virtually every industry in the global economy. After the headlines of a merger or acquisition have faded, there remains the tough job of consolidating many different corporate functions—including potentially redundant data centers.

All of these trends are leading companies to consider leasing. First, consolidation creates uncertainty—a combined company’s IT needs may be very different a year after the deal is sealed. An operating lease can help the company better manage that risk by allowing them to invest in the technology they need to combine disparate systems while retaining the flexibility to change as a new IT infrastructure is planned and developed.

Second, purchases require up-front capital and in tough economic times they are hard to justify.  If the company needs to replace the system in two or three years, they face a “book value” problem in that the equipment will be worth more on paper than it is actually worth since IT equipment is typically depreciated over a three-to five year term.

An operating lease can take major investments off the balance sheet. And on the P&L side, payments become an expense item which can be charged against income – with positive tax implications. This is particularly important for publicly traded organizations that must manage indicators closely watched by investors, such as earnings per share (EPS) and debt to equity.

In addition, a well-structured operating lease helps companies effectively respond to the changing technology curve. Leases can also be structured with early “opt outs” if better equipment is available, or can have a “technology refresh” written into the terms of the lease—again reducing the risks of a company being saddled with an expensive but ineffective IT infrastructure.

A real-world example brings the value of leasing to life. When a major consumer packaged goods manufacturer of soft drinks acquired a leading cereal and food company, technology’s role in the integration of the two companies took center stage.

The acquiring company had not decided on final plans for a large data center filled with IBM systems in one state, since it was already operating a major Hewlett-Packard -based data center in another. The company needed some additional computing power and functionality to support business operations in the short-term (12-18 months). The new systems were needed immediately, in spite of the fact that company was still completing its strategic evaluation of whether or not to merge the two data centers or keep the acquired unit’s data center as a standalone operation.

Since the cost of leasing a technology package for the short contract period of 12 to 18 months was prohibitive, a three-year deal was structured to accommodate the client’s budget. The lease that was structured provided the company with a pre-set upgrade option to take advantage of the benefits of the technology now, with the option to return the system and get a credit in 18 months if they so desired. A standard three-year operating lease would probably not have included this early out.

Leasing clearly helps companies conserve their capital, which is particularly important for small to mid-sized firms. Some IT systems that would be impossible for moderate sized companies to purchase outright are affordable under a lease. Also, leasing can help lower your tax bill, since many leasing agreements allow companies to deduct payments against income. This often provides a bigger tax benefit than depreciating the same system over its useful life.

A big advantage of leasing is flexible arrangements wherein companies can often customize their lease payments, maintain their technology edge through regular upgrades, and free up working capital needed to finance business expansion and acquisition. Therefore, it is vital to find a full-service leasing partner that not only understands these dynamics, but can also make them work to your advantage.

The question many companies face is not only how to link an effective financing plan with the overall business/technology goals of the organization, but equally important, where to turn for a suitable leasing partner.

Since technology systems have evolved from the back-office to support core business operations, a partner steeped in both innovative financing and technology is worth evaluating. A good candidate is a full-service solutions provider—who understands both the strategic value and lifecycle of the IT investment as well as the financial solutions. Ideally, your IT provider can supply three major components:

•    a package of  IT products;
•    the consulting capability to implement the package; and
•    financing options to ensure the solution delivers bottom line results.

Let’s examine this proposition in more detail. First, choosing a leasing partner who understands your business challenges and current IT systems is clearly preferable. An IT investment may involve replacing hardware, consolidating systems after a merger or for economic efficiency, or refreshing technology as needs evolve. This technology planning expertise often falls outside of the core competency of a bank or leasing company. Only a capable IT solutions provider can truly understand the complexity of these different situations and the impact of technology decisions on business.

Second, your leasing partner must consider these varied dynamics before developing an appropriate lease. The terms and conditions must account for the fact that IT systems become outdated at an accelerated rate. Your leasing partner should have expertise in creative leasing options tailored for your business needs.

Finally, if your leasing partner provides the “triple play” of IT infrastructure, consulting capabilities, and financial services, they will be better able to structure a comprehensive and integrated IT plan that meets your company’s short and long-term needs.

Ned Covic
President of Sysix Financial
Sysix Technologies, LLC

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