Leasing a Smart Alternative in Lean Times October 8, 2009 09:00 AM
With tax revenue down and access to the credit markets drying up, state education funding has been especially hard hit. Higher education administrators can use lease financing as a strategy to support the computing needs of students/faculty and university operations without draining current year fund allocations.
Ned Covic President of Sysix Financial Sysix Technologies, LLC
State-funded colleges and universities are facing tough times on the financial front. State governments are facing their worst financial crisis in years. States are required by law to balance their books following one or two year budget cycles, which makes the financial picture even more complex. In the current economic climate, states are forced to either slash spending, raise taxes or tap into precious reserve funds to keep budgets afloat – making the justification of new expenditures an exceptionally difficult sell to trustees.
Unfortunately, in spite of tight state purse strings, information technology (IT) officials at state colleges and universities face increasing pressure to stay at the forefront of technology. Student enrollments are growing at a fast and furious pace – as the down economy is sending many displaced workers back to school to acquire new skill sets. This trend is driving schools to compete to attract and retain students and faculty.
There is a growing demand for sophisticated technology and computing power to support online research and Web-based learning, along with an ever-changing list of technology "wanna haves" like instant messaging and wireless capabilities. Today's students and faculty expect top functionality from college/university computing systems…and IT officials must put in the technology infrastructure to answer the call.
EYE ON ACCOUNTABILITY University technology professionals must ensure they can address the new movement toward "accountability". Decision-making authorities at colleges/universities such as Regents and Advisory Boards are seeking assurances that the technology systems installed on campuses and information databases within these systems are protected against unplanned disasters and security breaches and that they effectively deal with privacy issues.
Technology systems are no longer tucked away in a "back office" – today's technology is critical to all "business" operations in schools – supporting everything from accounting to human resources to development and more. And these supporting technology systems generally require upgrading every three-to-five years, leaving tech administrators at a continual crossroad in balancing the need for new technology with the reality of depressed state education funds.
A survey by Educause, a noted higher education user group, outlined the following technology-related issues as most critical in the eyes of college/university IT professionals:
Top 10 Current Issues 1. Administrative Systems/ERP 2. IT Funding Strategies 3. Faculty Development, Support and Training 4. IT Strategic Planning 5. Security Management 6. Online Student Services 7. Teaching and Learning Strategies 8. Distance Education 9. Maintaining Network Infrastructure 10. Emerging Network Technologies
LEASING 101 With technology systems so critical to the support of education, what can tech professionals at colleges and universities gain from a look at leasing versus the more traditional method of purchasing? Leasing is fast becoming the preferred method for acquiring technology equipment and systems needed by business, education and government. Leasing accounts for approximately one-third of all capital expenditures in the United States because corporations, schools and governments are becoming more aware of the many different advantages, benefits, and options offered by this creative form of financing. Each year state and local governments and their agencies acquire hundreds of millions of dollars worth of equipment via leasing. The following are just a few of the advantages that make a leasing alternative attractive to the education space:
Convenience Leasing offers many conveniences over conventional forms of financing. Cash flow projections are made easily when leasing since most leases have fixed equal periodic payments. Acquiring assets through leasing may involve less red tape and time than conventional financing. Leasing offers the flexibility to pay for equipment that is currently needed over time rather than acquiring equipment through purchasing which limits the amount of equipment that may be acquired to the current year's available budget.
Affordability Incidental costs of acquiring equipment, such as freight or installation charges, as well as software, implementation and consulting services and manufacturer support can be included as part of the lease. This eliminates the necessity of a large cash expenditure or down payment which is typical in most purchase situations. Obviously, in a credit-tight economy, reducing large cash down payments or other incidental costs allows the college to employ its cash or savings for other more profitable uses or working capital requirements.
Improved Fund Balance Similarly, many state governments as well as political subdivisions such as colleges are required to have special capital appropriations made by the legislature or decision-making bodies to acquire equipment through purchasing. These capital appropriations are generally made once a year; thus prohibiting mid-year acquisition of technology equipment. In these cases, leasing is a good solution because the lease payments can be paid out of the operating budget rather than the already depleted capital acquisition appropriation. Leasing also provides the ability to finance essential technology equipment without incurring "debt" or "indebtedness" that is subject to state appropriation board approval. This is accomplished because lease payments are subject to annual appropriations, and as a current expense item, lease payments are not considered debt.
Lower-level Decision Making IT managers of all levels who wish to acquire equipment, but who do not have the appropriate authority to expend the necessary level of funds, find leasing to be a convenient method of acquiring technology equipment. Through leasing, colleges are able to make monthly lease payments which often fall within their spending authority guidelines. When given the lease option, Department Managers and Facility Managers may be able to move forward with the acquisition of equipment and services without using capital funds, saving time and money.
Additionally, the fast-paced world of technology is continually changing, which creates uncertainty – as a school's IT needs may be very different – even in the short timeframe of a year after an initial acquisition of a new system. A lease can help the college/university better manage that risk by allowing the institution to invest in the technology they need while retaining the flexibility to change over to new systems as a new IT infrastructure is planned and developed.
A well-structured lease can help colleges/universities effectively respond to the changing technology curve while keeping the acquisition within budget constraints. Payments can be structured to reflect the college's cash flow requirements as well as setting a lease term which matches the expected life of the equipment. During a lease, a company pays set terms for equipment usage without the burden of disposing of or writing off the equipment after it becomes obsolete.
IN SUMMARY A big advantage of leasing is that with some innovative thinking regarding flexible arrangements, colleges/universities can often customize their lease payments, maintain their technology edge through regular upgrades, and free up working capital needed to finance growth and expansion. Therefore, it is imperative to find a full-service leasing provider that not only understands these dynamics, but can also make them work to your advantage. Not all leasing providers fit the bill.
Since technology systems have evolved from the back-office to support core college/university business operations, a partner steeped in both innovative financing and technology is worth evaluating.
Ned Covic President of Sysix Financial Sysix Technologies, LLC