IT Focus Area: strategy
March 20, 2015
Why Leasing Can Help Keep Your IT Perishables Fresh
Let’s face it. No matter how “cutting-edge” or “state-of-the-art” your information technology (IT) is, the aging process often begins before the solution is even installed.
The needs of the business units today can and do change as soon as the requested service has been delivered, and these same business units expect IT to adapt to their new requirements almost instantaneously. Selecting the optimum funding solution offers the best possible way for you to keep your IT solutions cost-effective and operationally viable. It positions you to react to unexpected or revised service requirements and gives you an opportunity to realize significant savings in your budget.
Creative Funding Solutions
When you incorporate creative funding solutions into your overall IT budget plans, you can beneficially impact both your current year budget and your ability to manage future budgets. While the bulk of funding solutions revolve around basic operating and capital lease financing structures there are a few “out of the box” alternatives that can provide significant benefits and increased flexibility.
Sale Lease Back
Many organizations see the benefits of deploying new solutions in the form of anticipated lower costs and improved functionality but are held up by lack of available capital to get started. Lights on budgets for current gear is simply consuming too much of the available spend. You can unlock this “frozen” capital by selling back owned assets to a lessor, aligning the life cycle of these assets to their real expected useful life and leasing them back for that period. When appropriate this can be done in tandem with the acquisition of new lower cost refresh equipment providing both upfront lower expenses and accelerating the move to the optimized lower cost infrastructure.
Just-in-Time Storage (JIT)
As much as possible, budget managers often seek to avoid return trips to the budget “well”. Frequently, this means they buy extra capacity today so as not to run out in two or three years. An alternative funding approach allows you to project your capacity growth trends, and then enter into a multi-year funding agreement to access the needed capacity at the time when it will be required (versus upfront). This approach allows you to benefit from the downward trend in pricing and does not require you to overspend today.. With just in time, you benefit from future marketplace reductions as well as managing your budget to a fixed run rate. This solution provides you with a way to avoid buying more than you need today, and can save companies 13 to 15 percent annually.
Prepaid Usage Funding Solutions
For organizations that like the benefits inherent in a traditional lease but prefer to use cash or the low cost of internal funds the Prepaid Usage Plan provides an attractive option. This alternative provides all of the benefits of a traditional lease with zero interest expense. You make a one- time payment for the anticipated usage period up front and realize the savings associated with the expected residual value at the time of investment. Typically these represent somewhere between 10 and 15 percent of the equipment cost. For example an investment of $1M might require an outlay of $850,000 to $900,000 with the difference retained in the budget for other uses. At the end of the initial Usage Period you can elect to retain the equipment for a short period at a monthly rate, extend the usage period for an appropriate term, purchase and retain the asset or return it to the lessor.
Custom/Deferred Payment Structures
Your funding solutions partner should also be able to work with you to arrange custom payment structures. Deferred payments can allow you to gain usage of IT solutions while not remitting the initial payment for several months. Payment structures that anticipate increases in year-over-year budgets can also provide beneficial budget relief during the current year. Many organizations proactively take advantage of this alternative to shift expenses to match anticipated usage or adoption periods, to avoid double payments during migration periods and/or to align expenses with expected business conditions.
Note: As with any customized solution, it is important that the appropriate internal financial and accounting people participate in the discussion early on to ensure the solution meets the objectives it is designed to meet.
Early Rewrite and Extend
Far more than capitalized assets, IT solutions under a usage contract are optimum candidates for an early contractual rewrite to achieve an immediate decrease in expenses in return for a longer usage commitment. Run rate reductions of 15 to 25 percent or more often result from exercising a one year extension option during the term of the lease.
Customize for Success
No matter which funding solution you select, be sure it is tied to your specific business requirements. For example, a strategic plan for increased cloud adoption might direct you to operationalize expenses as much as possible and position assets for a migration to the cloud in a target timeframe. Dramatic storage growth capacity requirements along with rapidly escalating support costs might prompt a decision to shorten life cycles to take advantage of new less expensive platforms that include support on a regular basis. Rapidly changing security threats may direct you to try and maximize flexibility so that as threats and the technology to address them changes you can readily respond. You will realize the greatest benefit when you evaluate several different funding solutions that allow you to pay for the value you consume and access the most cost-effective technology available to meet your operational and budgetary needs — today and tomorrow.