June 11, 2012
commentary
Leasing IT equipment rarely makes sense
By Christian Perago
Consultant And Senior Manager Of Technology Operations, Berrydunn, Portland
I recently read an article in Forbes that promoted leasing iPads rather than buying them outright. This article made me think of all the times when I have heard similar arguments about the virtues of leasing equipment and the tax breaks, cash flow advantages and improved product lifecycle management.
Yet, in all my years in IT and management, I have never found leasing a positive experience. On many occasions I have advocated successfully not to lease equipment, ever.
I understand some companies just don't have the cash flow to purchase everything they need. Sometimes leasing a big-ticket item is a necessary evil, but sometimes it's just like purchasing a car you can't really afford.
Here's why I don't like leasing technology equipment:
- At the end of the lease, you are forced to make a decision based on the lease-end date rather than on whether your company needs to return or upgrade equipment. You may have to forgo a project that is more valuable to your company because of a lease deadline. If you don't, you will not be able to avoid the contractually built-in costs of delaying your equipment return or upgrade. The argument that IT departments hang on to equipment too long can't be generalized to all IT departments. The solution may be leadership or process changes. A lease is not a substitute for technology decision-making or project planning.
- You lose the flexibility to replace early (unless you want to spend double) or retire late. Maybe the equipment is still performing well and your money would be better spent on other projects; maybe your company is having a bad year and you need to cut or delay spending.
- When you have a fair market value lease, the leaser will often claim the equipment is worth far more than anyone could ever sell it. If you want to purchase at that point you will have to overpay for used equipment or send it back and purchase new equipment (see items 1 and 2 again).
- You are paying interest and lots of it. No matter how you do the math, you cannot pay less for anything when you pay interest (think of your credit card or your mortgage). Don't forget the salesperson adds a percentage to the lease interest rate to get extra money out of the deal (another hand in your pocket). The Forbes article said a school system paid 97% of the purchase value of its technology equipment, but failed to add the fair market value cost to the purchase, or the income lost from not selling the equipment. Let's assume the product retains 25% of its value at the end of the lease. If the school paid 97% of the value for the lease and decided to keep the equipment, it would probably be a total cost of 125% (lease + FMV payout) of the purchase price. Conversely, if the school decided to purchase the equipment and then sell it at the end of the lease, it would probably pay 75% of the products' value (purchase price minus income from sale). And don't forget if you return it, you still need to buy a replacement device.
- If at the end of the lease you send equipment back to the leasing company, the company may charge you for things that could arguably be called wear and tear. You often have to pay the shipping back to the leasing company. If you don't have all the manuals and power cords, you're going to pay. Don't have all the original CDs? Cha-ching. I have multiple experiences with different leasing companies where charges were higher than the street value of the product. But since they inflate the fair market value, they argue it is a valid charge. I believe the leasing companies know they are on the wrong side of this argument — if you refuse to pay they will usually meet you halfway with no resistance.
- The dangers of evergreen. Need I say more? I have seen leases accidentally evergreen because after three years someone forgot to send a letter to a leasing company on time and is now stuck paying for the equipment again. I recommend refusing to sign any contract with an evergreen clause. Cross it out and send it back.
- Who said only the leasing company can sell off old equipment? We sell all of our old technology when we purchase new technology. Twenty-five percent of the cost of the laptops at our firm are paid with the money collected when we sell our old laptops. Our employees also like being able to purchase used laptops at very low prices for personal use. My experience has been that it takes about the same amount of time and effort to return equipment to a leasing company as it does to sell it internally. Once you do it a few times, it becomes routine and it makes your employees happy.
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