A successful leasing program can help you accomplish several good things, but an ill-conceived one can hit you with unnecessary cost, risk and a lack of flexibility.
If your IT leasing company re-markets end of lease equipment, try this simple trick: compare the market value they place on the assets you choose to retain after the end of lease with the asking price for similar refurbished equipment delivered to your door. You might be in for a nasty shock, if you're anything like one of our major airlines that tried this recently. The carrier apparently had a row with its financier after learning the price it was charging for refurbished stock was just 40 per cent of the price the carrier was being hit with for retaining like assets after the end of lease. One of the largest and oldest lease financiers in Australia was - at least allegedly - seriously ripping the airline off.
The airline is not alone. Australian companies are losing thousands of dollars each year because they are unfamiliar with the detail in their IT equipment leasing agreements, according to one IT asset management specialist. Very few companies are aware of the contents, clauses and penalties contained within IT lease agreements, Ian Hyman, CEO of Hymans Asset Management Group, says. And it is costing them heaps.
"Financiers are taking advantage of the fact that few companies know the value of their IT equipment. Lease agreements are being renewed at a cost sometimes double that of market value," Hyman says.
With growing numbers of companies finding their IT environments out of control, experts say avoiding leasing rip-offs means instituting a formal, comprehensive asset management strategy that not only tracks hardware and software assets, but also manages software licences, networks, equipment contracts and leases, from cradle to grave. Asset management specialists agree that without such a strategy companies can lose large amounts of money in various ways because they have failed to take control of their assets.
Yet Hyman says that just as 10 years ago facilities management was a phrase people liked to talk about without really understanding, most organisations today talk about how to better manage their assets without understanding that their disposal policies are either non-existent or poorly executed. "The biggest failing is at the front end," he says. "There is no planning made for the asset when it is delivered into the company or the organisation's premises. An asset comes in, it may get moved around the organisation, but there's no tracking mechanism in most cases."
He says frequently assets that are lost, stolen or broken down don't get replaced or repaired even if there is a warranty to cover the work. When assets are taken out of service because they don't meet the current users' needs no one actually looks to see whether there is another person in the organisation who could take advantage of that asset. The result is enormous inefficiency.
Gartner research director, servers and storage, Phil Sargeant agrees. "There's really a process that people need to look at when they consider leasing," Sargeant says. "It's a fairly straightforward process, but one that is absolutely vital. Unless an organisation knows exactly the state of its machines, where they are, whether they can return them, all those sorts of things, then that's when the leasing contracts perhaps fall over. And that's when in fact the organisation starts to get ripped off.
"If you've got tools in place to address that, then leasing can be economic, but many don't," Sargeant says.
The picture is improving. Robert Spano, managing director of Integrated Asset Management, says most organisations that are serious about leasing are becoming equally serious about asset management. There's a move towards handling the two together, he says, "because leasing companies are starting to realise the benefits of not ripping off the customer, so to speak, or not enforcing the contract."
All agree that the rewards for taking control of assets can be significant. According to Hyman the airline mentioned above, with a standard policy of taking out a 36-month lease and then re-leasing for another 12 months, had 8000 seats. The "rip-off" was costing it millions of dollars before it became aware of the situation and took matters in hand.
Being grossly overcharged for the privilege of retaining such assets is just one of the ways IT asset management experts are warning that Australian companies are being ripped off. Sargeant says organisations also get into trouble because they enter into leasing arrangements on equipment when they have no idea where their business is heading in terms of growth and the applications they will need to forecast that growth.
"What happens is that because they've been unable to forecast future requirements, applications are all over the place, growth is all over the place. Frequently people have to break or change leasing contracts and that's when they can get caught out badly as well," he says.
All Too Common
Claiming to be able to speak from personal experience as the head of a company that on-sells between five and six thousand new and used IT products via its weekly national auctions, Hyman says the airline mentioned above is the rule rather than the exception. He says he sees cases every day of Australian companies losing thousands of dollars a year because they don't know the detail of their IT equipment leasing agreements.
It was Hyman who advised the airline to call the finance company's re-marketing arm to find out what the same assets would cost refurbished and delivered to the door when it began to fear it was being overcharged at the back end of its leases. He's advised other companies to do the same.
For example, a fuel company came to Hyman for help in re-leasing at the end of its lease period with the same financier that caused the airline so much grief, also believing it was being grossly overcharged at the back end. Insult was added to injury when it discovered the lease agreement declared the leasing company as the only one with the authority to set the market value. Worse still, in the case of disputes it is the financier that has the sole right to appoint an independent arbitrator.
"You really don't have any real way of appealing against those [market] values other than to turn around and say: 'We won't take the asset'," Hyman says. "That creates an enormous amount of additional work if ever you need to return that asset, because you need to do data transfers of the information to another machine [and] a person has to be without the machine for a period of time and so forth. That isn't a terrific option for a number of clients."
But Hyman sees shady practices amongst other financiers too. For example, he claims one specialist IT financier has a policy of not notifying clients when their lease period is up. At the end of the three years, if you fail to deliver the goods on the day or before the day of return, then effectively you are deemed to be open to amenity to a new lease for another 12 months.
Hyman concedes not all financiers operate this way, but says the one mentioned has probably the worst reputation in the market for abusing customers and is notorious for having a three-year vision for its customers. "So, over three years they'll write as much business as possible then spend the next three years trying to rape the client," he says.
Then there's the issue of handing back like for like. Some financiers will refuse to accept hand back of an identical machine with a different serial number, even though for all intents and purposes the lack of serial number match will have no impact on equipment re-marketability.
"It's a clause in the lease agreement," Hyman says. "When you've got an organisation of over 5000 staff or more - and there are a surprising number of those in Australia - returning the exact machine is extremely difficult. That's what they play on: that you cannot deliver the machine that you leased, therefore you either settle with them for some financial penalty or re-lease the asset.
"Typically, financiers demand a notification period of at least three months prior to termination of the lease agreement. Often these notification periods pass, so the financier simply rolls the company into another 12-month lease, charging the same monthly rate, instead of taking into account the rapid depreciation. For example, it is not unusual for a company to end up paying $1500 for a notebook computer, when the value of this three-year-old product is about $500. If there are 50 notebooks owned by the company, this is a significant loss," says Hyman. "If a company does question the charge, the financiers are the ones to appoint the independent arbitrator."
Hyman says he also knows of government departments that have entered into leasing agreements where both parties knew at the start that, for security reasons, the department would not be handing back the machines with hard drives intact. Yet that mutual understanding hasn't stopped the departments getting "hammered" at the end of the lease period for not returning the machines with hard drives. According to Hyman, some departments have been charged $250 for a new hard drive, on a machine with a total resale value of less than $250.
Finance companies also take a very tough line where assets arrive back incomplete or not working. They'll charge $200 for repair of a cracked hinge even when its impact on market value might be less than $20 on a machine that probably has a value of $200 complete. "That's why so many organisations now are really having to come to grips with asset management," Hyman says. "People are starting to understand the potential for savings, and I think also some risk management in reducing confrontation. In the last 12 or 18 months there has been a noticeable shift of people starting to become aware that this is important."
Operating leases are brilliant at spreading payments over the life of your PCs, printers, servers and so on, thus creating the possibility of giving you a higher return on your IT investment. But it seems that far too few companies are extracting the full financial benefit from the arrangement.
Ideally, an organisation should aim to start managing individual assets from the moment they're ordered, keep tabs on them during procurement and follow them from the loading dock to ultimate disposal. That way, asset managers should be able to guide the organisation in the acquisition, use and disposal of assets, and manage their related risks and costs over every phase of the asset life cycle.
"The online asset management capabilities that most of the major leasing players have in the marketplace is the best tool for that," Spano says. "That's available on a cost-centre basis and on an expiry date. Our asset management system, for example, is written in Lotus Notes, and you can do enquiries online to exactly tell you which divisions and which PCs are coming off, and when."
Spano claims the advent of online asset management is the solution and providing databases of assets (also known as fleets) to customers both big and small will begin to minimise the customer's concerns about being "touched up". "What outsourcing has introduced is the concept that you don't have to own the asset and manage the asset to be in control of the asset, so I think that has broadened the marketplace's view on how best to do it," he says.
According to Hyman the best key for organisations wanting to get a handle on their assets is to devise a checklist covering the outcomes they desire. For instance, very few organisations return leased equipment at the end of three years.
"So if you know that now, why lease assets for three years only? If you're going to have a three-and-a-half or four-year view on your asset, then why go through this at three years and then have to go through it again 12 months later when the assets finally become surplus? If you know you're going to retain assets for four years, then take a four-year lease," he advises.
"And I think most people have to determine how long they're going to retain the assets. In some cases they should be taking maybe two-year leases on notebooks, because they tend to suffer damage and become obsolete more quickly. I would have a four-year policy on PCs and monitors, and two years on some printers in heavy traffic areas; in executive areas it might be a four-year policy on printers. There's a whole range of things people need to think about that will reduce the total cost of ownership of the assets themselves." VThe Lease That You Can DoOver the years Gartner research director, servers and storage, Phil Sargeant has noticed that the motivation for many organisations to lease equipment is driven primarily by technology and financial management decisions, rather than by capital cost pressures. Sargeant says many IT departments see leasing as a way to help minimise the impact of technology obsolescence and facilitate product acquisition. On the other hand, the finance and accounting departments often like leasing because it avoids the need to put more capital assets on the books.
"It is important that organisations understand their motivations for leasing. When they do, they will be capable of selecting the appropriate leasing structures and managing the lease transaction to satisfy their objectives," he says.
Gartner has suggested that organisations look at (and understand) the following factors when making leasing decisions.
1. What's the real replacement cycle? Does management accept the need to replace some, or all, of the inventory on a regular and predefined (lease-term) basis or is replacement being undertaken on an as-needed basis?
2. Are the right asset management processes and systems in place? For leasing to be effective, there must be a well-documented process in place to be sure that all of the leased equipment can be located and returned to the lessor at the end of the initial lease term.
3. Does early installation of IT assets generate tangible return on investment? This question is to justify the use of leasing when capital funding is limited but there is a high return on proceeding with any replacement initiative (such as whether business benefits will be gained through the use of the latest technology).
4. Is the portfolio of applications stable and can we forecast required resources? It is important that the application portfolio be relatively stable for the term of the lease. If new applications are added that could force an early upgrade of the installed base, there could be a requirement for early termination of the lease to replace, or significantly upgrade, the equipment for it to be functional. An early termination of the lease or refinancing of the equipment with the upgrades can cause the lease decision to rapidly become uneconomic. The technology-planning horizon must be in sync with the lease term.
5. Will the lease provide enough flexibility to meet changing business requirements? This question is designed to focus on the terms and conditions of a possible lease agreement. Enterprises must consider business requirements and business flexibility (such as whether mergers and acquisitions are possible and if the lease agreement can cater to such situations).
Whether to lease or buy may seem like a simple decision to make, yet getting the correct answers to the questions organisations need to ask can be a very difficult process.
An organisation must be able to fully facilitate the lease process to reap the benefits of the lease. If the organisation is unable to do so, the outcome could be disastrous. Careful attention should be given to the terms and conditions of any lease to be sure that they can be implemented and will not disable business flexibility.
Strategic Approach Is the Best
According to ComputerFleet CEO Simon Kelland, getting best value from a leasing arrangement for a fleet of IT equipment has very little to do with lease rates. More importantly, organisations should ensure there is: control and visibility by the lessee of the leased asset portfolio good contract and relationship management with all stakeholders (including the leasing company and equipment vendors) internal cost accountability and flexibility of the contract with respect to return conditions and logistics management.
Over the medium to long term (four years-plus), a leased asset portfolio (or fleet) is fluid as some assets are returned before the end of their lease term, some are returned at the end of their lease term, some are kept by the lessee after the end of their lease term and some are upgraded mid-term. Organisations should understand that it isn't the same as leasing a single large asset like an aeroplane or a rail locomotive.
In a sense, IT fleet leasing is far more like a long-term service relationship than a financing arrangement. The arrangement will be far more effective if the lessee takes a whole-of-enterprise, strategic approach to their relationship with the lessor.
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