Magazine article Risk Management

The Option to Lease

Magazine article Risk Management

The Option to Lease

Article excerpt

With analysts at Forrester Research predicting that IT spending will grow by 5 percent in 2004, technology looks to be making its long-awaited comeback. While that figure may not sound like much, it is Forrester's first growth prediction since 2001.

Forrester is not alone. There have been many articles and reports pointing to an increase in IT spending--enough to indicate it is a real trend rather than wishful thinking. Yet this time around there is a definite shift in how the money is being spent.

After spending large sums of money on technologies that have still yet to provide their expected return on investment, CIOs and CFOs are now taking a more cautious approach. Rather than committing to large, up-front capital expenditures on technologies that could change three years down the road, they are looking for more flexibility and efficiency in their spending. While they want the productivity and other benefits that new technologies will bring, they want to add it and reduce long-term risk for the organization at the same time.

One of the ways they are accomplishing these seemingly dichotomous goals is through leasing rather than purchasing. According to the Equipment Leasing Association, the market for leased IT equipment will grow to $28 billion by 2005. This number represents a 600 percent increase in the average annual growth rate over the rate during the recent tech boom.

Why Lease?

Leasing makes sense, especially given recent history. Many organizations have been bitten by technology investments that have yet to pay off or are no longer adequate for their needs. For example, all of the data that companies currently store on huge legacy systems (as is still the case with some insurance companies, for example) has given rise to the enterprise application integration industry, whose job it is to move data from these legacy systems of yesterday onto today's modern systems.

Sure, these organizations are aware that there are better, faster and less expensive technologies available today. But they already own the equipment, and moving all the data off of it and onto a brand-new system would be a hugely expensive task. So the legacy systems live on.

But not every company is tied to a legacy system, and to such firms, leasing provides a means to avoid expensive, long-term commitments. Typical lease terms are for three years, with an option for four and sometimes five years. Because Moore's Law (which states that processing power will double every 18 months) is still in effect, however, most organizations elect to upgrade the equipment after the original three-year period. This strategy allows them to get the maximum advantage out of the equipment while giving them the ability to make a change when needed.

Getting Started

There are two basic sources for leasing 1T equipment. One is to arrange for financing from the equipment manufacturer (known as a captive, but not to be confused with a captive insurer), much as one might go to GMAC to lease a new car. Equipment manufacturers primarily look at leasing as a means to overcome an objection. They want the customer to take their equipment, not that of their competitors and offering financing provides one more reason to purchase from them.

There are two advantages to this option. The first is that it is easy. Just as one can walk from the dealer's showroom to the GMAC of rice, captive programs are essentially brought to the customer. They also tend to have very favorable initial rates, since it is more important to the manufacturer that the client chooses their equipment than it is for them to op crate as a high-profit center.

The other option is to secure financing from an independent financial organization that specializes in technology. The advantage here is that a customer is not tied to one particular manufacturer. If IBM servers and Hewlett-Packard desktops suits the organization best, this equipment can be specified and financed both through a single lease. …

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