Lease vs. Purchase

Considerations for Accurate Lease versus Purchase Analysis
The lease versus purchase decision should consider the entire IT asset life cycle, from "acquire-to-retire." Non-financial considerations, for example, such as reducing risks of technology obsolescence and the proper disposal of equipment, should be analyzed in addition to traditional lease versus buy financial calculations. Customers should consider how long IT assets will provide a competitive advantage for their business and just how much more expensive maintenance and IT support become for IT assets more than 36 months old. IT Administrators should consider how they allocate valuable IT staff to support older equipment, which requires more maintenance than current technology. Current technologies also have greater energy efficiencies per square foot - something many customers never consider, and a vital consideration for data centers.

Finally, the installation periods of leased equipment and purchased equipment should be compared "apples-to-apples." Recent IT studies have indicated, however, that analyses of purchased versus leased equipment do not compare installation timeframes accurately. What often goes unnoticed in lease versus purchase calculations is that purchased equipment is usually installed for up to two years longer than leased equipment, which carries hidden maintenance and IT support costs. On average, purchased equipment is installed for 48-to-60 months versus 24-to-36 months for equipment on lease. So this needs to be considered in order to make an accurate lease versus purchase financial analysis.
 

 

The Case for Leasing
In the past, off-balance sheet financing and cash conservation have been key reasons why IT departments have selected leasing. Operating leases can provide an easier and quicker vehicle to justify IT projects since a lengthy capital budget approval process can be avoided altogether. Moreover, with flexible lease payment terms, expected returns for new IT projects can be closely timed with lease payments. This leads to better cash flow management, quicker ROI, and easier financial justification for IT projects.

Technology refresh flexibility can be another leasing advantage, especially for large data centers or IT projects. IDC believes that:

"The real benefit of leasing is in the opportunity it affords organizations to remain current with the latest technology. In many situations, IT leasing offers greater operational, strategic, and financial benefits than outright ownership. Leasing all or portions of a complex deployment can be the solution when there is a business need for rapid technological change; to grow, remain competitive, or restructure. Frequently, the company that waits until it can afford to purchase the right technology solution may find itself at a competitive disadvantage. Leasing can provide an answer to this dilemma." (IDC, "Lease versus Purchase: More Than a Numbers Decision," William Roch, June 2007)

 

Leasing can afford greater operational flexibility for various IT projects. Lease terms and payments can be customized accordingly, depending on the asset class, to better match the useful life of IT or non-IT assets:

"New technology assets are typically depreciated over three-to-five years, while the actual projected useful life of the assets may be shorter. With two- to three-year technology cycles, leasing enables the user to take advantage of the continually improving price/performance curve (and energy savings) rather than be locked into equipment that might become obsolete before it is fully depreciated. When circumstances change and the lessee finds it advantageous to keep equipment longer then originally anticipated, either from a requirements or an operational perspective, the customer has the option to renew (at a similar rate) or purchase the equipment at the end of the lease at fair market prices." (Ibid)

 

Integrated leasing solutions that include IT asset life cycle management services (trade-ins for older equipment, technology refreshes, IT asset tracking/reporting, and disposal) can lead to considerable maintenance savings and increased productivity of IT staff. After three years, for example, installed equipment typically carries higher maintenance cost than current technology. Replacing older equipment with current technology (trade-ins and/or technology refreshes) often makes sense since IT administrators spend less time updating or repairing older technology. Lease financing solutions that include services for green and secure removal of older IT assets eliminate compliance risks. Thoughtfully planned trade-in credit for older equipment built into a new lease will not only help to reduce payments for current technology, but also reduce stranded IT assets. Finally, these kinds of IT asset life cycle services can prove to be very useful when customers migrate to new data centers.

The Case for Purchasing
Historically, customers who have purchased equipment have done so for three primary reasons:

1) The useful life of the equipment is considerably longer than     that of an economically viable lease
2) Purchasing is perceived as being simpler and most familiar
3) Few leasing companies are capable of providing integrated     lease financing alternatives tailored to the customer's     technological needs, business requirements, and equipment     life cycles.

Perhaps this last reason is most responsible for a purchase-only mindset today.

When IT requirements are predictably longer than five years and capital expense budgets are readily available, purchasing equipment can be easier:

"Purchase may be the correct decision for situations in which users determine that the useful life of an asset in their environment is longer than that of an alternate lease scenario. The technology may be robust enough that a five-to-seven year operational life can be reasonably projected." (Ibid)

 
Finally, IDC cautions:

"Although a purchase may be the right decision initially, purchased assets may ultimately have an adverse effect on a company's ability to adopt new technology. When accurate maintenance, IT support and energy costs are considered, leasing can provide multiple opportunities, such as technology refreshes and trade-in credit, to take advantage of current technology, rather than being held hostage to a depreciation schedule or the lengthy approval of a capital budget." (Ibid)