10 things to consider when leasing computers

by Rick Vanover | Dec 04, 2006 8:00:00 AM

Tags: Capital structures, Financial accounting, Investment, Operational accounting, computer, Rick Vanover, financing, finance, leasing, payment

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Takeaway: Leasing computer equipment makes sense in a lot of situations, but the process needs to be managed as carefully as an actual purchase. These tips from IT pro Rick Vanover will help your organization make sound leasing decisions.

This article is also available as a PDF download.

Leasing systems is a popular option with many IT groups, but it requires careful planning, evaluation, and management. Here are 10 things to keep in mind if you're thinking about endorsing a lease program.

#1: Get finance involved

It may seem out of place, but having finance involved with the business side of leasing is a good idea for the following reasons:

Payment management. Depending on your leasing arrangement, you can have your lease payment managed so that IT doesn't have to manage the periodic payments directly. Also, if there's IT staff turnover, this would be managed directly with finance to reduce risk of a penalty from no payment.
Business terms and conditions (T&Cs) sanctioned. T&Cs are a nightmare to manage, much less control. By having your finance group involved, there is certain legitimacy to the lease program you have selected--or there may be a formal approval process.
Direct asset management. This is more important for outright purchases, but if your organization tracks assets, the leased systems may need to be accounted for in some fashion. Having your finance or accounting group directly involved with the process can streamline this process and allow the information to be obtained directly.

#2: Consider using traditional financing for the SOHO

Many small offices have small technology staffs and even smaller budgets. Depending on the circumstances, leasing may be too complex for the small office, and there may not be a hard rule of "3 years and out" for office technology purchases.

When traditional financing is used, it can be done on a per-system and per-need basis. The payments are usually manageable when only a few financing accounts are active at any given time. These traditional financing vehicles can be any of the following:

OEM financing. Take Dell, for example. You can purchase select new systems and finance directly through Dell for a monthly price.
Retailer financing. Many retailers have financing options that allow you to directly finance the purchase price. This may be a good option if you're purchasing more than just a computer (special printer, furniture, etc.).
Company credit card. Many business credit programs exist (OPEN from American Express, Discover Business), as well as many bank-dependent programs with VISA and MasterCard brands.

Best practices

When using traditional financing for computer purchases, consider having the periodic payment come out of a departmental budget for the individual technology need(s). For smaller organizations, it is very difficult to justify an IT budget, much less have the budget be consistent and predictable. A popular option for very small organizations is for employees to finance these types of systems on their own and reimburse the costs directly. This is a hassle and poses risks to the individuals, but in some situations is the best solution.

Check first! Some models are not available for lease program options. For example, Dell products targeted for the home user are eligible for the Dell Preferred account, and products targeted for business users are eligible for the Dell QuickLease program. Be sure to check the options for your model(s) before advancing.

#3: Have a firm end-of-life policy for leased equipment

The buyouts are usually not effective in giving you the best overall value for the technology solution, and you shouldn't plan on month-to-month options when leasing systems. Have a strong policy that allows you to pull the equipment back to IT for a data offload process and a migration (if necessary) to prepare for the return.

Be sure to not miss any of the common issues with the end of a lease:

Have a means of returning the equipment. Original boxes may not be required, but a way to return the equipment is necessary in a lease return.
Don't lose the little things. Notebook power supplies, supplemental batteries, cables, external drives, or any other accessory or peripheral that was part of the lease will cost you if not returned at the end of a lease.
Have the systems physically clean. Don't have the systems returned with stickers or asset tags on the devices. There may be charges for systems with these types of markings.
Migrate data OFF of systems. This probably goes without saying, but we'll discuss it in more detail later.

#4: Supplement leased equipment with some outright ownership

Depending on the scope of your organization's technology needs, it may be a good strategy to have some leased and some purchased equipment to reach the best TCO. This may be a good strategy for a large migration project, with many temporary people needed as well as temporary servers; a new office or division that's operating on an experimental basis; or other foreseen temporary needs for computing resources. However, if you have a large number of leased systems, it may be a good idea to have a small number (maybe 5 to 10 percent) of outright ownership systems of the same make as your leased pool. This can give you the following benefits:

Enables a stash. Although we shouldn't have stashes, we all do. Having a limited number of leased systems allows for a spare power supply if needed for a lease return that's minus a power supply.
Makes testing easier. You can maintain a test configuration or image on a like system with an outright ownership system. This may be easier if lease charges are sent to the departments of the employees leasing, whereas a test system can be charged directly to IT in a different account.
Oddball groups. If you have some unique users or a field office (or a group that is going to be sold off), it may make sense for them not to be a part of your lease pool.
Easier management for telecommuters. It may be tough for remote users to send in their systems.

#5: Leasing can ease disposal dilemma

Despite the importance of environmental responsibility, many organizations either have a large collection of effectively worthless systems or have relied on incorrect disposal mechanisms. By having equipment that will be returned to the lease company, a large burden is lifted from the company. The biggest downside is shipping cost and shipping material, but because the inherent nature of the lease is a return of the equipment, a future burden is removed.

Note

Proper computer disposal or recycling is important to consider for the environment and for correct asset disposal if you are tracking the systems as assets. HP and Dell have good recycling programs for unwanted IT equipment. See the following sites for more information:

#6: Ensure NO data goes with a lease return system

Though systems should be re-imaged when sent to the lease company, it's still advisable that you restore an image of the OEM to the system and do some form of low-level data wipe on the drive. If a ready-to-go system is intercepted by the wrong individuals, you'll face many risks to your organization's intellectual property, network security, and other scenarios.

#7: Be wary of leasing mission critical systems

A common belief is that certain systems, like an ERP server or a mail server, should not be leased. This may be because you may make frequent changes to the hardware environment, can't afford the downtime, or simply prefer to run the system longer than a lease time and rely on uplifted warranty service for the components.

However, certain server-class or other mission critical systems may be good lease candidates. Thorough planning is usually the best cure for this dilemma. Consider a blade server environment; you may be able to lease blades in a way that allows the business to continue without incident. But leasing a general purpose file and print server for your field office with no IT staff complicates your administrative overhead.

#8: Identify the opt-out costs and procedures

Be sure there is a clear process to end the lease(s) early. There are usually penalties to ending early, and if you're replacing the opt-out system with another leased system, your costs will increase. However, situations arise where a lease needs to be terminated early. Have a concise procedure that details the following information:

Financial implications. Be aware of any fees, penalties, or other charges associated with early termination.
Technology implications. Update any tracking system with the equipment information as being terminated early.
Payment coordination. Ensure that the early terminated lease does not continue to be paid outside of any early termination fees.

#9: Be familiar with lease T&Cs

Terms and conditions (T&Cs) are never a pleasant experience to review, especially when issues or conflicts arise in your own policies. Many times, unimportant conflicting T&Cs are simply ignored for ease of advancement of business, but it's important to review them and apply them to your lease policy, technology policies, and end-of-life cycle policies.

Best practice

Be sure to have your finance department (and possibly your legal department) review the T&Cs of any lease agreement for your technology needs.

#10: Is end of lease purchasing a good idea?

Simply put, not usually. The end price of purchasing a system after the lease plus the costs over the term of the lease usually exceeds the original purchase price. That by itself is not too surprising, but considering that technology prices go down over time, it makes the end cost even more expensive.

Consider short extensions, if necessary, and possibly aftermarket systems of the same spec to replace the leased system that is soon to be complete. Believe it or not, even eBay is a good place for systems of age--and the prices there will usually be less than your purchase price at the end of the lease. This can be a more affordable way to buy time to allow your IT staff to perform a proper migration or maintain an archive or development system. Depending on your reasons for retaining a system at the end of the lease, there are various options for keeping a comparable system.

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