Making Your Information Technology Investment Count

Secured Lender, The, Mar/Apr 2006 by Forlenza, Riccardo

Despite the economic body blows of Hurricanes Katrina and Rita, CIOs polled by Deutsche Bank in the fall were more bullish about investing in IT than they were in August. Overall, CIOs predicted IT budgets will grow nine percent over the next year. Nearly half of those polled expect to increase spending on computer hardware, up over six percent from August responses.

CIOs feel confident that they're going to spend, but do they know how to spend effectively? Will their IT investments be strategic, and optimally aligned to their business goals and objectives, or will they be tactical - driven (or thwarted) by cash-flow constraints, management shifts, or even office politics?

In a recent study of the PC market, Robert Frances Group analyst Adam Braunstein suggests a PC refresh rate of approximately three years "to maximize returns on the total cost of ownership (TCO)."1 However, Mr. Braunstein continues, "Corporations often fail to stick to their plans, and end up keeping systems for a longer period, due largely to organizational changes and/or improperly weighted financial pressures." Failing to replace PCs at the right time can result in significant drawbacks, including more user downtime, system incompatibilities, increased security risks and lower productivity.

And as we move into 2006, the market intelligence firm IDC stated, "The economic climate will be characterized by rising interest rates, modest macroeconomic expectations, and relatively higher secondary market values for three- and four-year-old IT equipment."2

The leasing imperative

One way to overcome the issues associated with refreshing PC technology on a timely basis and addressing the changing economic climate is not to purchase these assets outright, but to lease them. Leasing can often act as a management strategy to facilitate the systematic replacement of equipment with increasingly short lives so your business can remain competitive. It can also aid companies in complying with tightening equipment disposal requirements and expanding end-user internal IT requirements, such as those associated with Sarbanes-Oxley.

With technology leasing approaching its 50th anniversary, innovative approaches to acquiring new technology continue to drive demand for leasing. Indeed, according to Meta Group, leasing is "no longer an intellectual exercise, but a business imperative."3

Regardless of an organization's size, the initial expense associated with the acquisition of IT hardware, software, and services is often the determining factor in whether and when it can acquire the new technology necessary to sustain business growth and improve productivity. According to IDC, "Leasing makes it possible for companies to acquire up-to-date equipment while preserving cash and credit lines for more strategic business uses such as facilities expansion, increased research and development, sales force expansion, or receivables financing."4

Rising costs in the airline industry forced Malaysia Airlines, one of Asia's largest national airline carriers, to undergo a major technology upgrade to improve business performance. But the cost associated with such an overhaul, along with how it would dispose of the existing technology, were daunting propositions. To alleviate its concerns, Malaysia Airlines was able to take advantage of a fair market value lease, which provided the airline with predictable monthly payments, and the ability to upgrade the technology. Plus, the leasing company would manage the disposal of its old equipment. The company now has the ability to leverage technology to improve work process efficiency without placing undue burdens on its cash flow.

IDC estimates that "approximately 20 percent of commercially deployed PCs and laptops in the United States are leased or financed."5

To lease or to buy

If you're thinking about whether to buy or lease, consider more than just the sticker price. Other significant costs include the price of any necessary systems integration, consulting fees, deployment, image management, equipment maintenance/warranty, training, software upgrades/ patching and hardware removal. As a general rule, systems that support applications with heavy performance and security requirements are good candidates for leasing.

When analyzing the purchase-versus-lease decision, the benefits of leasing often outweigh the risks of ownership. The costs of owning technology can add up quickly, and savings realized through leasing are often substantial.

In addition to efficiently managing technology obsolescence, leasing can also help "minimize capital investment in infrastructure assets, and comply with expanding environmental disposal requirements," according to IDC.6

Choosing a lessor

Once you have decided to lease, the first step is selecting an IT lessor that can most effectively respond to your needs. You can choose from a variety of different organizations, including banks, financing groups within technology companies, independent leasing companies, and investment bankers or independent brokers. Choose a lessor that provides: