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Is Leasing Really Worth It?
llamaluvr asks: "As I understand it, there are some financial benefits for businesses leasing hardware equipment. Does anybody know what exactly those are, and how much they really help? Do they really outweigh the additional costs of replacing, repackaging, and returning old hardware? How do the size of the business and the computing environment affect these benefits? Additionally, what is the best balance between leasing and purchasing equipment -- would leasing desktops and laptops, but purchasing monitors be best, or should one just lease everything?"
"A little bit of background: I work in the IT Operations department for a BU of a Fortune 100 company, and we lease practically everything right now. We have 4 full-time employees for about 800 workstations, and, while we seem to have enough manpower for managing projects and tickets, we have a tough time getting to returning the equipment, so a lot of it is already late. Complicating this is that many of these PCs are in a harsh industrial environment, and often have at least one failing part, which then costs us a fraction of the entire workstation (for example: a busted floppy might cost us $150 or more, unless we test the PC and replace the part, of course). Corporate has been more attentive to this drain on our time and money lately, and they have talked of outsourcing this process, but in the meantime, we're stuck with it. BTW, we lease IBM equipment through ePlus."
If it was a server, I think a major factor would be how far in advance could you get your boss (if you have one) to buy replacement servers so that you can start migrating the services to the new system. A lot of times, server and service migrations take longer than expected and so you might wind up having buy the server outright at the end of the lease because you aren't ready to migrate yet. Its not like leasing a car (which I do) where you can just take your stuff out, put it in your garage and then go swap cars.
i am not for sure be i believe you can write it off as an expense rather then an asset when you lease. ask an accountant...
For starters: I assume that you're in the US, but could imagine that some of the tax laws, which apart from keeping your liquidity fluid, but for a price, is about the only fathomable reason why you would want to lease in the first place, differ from state to state.
If it's a matter of keeping your gear in top notch condition and fixed 30 minutes after failure you might be better advised with a support contract including a service level agreement.
Cutting to the cheese: You are better advised to ask your CPA, or if you insist on getting fancy, your tax attourney.
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As I understand it, sin(x) can have values between positive 1 and negative 1. Is my x going to be positive or negative?
A little bit of background: I have a value of x somewhere between 0 and pi.
Snark aside, this really isn't an issue where you should be guided by ancedotal evidence posted to Slashdot. You're working for a Fortune 100 company, for crying out loud--you need a carefully-planned methodology, not a bunch of yammering 'experts' giving you off-the-cuff advice on a very complex problem...
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If you lease, you pay less now. If you purchase, you potentially pay less later. However, there are complications on your taxes for either (depreciation vs. amortization, lease payment costs, etc.) In General, I would expect purchasing to be a better deal unless you are expecting to have high turnover of machines and volatility of business (i.e. contract job only requiring machines for 12 months = definitely lease!)
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just buy everything and replace it every couple of years. machines are cheap enough so that leasing is not really any more cost beneficial.
expensive equipment should be leased. everything else should be bought with long warranties+onsite service.
I'm not an expert in this but as with any sort of leasing you will have to hand out the additional buck upfront but you can save a lot of overheads. Will it be more expensive? yes ofcourse... but then you can save on huge investments right away.
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Think of the hassel that you have to deal with when you are getting rid of lots of computers.
Like just about every business decision, the answer is a solid "It depends".
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When businesses lease equipment, they write-off the whole amount in that tax year. If they purchase equipment, they have to depreciate it over a number of years. With the large amount of IT equipment, keeping track of what was purchased when, and how much has been depreciated is a CPA's nightmare. Thus, the equipment is leased, even if it ends up costing more money to get lesser capable equipment.
Basically, it's because the tax law depreciates most of that hardware over something like 7 years. So in the first year you'll get to write off something like 20% of the value.
With a lease you expense 100% of the amount you pay as soon as you pay it.
This is why a very common option is lease-to-buy with a very cheap buy option at the end of some number of years. This is essentially an apparently legal scam to allow you to write it all off. (It's legal because the leasor really does still own it until the end)
The next-best option is to sell the hardware the day you stop using it, because then you immediately get to write off the difference between the amount you've already devalued it and the amount you actually got for it. Because computers aren't worth anything much sooner than 7 years, you always get a tax benefit when you sell a computer that just became obsolete.
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I can't say that I'd ever consider leasing unless it turned out to be MUCH cheaper. Old hardware can always be reused and/or sold off for temporary budget increases. Not to mention that high-wear equipment like laptops tend to break, thus requiring you to pay for the damage.
That being said, it does have certain political advantages. Having your equipment on lease ensures that the company *must* allow you to upgrade the equipment or go without.
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- Depending on the lease terms, you may simply get replacement equipment once your current is obsolete (e.g. workstation is a couple revs out of date).
- Tax benefits can be dramatic. Speak to your tax accountant / lawyer.
- Depreciation of assets can look very bad on a publicly traded company's books. To avoid this, many public companies lease as much as they can.
- Often leasing means consolidation. In this day of CDW and the like, that's not as big a benefit, but it used to be huge.
There are probably other advantages I'm not thinking of. Of course, the down side is that you can't just treat the hardware as your own. Your developers (if you have any) will be especially displeased to hear that they're not allowed to just slap in some RAM or a hard-drive they had lying around.Argh, too late! Anywho, I've actually wondered this myself often. I've noticed I'm always coveting the latest and greatest laptops, but I dont get them because I already spent allot of money on the current one, and its still good (so, basically, I cant justify the purchase). However, if I were to lease, I can just change laptops after the lease is over. The thing is, I really dont know excatly what happens if I break it, through negligence or accident, or how much it would cost for that matter.
...is your accountant. The advantages of leasing versus buying exist in the world of tax writeoffs and accounting rules. Asking Slashdotters about that stuff is as dangerous as asking them for legal advice.
Techies generally have no clue when it comes to things like this...myself included. The best policy is to simply specify the equipment you need and then let the beancounters figure out how to pay for it. That's why they exist. It's not your job to project revenue, track depreciation of assets, understand the tax code, etc, etc.
Taxes and tying up your current money have a lot to do with leasing. If you lease something, you pay less now and get to deduct it all. If you buy it, you have to pay more now and take several years to deduct it. Often longer than the useful life of the hardware. That means you have to keep a bunch of machines around that are worthless, but if you were to get rid of them or give them to charity it would cost a large amount in taxes.
I've slowly been learning that a lot of really bizarre and stupid business practices are 100% driven by the IRS.
Leasing effectively moves the value of the leased item out of the Fixed Assets of the balance sheet, reducing the overall fixed assets. This has the result of improving the ratio of asset turnover, a prime measure of business performance. It also has an effect on the operating statement, as it becomes a straight cost. It is a much more transparent way to deal with something that will probably get cycled out within 3 years. As others have mentioned, your tax benefit mileage may vary.
One area where leasing stuff is useful is during lawsuits.
In a smaller company if you lease your office, the furniture, the computer hardware, basically no real assets, when you get sued (which seems to be a when not if thing, in the US market) and if you lose, you have nothing to give up.
But if you want to own the stuff you lease, that's easy too. Just need a second company, company B. Company A leases the stuff from Company B. You own and run company C, which owns and runs companys A and B. This is only a small part of a giant company chain that can exist for several reasons.
One thing I have heard from the hosting group is that when a group buys a server, it's difficult to migrate off of it once the hardware is obsolete. You can't really sell it easily, and who would you sell it to? It still runs, so how do you get the business owner to pony up for newer hardware? Before you know it you're heating the server cage with a half dozen Apollo DN3000's.
When the client is paying hardware rent every month it's easier to say "good news, for the same rent you can get the latest hardware".
Leasing is 48% better than outright purchase.
Except in New Jersey, Pennsylvania and Ohio, where the difference is only 42%.
We seem to be losing money due to an unbalanced lease agreement. I just wanted to ask you, is that bad?
The big reasons to lease
a: Flexibility. But this is often overridden by the lease turms
b: Taxes. Because a lease is an expense, you can write off the full value instead of doing depreciation, which is painfully slow for computers.
OTOH, if you cycle through your computers fairly quickly and resel them, you can then write off the part that wasn't depreciated, so the tax hit for buying doesn't get to be so bad. This is the trick car rental places use, and why they sell their fleets so quickly.
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Remember that leased equipment can't be donated to schools after its useful life has expired, which is a common avenue for corporations to write-off fairly large amounts (as if a broken 14" CRT is worth $200 to an elementary school).
Did you take intro economics? or at least pay attention to elementary school word problems?
It's really easy. Take the net cost of buying a machine, divide by expected lifespan. Take net cost of leasing a machine [include shipping, and the such], divide by lease time. Compare cost per time. Pick the lower value.
Though that assumes that large companies like Fortune 100 sorts are actually make logical decisions. More likely than not, an uppity up in your company plays golf with an uppity up in the leasing company.
Leasing equipment vs. Buying equipment depends on how and how long you are going to use the equipment. Think about how people buy/lease cars with this. If you are going to keep a car for 6 months/3years you might as well lease. If you are going to keep it until it has 225k miles on it and the headgasket is going, buy the thing. Same with PCs. If you want to keep your PCs always at the latest and greatest, lease. But for those you are going to keep and upgrade (thin clients and low power pcs qualify here). Buy the things. You get into accounting problems with depreciation, but you can keep the desktops past their 3 year derpeciation cycle if they will still do their job. For example, we have P1-133s here that are used as thin clients on a dual P3-800 terminal server that is shared amoung several people. Cost to replace with new machines for everyone (or lease) would cost several $k and wouldn't provide any improvement over what they do now. However, for those of us in engineering that need higher power computers between CAD programs and other types need relatively recent computers (2ghz+) and can't use thin clients. Two options for that is to either buy new machines every couple of years or lease. We get new machines however, they are then passed down the line to people who don't need new ones (thus saving money).
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For easy management why not try out a terminal server system? The clients can leased easily, and the ease of managment should free up a bit of your guys time. your boss will like it because of the effect on the bottom line.
You can also lease the terminal clents.
They are simple devices, very little to go wrong and drop-in replacement is another advantage.
I'm working on a combo grid/shared memory/terminal server system atm to try and create a distributed destop TS system for our particular setup here.
Terminal servers would be a good option to check out.
--cros13
leasing desktop are waste of time unless you want to be in a continual upgrade cycle rent server that change a lot a blackberry server or even email rent thing where the software upgrade cycle matches the hardware one
Most companies have two budgets: Capital and Expense.
Capital budgets are spent on capital goods, usually, like computer hardware, employees, buildings, etc. Things the company plans to keep around.
Expense budgets are used for such things as paying the electric bills, water, coffee, etc. The thing is, consultants also fall under this category (as opposed to a full/part time employee which are capital) as well as server leases (as opposed to purchases which are capital).
So in some cases a company may have a lot of extra money in the expense budget, but not the capital budget. Because said company is also irrational, there is no way to transfer some of the expense budget to capital in order to pay for needed hardware. This, therefore, requires the VP of said corporation to lease the hardware with his expense budget.
I see that as waste, just like leasing. So what if you get a $1000 computer for $50 a month, at the end of the month you paid for half the system. I know it sounds good that at the end of the year you could get new computers, but you are still paying! You are always paying.
I worked at a company that had nothing but PII 400's. They worked perfectly fast for all buisness functions. I could use the database, word, excel, internet. I could have 10 windows open and it worked.
I think computers are being sold like snake's oil elixer, as a cure to everything. Have problems, upgrade!
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One benefit is less paperwork I'd think. If a company 'owns' it, you have to deal with depreciating the equipment over IRS acceptable periods. I've got a computer still on a depreciation scale despite not having a single original component. A non-profit company I work with insists on keeping, and tagging replaced/repaired components as proof of work done on a PC. The extra overhead/paperwork costs money.
Besides, business is about making money, and cash flow. Assets may be cheaper than leased equipment from one perspective, but consider that extra money 'now' has better payoff in most businesses than the cost saving that will take the life of the purchase to recover.
This is almost certainly a false economy, btw - the amount of productivity lost by having crappy hardware must be massive, but it's hard to quantify compared to, say, the cost of 500 brand new, top of the line machines.
So, I would say, buying your own will be cheaper in the short term.. but it could end up biting you later on in a way which is very hard to measure.
If you don't need lots of computing power, ie.. just for office stuff I would probably say that with todays prices I would buy. I work at a big biotech, and have a brand new 3ghz pc with win2k, but I really dont need anything more than a P-133 and win95 for most of the stuff that I do *at my desk that is* .
If you need to stay ahead of the curve on speed, like if you do imaging, then I would lease.
You say that you the machines are in a heavy industrial area, so you would probably need to calculate failure rate along with the cost of fixing the machine (time, parts, etc.)
All in all I would say buying is better, but then again, leasing might look better on the books, and we all know how important that is these days.
They would say, better take a constant, slight hit every quarter than to possibly tank stock prices because of a huge equipment purchase.
but what do i know. The only 2 reasons I don't use a NeXT for every day stuff is ordering on the web and mp3s. Other than that a nice NeXTSTATION is all anyone really needs.
Leasing something means that you can count the lease price against revenues during taxes. You only have one number to deal with.
Buying means depreciating the cost of the item usually over a number of years. So that computer you bought and used for just one year may stay on the books for a few more years. Also, it's still an asset that must be accounted for. If you liquidate the computer later and you've depreciated it, you have to claim any money you received as income.
Leasing is far more expensive than purchasing. There may be some support reasons as to how a leased computer gets replaced, but that is more a matter of support than lease vs buy. Leasing also tends to come in just a few packages so computers are more interchangeable.
Generally for the managers needing a computer, it's easier to get a lease approved than a purchase because money is put off until next year. Also, it's easier for a manager to get a lease approved than to work out accounting details of software.
There are certain threshholds that dictate whether you can write something off entirely or have to depreciate it. Once you cross those, most companies will lease.
It's much the same reasons that a company will hire a contractor for 20 years instead of an employee.
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I suggest that if you want the whole picture on this is that you talk to the finance and accounting departments in you company. What my seem like a straight forward decision on your departments part may have a negative impact on the company as a whole.
From a managerial accounting perspective it's more profitable if you have more fixed costs than variable. So if you already know what your fixed costs are (and you will as you know what you're paying monthly on the leased hardware) you can increase your degree of operating leverage.
Once you break even the profits are much larger than if the equipment was purchased directly than manipulated and expensed quartly/monthyl/etc.
A lot of company's lease testing enviroments so they can just swap them out once testing is done. That's what the company's I have worked for did. 4 floors worth of datacenters and nearly 75% of all the AIX, Sun, and IBM machines were leased.
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The reasons for leasing are twofold.
As everyone here has said it's due to taxes. I also believe (but I'm not an accountant) but the leases don't appear as capitol purchases.
Secondly equipment can be kept somewhat up to date by replacing old with new. We all now technology changes at a rapid pace, and this allows the company to keep up.
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In a perfectly fluid business environment, it would cost approximately the same over the long run to buy or lease.
Theoretically, leasing equipment (of any type) means less hours are devoted to non-core business issues, and it allows you to compute your costs more precisely. The tax advantage you referred to is that the entire cost of leasing is fully deductible every year, but a capital expenditure requires you to depreciate it for several years. Again, theoretically, those numbers should wind up being pretty close.
But, the devil is in the details. What works for one business may not work for another. You need to actually crunch the numbers to make sure.
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This is actually an accounting and cashflow issue.
Essentially it comes down to the rate of return of the equipment vis-a-vis the companies cost of capital.
If the return on the equipment is greater than the cost of capital it makes sense to lease. Now within this calculation you must take into account the cost of maintaining the equipment. That is subtraced from the rate of return along with anything else you deem important.
I am simplifying here as I don't want to write a book but it comes down to this:
It is irrational to purchase equipment with money that could earn a greater return elsewhere. It is irrational to use cash to purchase equipment if you can borrow at a lower rate than the plant produces.
You also don't have depreciation which can look bad on the books. Ask your accountant concerning GAAP and IAAP.
Two scenarios in which I'd lease something:
1. Buying something very expensive but wanting to pay over time. In this case, leasing is just like a loan with a package of services. You can value both those and see if the lease is worth while or not.
2. When a capital good is not 100% fiscally deductible. E.g. in Belgium, a car is not fully deductible. When leasing a car, the total cost is somewhat higher but is totally deductible (since the lease is a service).
In some businesses leasing is also used as a way of turning capital goods into money, but this is again just a form of loan. A mortgage on the goods. Governments enjoy doing this before elections so they can boost their "income".
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Damn, I leased this post when it was new and now it's old. Likewise with leased equipment I guess.
I am not an accountant, but I am a small business owner so I have some idea about this stuff.
The advantages of leasing are primarily:
1. cash flow benefits
2. tax benefits
One of the primary things that small businesses (well, all businesses, but especially small businesses) have to manage is their cash on hand and their cash flow (when cash shows up, when it leaves) If I have to buy a $3000 server and I pay cash then I need to have $3000 cash right now and that cash goes away. If I lease that server, then I might have monthly payments of $50/month. Over the life of using the equipment I pay more, but at the outset I don't have to have all of that cash around.
Also, when you pay money to buy something of value, for tax purposes you don't take all of that cost off your profit immediately (you pay taxes on profits, not gross income) You have to depreciate it out over a period of time which is supposed to represent the useful life of the equipment. This means that while you might have paid the money out (in cash) you can't claim that they money has all gone away yet for tax purposes. Not fun!
When you lease an item the leasing company owns that capital expenditure and so they depreciate the item. Your monthly payments can be treated as expenses so they come off your taxable profits immediately. Plus you don't have to account for the depreciation, etc.
In my business most of my costs are salaries for my people, not workstations for them to use so workstation costs are a small fraction of my expenses. It makes sense just to buy a decent workstation outright rather than haggle with the lease people and try to return or buy out the eqipment later on. Other businesses will operate differently.
My $.02
leasing equipment is expensive and ends up costing more. sometimes companies don't have a choice though.
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In some cases, you can deduct the entire lease amount in the first year -- which is a big tax savings, especially since you can include things like MS Office if purchased with the hardware.
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As a small business owner/operator, I won't ever lease.
I refuse to pay 20 to 30% more for hardware that is completely useless when I'm still paying for it.
I prefer to accumulate assets for my company (even though they depreciate, like any asset) rather than debts, and long term contracts for leases.
If I were a larger company, I'd think slightly differently of course. If I needed 15 computers right now, a lease would be an option - but I'd still only do it if the rate was better than a bank loan -- and that's rare.
As for actual costs, and actual writeoffs it depends on your local laws. Here if I purchase a whole computer, say $1500, I can write off 30% in the first year for depreciation, totalling $450. If I lease one I can write off 100% of the payments, if I get a "deal" and am only paying 20% on a lease, my payments are roughly $50/mo, totalling $600/year writeoff.
There is a writeoff advantage, but does it outweigh the difference in cash paid for the computer? Probably not. But again, too many variables.
It's just Crap.
It all comes down to how you have to do the depreciation.
With leasing, you just treat it as an expense, just like say, buying copier paper.
With purchasing and depreciating, it's like any other asset. The IRS has rules as to how fast you can depreciate it, etc, etc.
Renting is more expensive than leasing because you can halt the contract with short notice.
Buying means spending more money to start with.
Borrowing money to buy instead of leasing would be the obvious choice IF the lender knows that you will succeed. If there is doubt about whether you will succeed with your new company, it will be very expensive to borrow the money to buy the stuff, and then leasing is cheaper.
That's it.
Lars Dybdahl.
For a Fortune 100 company, the biggest reason to do anything is the public markets. How things look on an annual/quarterly/daily basis is important, because the secondary markets (stock markets) will judge your company based upon how THEIR customers judge them. So if it's quarterly numbers, then any procedure that helps those quarterlies look "better" will be adopted.
Investors HATE RISK. They hate not knowing what's going to happen in the future, so any steps that a company uses to reduce risk is rewarded. Any steps taken to off-load that risk onto someone else is considered good management. Leasing equipment is a way to off set the risk of obsolescence, critical security hole, exploding hard drives, etc. to someone else.
Leasing equipment means having an "operational" expense, that hits the books on a predictable basis. While the dollar costs might be more than outright purchasing, when you consider the premium associated with purchasing, leasing makes more sense. Again those premiums include: time value of money, software/hardware, upgrades, etc. Being able to say "computer operation costs are X for the next 5 years" means a lot when you're planning the budgets. Not knowing if you'll need to take down all your workstations, because the OS changed. Or if all or 386 chipsets become too old. These are things that cause surprises, and the markets never reward surprises.
I doubt the person wants to know in order to make a decision, more to understand why the business is leasing machines. I would suggest he takes the time to clean up his resume. More and more businesses are outsourcing EVERYTHING, including the IT maintenance role.
Leasing, as a business decision, is a little more complicated than hot grits and beowulf clusters. The basic Total Cost of Ownership/timing questions that you seem to be focused on are only a portion of the reasons that drive most people to Leasing, and they're usually the smallest pieces. Usually, it's more a question of tax liability and risk. These are both topics that I could go on at length about, but I'd probably be mostly wrong, since I'm not a tax accountant.
The one thing I'll point out is that while you're bearing IBM's profit margin in your costs, you're at least seeing those costs, and you can articulate them to your management. If the costs were all baked into your baseline funding, then it would be harder to tell your management what the reduction in service is if they cut your budget. The ability to blame the vendor is an important factor in most business decisions, and shouldn't be ignored.
If you aren't billing clients for the cost, I would recommend going with less bleeding edge equipment which can be purchased outright. Bleeding edge stuff tends to get leased because it's so expensive, and because those who get the stuff expect to stay leading edge by leasing newer stuff in a year or two.
BUT if you buy outright, always have a trickle of new equipment coming in that replaces the really old ratty stuff, else you end up with too much dependence on legacy equipment, which can be an even worse trap.
Bottom line -- only lease if you can bill someone directly for it. This often is the case because clients often won't pay to use equipment you own.
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This is not something you should be doing, especially if it is for more than just your site. I would recommend speaking with a procurement firm* which may help you in analyzing the costs you have. The number of variables going into this is going to be so large that you probably may know a couple (or a dozen) but miss out on a lot more.
The easy answer: do {leasing, buy your own} if you can afford it, as it reduces a lot of headaches as long as your {service provider, in house staff} is dependable.
* Such as ICG Commerce. Disclaimer: A friend works for them.
Small potatoes make the steak look bigger.
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Most companies that do lease old equipment already have most of their income coming from selling these products. Leasing hardware is just another channel for their income.
Bear in mind that I am not in IT, I am a software developer, and I have never leased equipment. So take my advice with a grain of salt. Having said that, I honestly think there is no cut and dried answer to your question.
To lease or not to lease really depends on your situation. I know, that sounds like a lame cop-out, but it's true. In your case, your company has come to see the dark side of leasing, namely high costs associated with the return of the equipment, especially if it has anything beyond normal "wear and tear", whatever that really means.
However, if I ever decide to become an independant software developer, I might seriously consider leasing several pieces of equipment needed to do my job, since I would not have a huge capital outlay up front, I can manage the monthly expenses, and plan for the payments as they come due, even so far as making some of those lease payments with the income stream from my product(s).
So in that situation, leasing would be very beneficial to my cash flow, without seriously damaging my operating capital, which I would need for a long time during my startup phase.
This idea made no sense to me back in the days when I worked for a 'Big Six' accounting firm - you know, when dinosaurs roamed the earth?
However, at the time, this organization was legally a limited liability partnership. As such, any assets were problematic for a couple of reasons.
1. Capital expenditures must be depreciated over a multiple year cycle - you may pay $10K for that box, but you have to treat the box as if it's worth $10K this year, $6K next year, $3K the next, etc. We all know that computers depreciate more rapidly than cars, and there's no way that you could recoup 60% of the purchase price 12 months after purchase of a box. Expenses, however, are written off as they happen. Spend $10K on a lease this year, and you write off $10K THIS year.
2. You also show no value for that asset because it's not yours. This matters when the partners are concerned that a lawsuit loss might cause assets to be liquidated and LLCs like to have as few assets as possible. The less there is, the less that can be taken - or so the thinking goes.
So, it may cost more actual dollars the way you're doing it, but I bet that the accountants and lawyers have it figured out so that it's really in the best interest of your organization to 'waste' that money.
Hope this helps!
Regards,
Anomaly
But Herr Heisenberg, how does the electron know when I'm looking?
Leasing assumes you can't find a use for obsolete kit. Plus it's a right royal pain in the arse to administer.
Well, if you design your systems correctly your kit will still be in use long after it has depreciated.
That means *don't* put the power on the desktop where it will be obsolete in 18 months. It also means make use of *all* of your computing power. It isn't difficult, there's loads of (free) software out there to help. e.g. http://gridengine.sunsource.net/ . Oh oh oh. Look! It has that "Grid" buzzword! Don't worry it's just a load balancing network queue system, been around for decades.
You can save a *bundle* by designing your network of servers & services properly.
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where I work, we buy the screens. They don't go obsolete nearly as fast and cost a lot to ship.
The PCs are a different story, we lease those and we lease the servers. Comparing a purchase to a lease isn't really fair. Leasing a PC costs a little more but you have other benefits like upgrade costs and tax benefits to more than offset the costs.
Companies have legions of accountants to find out what is more profit friendly... leasing works for some and not for others based on a lot of variables.
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My experience has been that most items are bought out at the end of the lease, so you should figure that price in for the end of lease.
Also, some leasing agencies do not break out individual items for buy out. It's an all or nothing deal.
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Hi - in mid-1988 I worked for a large software company near Torrance, California that was close to releasing a new version of their flagship product. Early on, someone had estimated that the final testing cycle for that new version would be about three months, so they decided to lease (not buy) a wide range of computer equipment for maybe 50 to 100 temporary employees brought in for the final product testing. Well, the testing and final debugging actually ended up taking about 15 months (instead of three) and the net result was that the company ended up spending about three times on leasing that equipment than had they purchased it all and simply put it into a dumpster at the end. As I recall they were paying almost $100 a month for each dot matrix printer, and maybe $300 a month per laser printer. And yes, the company went out of business (actually was acquired) not long after this fiasco.
TWR
My company traditionally purchased their own equipment, but at one point was offered a "killer" deal. We were a major software company which was recently taken over (ahem). The leasing deal looked great on paper (i.e. the Bean Counters LOVED it). In practice, it sucked wind. Not the pleasant kind I find blowing by my window as I type this, but rather more of the offensive sewage variety. It created a maintenance nightmare, added overhead that required more staffing to deal with returns, getting off-lease equipment returned from people in the field, which required new leased equipment, a rebuild, transfer of files, etc. despite the fact that the machines were plenty good enough to handle the current software load for another year. By the time the dust settled, my department vowed never to lease anything so transient as user desktops/laptops. Some large cost items which made sense and didn't require extra staff, tracking, and hidden work requirements were left on-lease. All-in-all, the CPAs can figure out how to get you some bang for the buck either way via depreciation, tax breaks, and what not. Don't be sold on leasing because someone tells you it's a better deal financially. When we ran the numbers after all was said and done, it ended up costing us much more in PeoplePower and requirements to make it all work - and even then it still sucked. Own your own. Accept no substitute.
Knowledge is of two kinds. We know a subject ourselves, or we know where we can find information upon it. -Samuel Johns
We have some Xerox plotters that are constantly down, thus slowing down production since they all seem to go down together. If we had bought them instead of leasing our maintenance expenses would be through the roof. We shall be switching companies after the contract expires.
Wishing I was a millionaire since 1969.
- You aren't stuck with old hardware on the floor. (Kit for you limies)
- You can PLAN you lease replacement and hardware ordering months in advance.
- The cost is the same as buying for a three year server lease. After three years no one wants that old (slow) pentium any more and recycling it into a lab gives you an apples to oranges test environment compared to production.
- After 3 years you are approaching MTBF for server components and the cost savings of avoiding downtime could probably buy your server multiple times over.
- You can plan your staff's projects and time accordingly. I can't over emphasize how much of an advantage being able to plan into the future is. :)
- You can touch base with your customers (in advance) to see what their plans for the application(s) hosted on this server are. It gives you an excuse to meet with your customers and discuss their direction. This can be good PR and shows that you want to add value to their organization's product/deliverables. You aren't dictating to them, you are working to provide a good value to the customer, etc., blah, blah...
- You always get MORE POWER from new hardware and usually for a lower cost. - If older applications don't need the power of new hardware or are being phased out then moving them to VMWARE virtual machines may be a good idea (which can lower your costs).
I'm sure I will think of some more in a few minutes but that is what I can get in 5 minutes.
"Be kind, for everyone you meet is facing a great battle." - Philo of Alexandria -
I worked at a small company that ran on Macs. Whenever we needed a new one, we would add it to this lease. We only had about 15 machines purchased over the course of about 4 years. Nothing top of the line, but adaquate for Photoshop and Illustrator.
When I left, the leasing payments were nearly $1,500 a month, which works out to almost the cost of a new machine.
The only reason (especialy listed) companies like this is for cashflow and not having it on the books.
In one year you can choose to spend, say, 1M on IT. Or you can spend 250K leasing it every year. That leaves 750K looking good on the books and can be used to invest in other money making opportunities.
7
Does that answer your question? I didn't think so. Try asking a reasonable question next time.
Does anybody know what exactly those are, and how much they really help? Do they really outweigh the additional costs of replacing, repackaging, and returning old hardware? How do the size of the business and the computing environment affect these benefits? Additionally, what is the best balance between leasing and purchasing equipment -- would leasing desktops and laptops, but purchasing monitors be best, or should one just lease everything?
Maybe. Maybe. Maybe. Maybe.
From my experience companies use the same IT equipment with minimal upgrades for x amount of years before tossing them in the boneyard:
...so for example if a phone system is going to cost $60k to buy or $20k to lease for 4 years well then consider leasing.
Workstations: 3 years
Monitors: 4 years
Laptops: 2 years
Printers: 4 years
Servers: 4 years
Phone system: 4 years
It's 5 or seven years that you take depreciation. a couple of years ago i bought some hardware. the tax man (H&R) said that to get the full dep i had to keep the stuff 5 (or seven) years. he said that if it was junk, i should put it in the basement until we were done depreciating it.
5 years is a long time for computer equipment. the only thing that i've had that still has high usefullness after 5 years is an HP laserjet 4000 printer and a viewsonic 20inch monitor. a fair amount is around because it still has *some* usefullness. but there's been an amazing amount of stuff that was junk before 5 years was up.
so, i can see the tax benefit for leasing (computer equipment).
eric
We setup a lease program with a local outfit, for our customers who wanted to lease their IBM PC's instead of buying them.
This is what the guy from the lease company told me:
A leasing company doesn't have a bank full of money, with which to purchase your equipment with. It is simple where the money comes from. It is a loan.
The "lease application" that you fill out, is a loan application for the bank the leasing company uses to finance your purchase. The "Lease initiation fee" is the banks required down payment for the loan they are giving the leasing company, plus a little profit.
So, the lease translates into a loan. Plus some profit for the leasing company. Net effect is that you will pay more for a lease, than a loan.
So why do people lease? The answer is in the fact that a lease and a loan appear in very different columns on a companies financials. Sometimes it is worth the extra cost, for a company to have fewer assets, in which case, the lease option is better.
We changed from buying to leasing hardware (desktops and servers) about three years ago. The primary reason we changed was to move the costs out of our capital equipment budget into the expense budget. We're not a huge business and prefer to reserve our limited capital for plant equipment.
..." yeah, we "sold" it to you for $20, including keyboard, monitor, mouse, and a Windows license.
On the other hand, I wanted to change to leasing anyway. I time-phased the replacement schedule, so we replace 1/3 of our desktops/notebooks every year. For desktops, everyone getting new hardware every three years not only gives us a fair chance at keeping hardware fairly capable of running new software, it also cuts down on user complaints -- "They get new computers; we have to use old stuff!" Everyone knows that there's a three year cycle and when your turn comes up, you get new kit. It does also help with the disposal problem: our society is so saturated with cheap PCs that most charities, schools, and non-profits don't want old stuff. I'm willing to sell (or give, depending,) obsolete stuff to new employees but that hasn't worked terribly well in the past. Too many folks want too much support -- "Can I put a wireless network card in this old computer? What can I do to make it run this game my son bought?" -- that sort of thing. A few employees try to take advantage -- "You sold me this computer and it won't
A downside is that for most leasing companies, you have to keep the original packaging material to ship the stuff back to them three years down the road. Never underestimate how much space all those boxes are going to use up, not to mention the time you'll spend trying to match PCs, monitors, laptops, etc. to their proper box.
For servers, it means we get new servers every three years, which means that I don't have to hugely overspec the thing when I buy it in the hopes it will prove useful more than three years down the road. It also means that it gets complicated if you decide a year later that you need more memory or additional processors. The leases won't end at the same time or you buy it and end up with a box of useless kit when you return the server. It also means that for better or for worse you're going to end up doing server replacements (and all that entails, time-wise,) every three years. We time-phased this, too, so not everything gets replaced at the same time.
We recently decided to go with five year leases on the servers. The rate of cycle-eating inflation with applications hasn't been too severe lately, so we think that even if it won't be top-of-the-line three or four years down the road, we can still find something it can do. For example, if the new one gets too slow running the database, maybe it could host a different application, or a set of aplications known to play well together when hosted on the same box.
On the whole, after three years (one full cycle,) of leasing, I prefer it over buying. I spend a lot less time worrying that I'm buying too little hardware for my needs down the road and we're saving capital for other uses. I don't worry about what to do with older equipment any more and I know that when the manufacturer's warranty runs out, the hardware goes away and is replaced by new stuff with new warranties. As a smaller organization with limited resources, our little group hasn't spent noticable time on hardware issues for the past three years and that's a good thing.
Rb
Leasing equipment is a losing proposition, in my experience. It's never worth what you save up front; like most "loan shark" style propositions, the savings seem obvious, but most of the costs are hidden. If it was cheaper to lease, computer dealers wouldn't be encouraging it.
Microsoft cheerleader, blue flag waving, you got a problem with that?
If you have a commitment to get some work done that will make you a profit, and you don't have the capital to buy the equipment, you can lease it.
love is just extroverted narcissism
there is a HUGE difference to some "regulated" industries such as power companies and I think Telecos. If you buy a server it like buying a factory. It cannot be charged back to the customer because you have residual value in the capitol. If you lease servers and server maintenence, it is just part of the cost of business, and they are allowed to roll it in to what they charge the customers (basically getting to write off the whole thing instead of just 10% depreciation per year or whatever)
You're in a business unit of a Fortune 100 company. You have accountants that can answer this question.
Every business is different -- ask a professional what is best for your business. That's what you pay them for...
-ch
For the lessee, the answer is clearly yes. For the lessor, the answer is clearly no.
If someone says he and his monkey have nothing to hide, they almost certainly do.
You can write off 100% of a lease in the year you sign for it, capital assets you buy need to be depreciated over 3+ years. It really depends on your companys cash and tax situation, and you're better off telling Accounting to figure out what needs to be done. If you're a small business, get a CPA, you can write off the cost of their opinion, and you'll come out way better on cash flow, profits, etc. First year I used a CPA, they got me $10k, and cost less than $1K.
ericr
I'm not a CPA, but I sleep with one. YMMV. IANAL. WTF? EIEIO
It was Judge Woodlock, in the US District Court for Massachusetts, with a gavel.
1. Lease (or buy)
2. ???
3. Profit
I agree that the solution to this involves spreadsheets rather than anecdotes. Figure out how much it would cost to maintain what you own if you bought it instead of leasing. Figure out the MTBF and cost of dealing with the F part for each item. Figure out how many man-hours it would take to prepare things to return from lease. Work to maximize efficiency in the numbers. The numbers are something that you (the original submitter) are you a uniquely good position to know and to examine.
People are missing the obvious. Companies lease because they don't want to pay a lot of cash up front. Why drop $1.2m on 1000 computers when they can lease them all for at $40k a month for three years? It's the same reason people finance their cars. And yes, leasing is financing. Don't be fooled by the accounting treatment. When you lease, you make a promise to pay X for Y months, and then give back an asset worth Z. X*Y+Z is the cost of the asset plus some interest. Companies have two main financing alternatives if they want to buy an asset. They can sell stock or issue debt. The problem is, those two actions show up on the balance sheet and weaken the company's financial picture. Leasing doesn't show up on the balance sheet (also called off-balance sheet debt) and they get a tax savings for whatever they buy, and interest rates are usually good (because it's a real asset), so leasing's become the third, and typically the best, alternative for acquiring a capital asset. -- Tristan Yates, author of IT Leader
Tristan Yates
we lease all of our hardware as well. leasing is a great option. with the three year term, its about time to upgrade the hardware when the lease deprecates creating a rotating hardware inventory. this allows us to take advantage of new hardware as it evolves. infrastructre is a perputal cost with either a purchase or lease, leasing keeps the cost down.
It depends on how the leasing agreement is set up.
Leasing could be a way to purchase a service, that is the maintenance and perhaps the replacement of the equipment if you don't want to do that yourself.
Leasing can also be pretty much the same thing as borrowing money for purchasing the equipment. If you cannot afford to buy the equipment, you could lease instead of borrowing money, which would make your balance sheet look better since there will be no loan. This is sometimes called "finacial leasing".
Under modern accounting standards (at least in the EU) leases that are essentially equivalent to a loan + purchase have to be reported as such in the financial statements.
A lease is pricey but perhaps you're getting more for your buck than just the gear. Is there maintenance above the usual warranty for purchased equipment? Do you get priority access to replacement gear if the stuff you've got goes bung? If so, then the lease price may quickly make up for what you'd pay for hardware support.
If you are having trouble returning the gear is it your fault for not writing down where everything went and when it is due back? It isn't hard to make a document saying something like:
Thinkpad, M/T 3849, S/N 2940, Accounting 2nd floor (James Robert), March 23 2006
Would this solve your main problem?
If you were to buy the gear what would this get you? You'd be able to do your own support and buy generic replacement parts. But don't fall into the trap of thinking you should do everything yourself, particularly if that's not your job. Perhaps if you brainstorm the pros and cons of each model as well as your best solutions to the problems, then you can give the bosses this information and let them decide whether they need to change things.
Another easy trap to fall into is whinging. Are you suggesting a solution and acknowledging its potential weak points but deciding it's on the whole better? If not, I suggest you return to the brainstorming stage before bothering the boss again.
We purchase our servers and PC/latops with services agreements. After 3 years we replace the servers and the desktops/laptops go until they die then we replace them also.
If something goes down (depending on what goes down) Someone comes there to repair it in 4 hours or next business day. No hardware repairs for us, no repacking and no sending back.
The biggest concern is managing users data. IMAP, and getting the users to properly manage their own data with provided tools is key. (replicating documents to home directories or just outright storing all data on home directories)
Leasing is beneficial from a tax perspective and an organizational perspective.
If you lease equipment you don't own it. You are borrowing it. This means that it is not considered an asset and it is not depreciated over a depreciation schedule (the schedule is not 7 years, it is changes, and can be as short as 2 or as long as you want). Not having assets is a good thing for most companies when the assets depreciate so fast they they are not worth keeping up with. Technology is generally seen as an asset that is hard to book.
Computers are also seen as a cost without an associated revenue, because the revenues that come from it are indirect (if you are offended, office supplies are also not associated with revenues). Leasing the company keeps it as an expense rather than an asset that was purchased which can make the books look cleaner and better.
Finally and most importantly for most small companies, leasing means that the cost is spread evenly over the same period of time as the use of the equipment. If you $20k in servers and PCs, you can financing it through a leasing company rather than paying $20k outright (from capital) or getting a loan from a bank for $20k (which is very difficult).
For a larger company, this is not the case as capex can be easily absorbed, and the main reason for doing it is isolating cost centers and keeping assets (which look like revenues) off the books unless they are actually resellable assets.
For a Fortune 100 company I would suggest you buy
your workstations at www.wal-mart.com and keep them
on average 3 years and then sell them or give them away to your employees (solves the hazzle of getting rid of computers). Running 5 year old computers usually does not make sense with todays wages. Time equals money. Harddisks last typically 5 years.
For servers stick out with IBM and ask for their best advice.
Greetings
Jim Oksvold
I work for a business unit within a Fortune 100 co and did an analysis of lease vs. buy some 6 years ago. We concluded that because 1) the depreciation cycle and 2) the rapidly changing notebook hardware we would lease notebooks and purchase the monitors, keyboards, and mice. Desktops would be leased on a 3-year cycle and notebooks on a 2-year.
;). You should be sure to include the cost of late / damaged units in your own analysis.
We have a lot of trouble getting units back on time as well, but that's not my department anymore
Another important point is that hardware isn't changing as fast as it was 6 years ago -- just how long will a current machine be usable to you now?
Others have already spoken more specifically about the tax & accounting benefits, so I won't repeat it here.
Renting is more expensive than leasing because you can halt the contract with short notice.
The difference between renting and leasing. Short version. A lease is a contract. Renting isn't. You can halt a contract if the terms of the contract permit it. (or don't prohibit it in some cases) If you rent without a lease, you can exit the arrangement at will. Because there is the option of leaving a renting-without-lease arrangement early, one would expect renting to be more expensive as the property owner is not assured of the cash flows.
Buying means spending more money to start with.
Usually but it depends on the terms of the sale. I can sell you something in small monthly installments if we agree to it.
Borrowing money to buy instead of leasing would be the obvious choice IF the lender knows that you will succeed. If there is doubt about whether you will succeed with your new company, it will be very expensive to borrow the money to buy the stuff, and then leasing is cheaper.
This usually is true but not always. Lenders never really "know" that you will succeed. That's why we have credit ratings and even those don't always help. Enron had a solid investment grade credit rating, right up until it went bust. Besides, while what you said may be true in general, in reality sometimes one can find really good deals. When leasing is more attractive is usually because it has tax advantages related to depreciation. It also can have cash flow advantages depending on the terms. Whether leasing is preferable to buying depends entirely on the terms of the deal. If someone wants to sell something at a steep discount, no buyer is going to take a lease just because the cost of capital is normally better with leasing.
The second constraint is that those doing the maintenance have no ties to you, which mean that they don't have to do anything effective. I've been in companies where "guaranteed support" from contracts really didn't exist. The contracts had too many get-out clauses and fine-print, exempting them from any kind of quality of service, even though we were paying through the nose for those extra guarantees.
The third problem is that you're likely to get refurbished equiptment with an unknown history and minimal to no quality control. Even if there were checks, though, reliability is an unknown. From electron migration to thermal damage on chips to hairline cracks in the motherboard - there are many faults that are hard to identify in any simple laboratory test, but which are exceedingly likely for older equiptment.
Security is a big issue, these days. You think a refurbished server or router is going to be running fully-patched, fully-tested environments? Chances are, even those who own the equiptment will have no idea of what is actually running. It is unlikely, but possible, that "logic bombs", root-kits and other hard-to-spot malware may be running on the device when you get it.
Buying a commercial off-the-shelf solution is not perfect and won't PROPERLY fix any of the above, but it's a better bet for anything that is mission-critical.
The "ideal" is to buy the component cards from the manufacturers, assemble & burn-in test in-house, and then deploy. Then, you have 100% control over the steps and actually can provide a higher level of assurance. True, it won't have any fancy warranties, but as downtime is the most expensive part of any IT operation, fancy warranties that companies rarely honor anyway are of little value.
The gratest fallacy in IT is to rely on stickers, labels and other scraps of paper. (a-la the certification issue discussed on Slashdot recently.) These things add nothing and frequently cost lots. What adds value is whether the hardware works and works well.
If you want the job done right, do it yourself. That has been true for hundreds of years, and if modern practices have changed things at all, they have made it all the more important to remember.
It's a small world and it smells funny; I'd buy another if it wasn't for the money; Take back what I paid (SoM)
I know most of us here probably don't do accounting, so here's the answer. Your accountants want you to lease. A lease payment is immediately deductible as a business expense in the year that it's taken. Buying a piece of equipment is different- the purchase must be depreciated over some number of years. What this means is that if I buy a $10,000 server, and it's depreciated over the course of 3 years, I get to take a $3,333.33 deduction this year, next year, and the year after. That also means that I have $6,666.67 that I'll be taxed on this year. But that also means that, even if I make a profit next year, $3,333.33 of it won't be taxed. Note that if I have a profit this year and a loss next year, as a business, I can get a refund.
If you build a business slowly over a number of years, you always have enough depreciable assets from prior years that the hit isn't so bad on an ongoing basis. Even so, if there's a choice between buying a $10,000 server that'll last 3 years, or just leasing it for $3,333.33 per year, I won't have a big tax hit up front.
Anyway, I'm not a CPA or an attorney, so this isn't official financial or legal advice. I pay plenty of money for those types of advice, you will, too.
Do you have ESP?
Here's the leasing rule of thumb that an accounting teacher at my college once gave me:
Every product you buy has an estimated replacement lifespan. Computers, for example, get to be about 3 years old before people tend to replace them. The cost of leases are usually calculated using this estimated lifespan.
If you are going to use a product for LESS THAN 75% of it's replacement lifespan (switch computers every 2 years), you are better off leasing. Anything longer than that, and you're probably better off buying.
Please note that the replacement lifespan is quite different than the actual product lifespan (Computers working 8+ years, etc).
~D
This sig has been enciphered with a one-time pad. It could say almost anything.
regardless to how many people slammed the question for being stupid or the slashdot community for being the wrong people to ask, i feel i've learned a decent amount about a mysterious process by reading some of the comments herin.
props.
If you operate a scam or fraudulent company, it works out nice. When the Feds confiscate the company assets - none of it is owned by the company.
My company leases notebook computers.
If we didn't lease them, I'd still be using the three year old underpowered Dell that was slowly falling apart, because you _know_ they wouldn't be willing to buy me something to replace it with...
Since we lease, the Dell's lease has expired, so we had to send it back and get something else, and you can no longer get three year old underpowered Dells...
-JDF
"for example: a busted floppy might cost us $150 or more"
;-)
Are you serious? I havent so much as seen a floppy disk in years
Your a friggin Fortune 100 company for crying out loud! Buy 10,000 CD-R's, they'll be cheaper than 5,000 floppy's, hold far more data, and are disposable!
Arg!! Broken what? Get with the times!
There are 10 types of people in the world. Those who understand binary and those who do not.
If you are a small company that's just starting out, leasing equipment has the benefit that you can lease what you need now, and not be stuck with it if you outgrow it in a few years.
This is particularly true of things like network printers and copiers.
Jon Acheson
All opinions expressed herein are my own, and not those of my employers, who are appalled.
My company switched from leasing equipment to buying a few years ago. At first, they renegotiated the lease agreement to switch from two years to three years. At about the same time, they bought all the monitors. A year or two later, they switched to buying all equipment. The last leases expired a couple of years ago, so everything is owned now.
The net result is that instead of being forced to upgrade our PCs and workstations every two or three years, we upgrade them whenever we have a real need to upgrade them, which is generally when they break. Everyone seems to be pretty happy with the new system.
The real issue is that in the 90s, you could double the performance of a system by upgrading it every two years or so. Now, you'll often find you're only getting a 20% boost after two years, and it's just not worth the hassle of swapping systems. Users used to love leases, now they hate them for those very reasons.
Dear Slashdot, I work for a Fortune 100 company. I can't seem to find the phone numbers for our fortune 100 accounting and fortune 100 legal departments, so I'll just ask a bunch of panting 14 year old boys: Did your mom lease or buy your basement computer?
Buying = Investing
Leasing = Expense
Generally the choice depends on the company. Rich companies with carefull managers (who are usually owners) will buy all equipment. Companies with low cash and managers ( not owners, but with options) looking at growth and profit will lease: no money needed short term, and expense is divided over many years.
in other words:
Investing = assets, no debts, long-term profit
Leasing = expense, a binding contract, short-term profit
A Fortune 100 company should be a rich company.
Leasing with bundled services is coming into the bigtime. I used to work for Everdream (shameless plug) and they really do have a nice offering, IMHO. What was nicest about it was that I leased one system for my parents, who retired to a very quiet spot in Kentucky, and I could just tell them to call the 24/7 Support Center whenever they had an issue. The monthly fee was entirely reasonable, the machinery was new'ish, and they got my parents up and running quickly -- even when they went out to buy an HP printer from WalMart. Leasing was easily the best thing I ever found for curing my headaches caused by that ubiquitous business unit also known as The Family.
You example of buying components and assembling boxes yourself is exactly what you do _NOT_ want to do in a critical production environment.
Establish long lasting relationships with large systems integrators and builders such as HP, IBM or SUN. Work with your vendors to get a solution that matches your requirements.
Then, hold your vendor to the agreement. If your not getting what you need, call your sales rep. Call the VP of customer relations/support for the company. Talk to the money people rather than the technical people if you are not getting support. It will get fixed, and quick too.
A little bit of background: I have a value of x somewhere between 0 and pi.
Hmmm...since all values of x in the range (0,pi) are positive, I can authoritatively state your x is going to be positive.
On the off chance that you meant to ask, "Is my value of sin(x) going to be positive?" I can authoritatively state your value of sin(x) is going to be positive.
-Loyal
I aim to misbehave.
I worked for a Fortune 100 company for years and I used to ask the same question. Yes, one answer was that it forces the business to buy new equipment because the old is on its way out the door, but computer leasing actually hits the accounting books differently than if the company had outright purchased the equipment. From the market's point-of-view, an outright purchase looks like investment, while leasing looks like just another "cost of doing business."
So all of that said, you almost surely will save $$$ buying instead of leasing, but those accountants and your Chief Financial Officer will never let it happen since it cuts into their bonus checks.
To lease vs. buy is almost entirely an tax accounting and busines finance decision.
When you buy, the equipment gets added to your balance sheet assets and can be depreciated on a particular appropriate schedule against taxes. This amount of depreciation substracts from your taxes. Adding assets can become a problem under some circumstances. Further if you borrow to pay for the purchase you have to add the load as a liability. Often this results in having less cashflow flexibility and it can affect corporate borrowing interest rates by changing the debt-to-equity ratio.
When you lease the entire cash flow amount, including sales tax, is a business expense as you pay each month. This means that the leased purchase *can* directly improve your net profits after tax since business income tax is: T = % * (R-E) unlike wage-slaves (aka individuals) for whom T = % * R. Also there aren't debt-to-equity ratio issues.
One additonal operational/technical issue with lease vs. buy: if the useful lifetime of the asset is shorter than the depreciation cycle, you'll often end up with an upside-down valued asset at salvage (its market worth is less than the salvage value - pretty much a given for computers) which pretty much means you take a loss and have to pay to dispose. With a lease disposal is already handled - the only caveat is making sure the terms deal with upside-down salvage favorably. If you get a good lease deal you can keep a steady stream of new, leading-edge equipment on-tap for less than what it might cost to buy and have to hang on to old, aging equipment (ignoring Linux-ability but counting maintenance and spart parts).
On average, a good CFO or CPA can make more $$ for the company (if it's doing well sales-wise) with a lease vs. loan/purchase.
for tax benefits, lease payments are currently deductible as opposed to being capitalized. corporate america only cars about dollars, they dont care what the effects of leasing are on the IT department
Tax purposes as already mentioned.
And cash flow. Which is pretty important for small businesses, and if you're swapping out thousands of computers at a time, might be important for larger businesses too.
You have a window? That you can open?? In your office??? You have an office???? Bastard!
Do not touch -Willie
If you live in a rising economy where interest rates are way too big leasing isn't a very good option.
Brazil, for example, has its base interest rates (defined by federal bank like FED) are just below 20%, so leasing would be annually above 50%.
Think better.
-=-=-=-=
I know life isn't fair, but why can't it ever be un-fair in MY favor!?
My company currently leases their computer equipment and it's a nightmare. The CFO sayes "it's good because you always have fresh equipment in the environment" which masks what's really going on. The technology is being driven by the lease, rather than corporate need. You can replace purchased equipment every three years also, nothing is preventing you from doing this if you realy want "freshness". By leasing you are forced to upgrade and migrate systems that do not necessarily need upgrading and you need to take time away from other projects to do it.
I went into my insurance agent to change my insurance poicy a while back. This is obviosuly not a computationally expensive task, but his computer had to have been an original Pentium. Had his computer been fast, I would havebeen in and out of there in 3 minutes. But I literally had to wait 10 minutes for the thing to boot up and open up the requisie program.
Two people sitting in a room waching a computer boot costs $40/hr. Given the current prices of computers, not replacing the computer was a very poor business decision as any savings from not buying a new computer were eaten by lost productivity.
paintball
Also, if you were to lease refurbished equipment, why wouldn't you reformat the system from scratch with the latest software, etc. Heck, why don't you do this with NEW equipment? God only knows how long its been sitting in a box on the shelf?
True, it won't have any fancy warranties, but as downtime is the most expensive part of any IT operation, fancy warranties that companies rarely honor anyway are of little value.
You should be working with reputable vendors, not fly by night whitebox assemblers operating out of Pakistan. All my critical equipment is covered under 4 hour response warranties, and once I've identifie dthe problem I usually have a replacement part on site in 2 hours. The only exception I've had is during a hurricane when the part had to be sent from a remote fulfillment center, then it took 6 hours. Something tells me you're an order the parts and build it yourself guy, useful for making your clients dependant on you I guess, but not much else.
You are in a maze of twisted little posts, all alike.
Funny this question should come up now.. Just 10 minutes ago I finished reading an article in Health Data Managment about hardware maintenance. In the paper version they had a special sidebar about leasing vs buying. In the electronic version, it's at the bottom.
In short, they found that if you want to turn over your computers frequently and on schedule, and were good at asset managment, leasing was generally favorable. But if you decide you want to turn them over ahead of schedule, make changes to the systems during their use (like add memory), or aren't amazing at tracking assets, then the administrative burden could be really heavy.
They also had a neat description of a procurement system that facilitated the vendor bidding process.
Overall, the article is a nice balanced look at the topic.
It's changed - See IRS form 4562 instructions.
3 d0e441
As a special case, you can depreciate PC equipment and software over 3 years if it was purchased ina certain date range, or if it's purely a business asset:
http://www.irs.gov/instructions/i4562/ch02.html%2
But consult your tax professional for rules changes.
See also:
http://www.irs.gov/instructions/i4562/ch02.html
which describes all the depreciation rules used in filling out form 4562 (the form you use to claim depereciation of capital assets).
-- Terry
Because when I buy off-lease computers such as Dell Latitude C600's for $150 and IBM IntelliStations for $300, it's definately worth it for me. The company who leased the top of the line computers got what they needed (top of the line), the leasing company made a buck, and I bought a relatively inexpensive workstation or server just a year after they were made.
While purchased items are capital expenditures. The trick is to do a $1 lease buyout, so you don't have to worry about repackaging the stuff once the lease is over.
Pedro
----
The Insomniac Coder
One big problem that exists with a finance lease is that if there is some kind of problem with the goods, you must continue to make the lease payments. This can reduce your leverage against your supplier. A finance lease is where you have a supplier sell the goods to a finance company, who then lease the goods to you. Almost all leases are finance leases, with the leasing company being an seperate arm of the supplier.
When a company doesn't have 100 thosand to throw down on a new server they can lease it over 3+ years thus making payments over the course of that time, therefore keeping more capital around. This is a great way to save in the short term. REturning the equipment really depends on the lessor. Most lessors will require original or like new packaging ( keep them boxes in teh basement ). Other wise you will have to buy boxes and foam and bubbles, should i continue? All and All it's a way to spend the same amount over time then up front. With lesser Precentage points.
Why not get the best of both worlds? Form a seperate company and lease to yourself? That way you can get the tax write-off for the main company, and if your leasing company just finances the purchase, they can get tax write-offs too. Keeps the nasty depreciating items away from your primary (publicly traded) company, and insures that you can do as needed with the hardware without worrying about having to cough it up?
Pro
:-)
===
1. Forced retirement of obsolete equipment at the end of the lease. Leases eliminate management discretion in the upgrade process. You can and will upgrade when the lease expires -- not before, not after. Useful when senior management is out of touch with technical reality, although the loss of discretion cuts both ways (see below).
2. Monthly payments -- better short-term cash flow without actually borrowing money.
3. The "temporary" nature of leased PCs is understandable by the average employee. If they KNOW their machine is going away in 36 months, they tend to find better places (file server, CD, etc.) to store their data. Leased servers have the same impact on sysadmins -- they can plan on a non-discretionary 100% replacement at a known date in the future.
Con
===
1. Mid-life hardware upgrades are a problem. Do you save the old parts to put the machine back to as-delivered condition when the lease expires?
2. Who owns the software? Is that leased also? Usually the answer is "no" (see Microsoft EULA). But you have to wonder about the OEM packages that may be pre-installed and supposedly licensed to a specific machine. Of course, open source would take care of the problem
3. It is possible to have a lease that extends beyond the warranty period. How much do you spend to fix a computer you don't own? What happens when you return it and it's broken? If you are paying seperately for hardware maintenence, how happy are you going to be when the maintenance cost exceeds book value?
4. Towards the end of the lease, the monthly payments will exceed the value of having the equipment. What do you do if the equipment is obsolete before the lease expires?
I think the depreciation curve on IT equipment is too steep for leasing to make sense. I have some experience with leased equipment. My company bought a smaller company, and they had leased PCs. Not only were they leased, they were barely adequate when new and were obsolete at the time of the acquisition. Nobody would spend money to upgrade the PCs because the lease was going to expire in about a year. The cost of the upgrades (monitor, OS, memory, disk, etc.) was dangerously close to the cost of replacing the machines outright. The employees had to suffer with junkware for almost a year before the problem could be solved. If the machines were purchased, the problem could have been solved sooner. It's hard to acknowledge technical reality when money is going out the door every month. If the stuff is already paid for, it's a little easier to wake up and smell the cappuccino.
I leased a laptop instead of buying a few years back, even though I had the cash, for tax reasons. I was a newbie and didn't really know what I was doing. Turned out the interest rate on the lease was so high it more than offset any tax savings I was getting. In the end I ended up paying over $10,000 for a $5000 laptop.
I would have to say that this is the first time that *I* have seen a flamewar that didn't involve Microsoft vs. Linux...
Sleep: A completely inadequate substitution for Caffeine.
Here in Minnesota, they are instituting new regulations about what you can discard in the trash, et al. This is due to the DNR wanting more control over what goes in the landfills. So...; after July, you'll have to pay someone to scrap out that old server or group of Pentium II machine's that were left over from upgrading the front office cubes.
Leasing might wind up cheaper in the long run since you won't have those disposal issues that will be plaguing us in the upcoming months and years. It ultimately will be one of those things that based on where you live, and what the laws are (or what you think you can get away with) you'll have to sit down and run the numbers to figure out which will be best.
The other things with leasing is that if there is hardware problems, the vendor usually will take care of that, and you don't have to. But... that support is also built into your lease price! Sometimes the software support is also covered, and also you pay for that as well. Might be other things too such as "mandated upgrades" which would force out an otherwise proper working server for a new one... and along with that the headaches of the transition... all those lost files that didn't make the backup... the new OS isn't compatible with what was on the backup tapes...! Whew!
Lots to think about there!!
Cheers;
Jeff
All content in this message is copyright (c) 2008. All rights reserved. RIAA is prohibited here.
Another possible option for some is to buy systems in part and assemble the parts into systems.
The parts are expensible right away. Nice way to avoid decpreciation.
Leases are 99% about tax tricks. The person to talk to is your accountant.
I used to work for an ISP that leased all of their equipment from the 3Com NICs all the way up to the Cisco 12000's.
From themselves!
The owner of the ISP started a "sister" company that owned and leased equipment. Our ISP wasn't his only company, he also leased some medical gear to himself. But another big feature was the fact that we had massive colocation. He also leased equipment as a third party (HA!) to our colo'd customers
"Genius may shine aloof and alone, like a star, but goodness is social, and it takes two men and God to make a Brother."
Unfortunately, the IRS schedule for computers is 5 years... So, being able to lease equipment and deduct it immediately is important. Additionally, by setting a low buy-out price, you essentially buy the equipment, but are able to deduct it in say two years as opposed to five. This saves deductions for other capital expenses.
For a fortune 100 company, no fuckin' way.
"Avoid employing unlucky people - throw half of the pile of CVs in the bin without reading them." -- David Brent
look at post times idiots, my post was the third post, and right about the same time as the first person that said the same thing. gah... pay attention...
I got a hard sell on leasing desktops from a reseller and I asked them "When the lease is up, what do I give back to you? Just the PC, mouse, monitor and keyboard? Or the box? The misc junk that ships inside?"
When they told me it was the whole fscking thing, I was appalled. We seldom have room for storing PCs/monitors, let alone all the crap AND the boxes. The odds that ANY of our PCs still has the same keyboard, mouse and monitor at the end of its life cycle is maybe 50/50. We'd have to hire a full time "lease integrity specialist" to deal with all the keep-track-of-it-all hassles.
It may place constraints, but it often helps. If you're in a big organization, you often have to jump through massive hoops to acquire new equipment. Leasing often gives you the ability not to have to screw with the assholes from property management who have to tag the shit you buy and who make it hard for you to get rid of old equipment, which in turn makes it hard for you to get new equipment. If all you want to do is use something, leasning makes it easier to avoid dealing with the tards in your organization who keep you from getting things done.
Think about leasing equipment vs. buying as being sort of an "independent contractor" where buying is more like an employee. You can more easily terminate the agreement when the contract is up, and there's less hassle, less paperwork, less crap. On the other hand, it might be more expensive. But there are real benefits.
Get another business unit to buy it for you guys on their budget. (Think social engineering.)
I have done a lot of work installing desktops & servers that were under lease. The hidden pot of gold to the leasing company comes at the end of the lease. Over 90% of businesses are not ready to return the equipment at the end of the lease. They need to arrange upgrades, replacements, new software, whatever. But the leases are financed such that all the costs are covered by the end of the lease, say 36 months. And if the equipment is not returned on the anniversary date, the monthly payments continue until it is returned, or the client buys out the equipment. These payments after 36 months are almost all total profit to the leasing company. HP Financial, Dell Financial and GE Capital all make a killing at this point.
If your business is proactive and arranges to replace the equipment as is comes due you do OK, but most get fleeced for 3 or 4 months, some over a year until they can make a decision and implement it.
ONE DOLLAR BUYOUT!
That's it! You can keep what you want to keep, toss what you don't want. For some equipment, packing it and sending it back to the owner is cheaper than to dispose of it yourself.
Alternatively, one dollar buyouts mean that off lease equipment could be given to employees after the 3 year lease is out.
Who here wouldn't like a circa 2002 2.4ghz desktop?
I don't work for a Fortune 100 company, first off. but here's what happened at the home builder I do tech support for:
They needed a server, at the time there were only 5 workstations, but they were planning to grow. So, they got a Dell server. P3 500mhz, 8gb scsi, 256 RAM. This was 2000. I forget what it would have cost to buy it outride, but they did a 3 year lease at like $48 a month or something. By the end of the lease, they'd payed thousands, and they didn't own the hardware. Dell gave them the option of returning it or purchasing it for $700-ish.
In the end, we kept it. It seemed worth the money to save teh headache of migrating active directory and exchange to a new server, plus there had been a few upgrades to RAM and HDD.
Leasing just seems like a scam to me.
Often in Error, Never in Doubt.
Leasing is an Operating Expense. On many spreadsheets this goes directly against profits, and can be a "tax" advantage because it goes directly against profits.
Buying, (after a certain amount), is a capital expense, and does not go on the balance sheet against profits except as the equipment is depreciated. Transmografying cash to non-cash *assets* does not change the value of a company, the loss in value those assets have over time change the value of those assets.
Leasing in some sense is also having the company that is leasing the equipment to you, loaning you money or investing in your company.
Whether or not leasing makes sense, is not clear cut, and one of the reasons you have either a VP of finance, or a CFO to help you make that decision.
If I own a business, why do I care if it is a CPA's nightmare? Does the extra CPA cost ( I am assuming there is one ) swamp the return from purchasing? If so, then there is the argument. If not, the purchase and let your CPA's suck it up.
:-)
I mean, the only reason that complexity of solution stops management from going down one path in deciding what features to add to the program I am working on is the cost / benefit ratio. If I dont like the way the analysis works, I cant tell them "well, that is a nightmare for me". They will laugh, then give me a tighter deadline.
emt 377 emt 4
Something that did not seem to be discussed here. When you rotate out of server hardware whether from obsolescence or lease expiration, moving from one piece of equipment to another is a royal pain in the petuti. Pick your poison: VMware, MS Virtual PC/Server, Xen (if you are all Linux). Once you are virtualized you no longer have to worry about HAL (hardware abstraction layer) issues like scsi drivers, video drivers, etc. Need more "oomph" for a server? Use VMotion to move it to a more capable server, without shutting it down! Xen has a similar tool. VMware has P2V that for $1500 will convert 25 physical servers to virtual servers, it is time limited to 12 months. The unlimited is $5K. /PAE and large memory requirements might not be suitable. There are plenty of sales people that will crunch the numbers for you, just talk to more than one company so that you can keep them honest. Three year down the pike you can swap it all out for the latest & greatest and your users never miss a beat.
Lease a pair of IBM Blade Server chassis (no single point of failure) populate with enough blades to support your needs with an extra so you can clear blade of its VM guests to do a flash or host OS upgrade in the middle of the day. Add an appropriately sized SAN for your disk storage. IBM has very reasonable support contracts (and will support VMware for you as well, 1 phone number to call). Lots of advantages, there is a big productivity improvement in creating & maintaing servers, you can do more with less people or hopefully reduce some of the late evening and weekend hours. Biggest draw back is cost and a 3.5GB limit per VM (some SQL servers with
Terminal Services works well for non-graphic tasks, word processing, spreadsheets, etc. Things like Photoshop and CAD are currrently NOT well matched to a T/S environment. Create enough load balanced T/S VM guests so that you can take one out of service for OS updates.
There is no right to feel safe thru security vaudeville at the expense of everyone's freedom, privacy and tax money.
True enough. After all, look what happened to his empire. He couldn't even keep his flood control dams online....
Insert witty comment *here*. I'm fresh out of wit...
So some PHB rounds up every last piece of Big Blue equipment (200+ terminals, a few servers and ever piece of token ring cable they could pull) and auctions it off. Low and behold everything was leased. There was less than a year left but since they didn't have possesion of the gear they had to pay IBM the rest of the lease and the full, retail price (priced when it was new, not a three year old model) for everything, down to those token ring cables.
Rumor had it IBM knew what was going down and let it happen. Also that it cost HI $300k. IMO good for IBM.
Man, you have to work to fuck up that bad.
They will not advise you that the lease has ended, and will subtract from your bank account forever. Not refundable.
Plus, the bank will not terminate the pre-authorized payments unless you put a stop payment ($20 a pop).
Slashdot entertains. Windows pays the mortgage.
Buy what appreciates, lease what depreciates. Nothing depreciates faster than computers (except possibly fresh vegetables). I can only think of about two scenarios for computers where it makes sense to buy instead of lease:
:) Managed services can rock and can suck - it all hinges on allowing your vendor to operate in a way where they win (make a profit) and you win (get reliability and fast response). Negotiating the margin to the bone with managed service companies is really really stupid - it will always cost you because the managed service company staffs based on budget, not on mean time before failure and incident rate.
1) You user fund accounting where everything is purchased based on grants of earmarked funds and your funding source is paying a lump sum so you can buy new computers.
2) The computer will be in service for more than 5 years (think that old 1980s HP box in the back of the data center that runs the ammortization and billing on some ancient capital expenditure). Midrange and mainframes often do this.
When I've sold on lease:
1) Client wants the purchase to be 100% business expense. Lease is rent, and you get no asset back for your money until year 2 or 3 buyout - and when you do it's a laptop you paid $1 or $40 for...
2) Client wants to ammortize a large project over time. I.E. $500,000K in hardware and $500,000K in services for a rollout.
3) Client wants to eliminate disposal issues.
5) IT wants to enforce a lifecycle policy to keep worn out obsolete junk.
A few notes:
Data is where the real value is... not on desktops and laptops. If it were not what was on the hard drive for sub $1000 machines.
Leasing has nothing to do with who fixes the gear. You can roll your own by having a bank or leasing company do the paper and someone else sell/install. It's managed services, not leasing where you buy installation, support, PC etc... all from one vendor for a low monthly fee
Dollar buyout or 5%, 7% and 15% residual buyout programs make lost/damaged equipment no big deal. I did a rollout once where we replaced laptops. If an old laptop wasn't turned in the fee was a whopping $40. The cost of boxing and shipping the laptop was $30.
If you do lease and opt for a high residual value, you have to be very good at asset management. If your company culture is loosey-goosey with property or money, don't lease. It really sucks to have to buy out a bunch of obsolete $1400 laptops for $500 a piece.
-- $G
Others have talked about the tax and cash flow implications.
Here's my experience:
1. We had machines that were 2 years into a 3 year lease that were sitting under people's desks because the early return penalty was so high and the person "had" to have a bigger faster machine.
2. Stuff got swapped between leased machines when the techies were desperately trying to fix a problem. End result was that there were a lot of penalties paid because the off lease machines were no longer configured the way they were delivered.
3. The company went through a major downsizing ( 66% lay off) and there were literally skid loads of PCs returned early with lots of penalties.
4. Repair of problems was handled in a timely fashion. This was independant of whether we were leasing or buying. The service contracts on bought equipment provided the same level of service as the leased. It no the financial tap dancing that determines how good the service is, it the service company and your comany working together.
5. Sometimes the decision is not a matter of which is best, it sometimes has to do with which budget the money is coming from We rented 10 PCs for 3 years simply because no one would put it into the capital budget. Each year the analysis showed it would have been better to buy the things and own them after 18 months.
6. Leasing is no magic bullet. Someone has to pay for and service the machine and that includes the financing cost. Those costs will unltimately be paid for by the lessee ( you).
7. It was allways hard to get management to replace bought units. Yes they knew 3-4 years was a good refresh cycle but would they plan for and implement it? No. The only way it was forced on them was to go the leasing route.
Ultimately alot depends on who does the figuring and who gets to implement it. It can work well or badly and the devil is in the details.
Good Luck
It really depends on the useful life of the computer. As you stated, it would in fact be better to purchase the monitors, as their useful life is about 8 years, maybe. If the cost of leasing the item over the useful life exceeds the cost minus the expected resale value of the item plus the expected repackaging and return costs, it would be better to purchase the item. This is basic accounting theory.
I can't believe no one has mentioned NMCI. EDS is raping the Navy. A typical desktop costs $800 a month, A MONTH, to lease. In the '80s we talked about a $500 toilet seat or a $600 hammer outrage. NMCI makes hat excess look like chump change. Why doesn't 60 minutes expose the fraud? Why does Slashdot ignore it? Answer: too many people have been bought off. Any responses to the contrary?
Yes, leasing does provide balance sheet benefit because it doesn't have to be depreciated, which reduces profits (in accountant fairy land).
Of course, I'm not a CPA either, so how can you lease and still get what you want? Learn how to negotiate! You don't think IBM loves to say they have Fortune 500 clients?
So write a better contract. You know you can't change price or lease terms (smart CPAs should do that), but get the things that matter - repairs, turnaround time, replacement after estimated lifetime, excess parts, etc.
Vendors will play ball, probably buy you lunch too.
Why cut IT when your office space costs $3/sf? gibso
The company I work for develops complex technical software that operates on relatively large datasets (read: guzzles CPU/RAM like no one's business!). In our situation we require the absolute latest and greatest in hardware and we don't neccessarily know what platforms will be supported even 1 year in advance.
... just doesn't make economic sense.
For us, purchasing a $1M servers for QA/customer support efforts only to find out 2 years later that:
A) The platform will no longer be supported.
- or -
B) It's now too small to run our software with the datasets that our customers are using.
- T
that is what we do here and is
a general rule in most businesses.
by the way, we do a lot of highly customized
software development and 'buy' that part since
it becomes a part of our core business value.
we view computer systems as an information
utility, and do not 'buy' utilities. we
rent them such as power, water, etc.
OK, I just asked my wife about leasing (Bach. Business Accounting + 10yrs with Big4 Bank in Australia) and I'm even more confused than before I asked. Accountants went to university for a reason. Use their knowledge and save yourself another hat fitting.
-- Howto: Get +5 (1) Whine about M$ (2) Namedrop Gentoo (3) Casually Abuse Mods (4) Namedrop Early Computer Model
Another aspect is that leasing allows smaller companies to aquire equipment without requiring them to make a huge initial investment...
Any sect, cult, or religion will legislate its creed into law if it acquires the political power to do so.