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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.
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.
HTH, HAND, etc...
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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...
Obliteracy: Words with explosions
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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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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- 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.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.
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
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?
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.
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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.
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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)