A Remedy for Cash-Flow Constraints
Like all small businesses, law firm Hicks, Thomas has to keep a close watch on its monthly cash flow and expenses. So when the time came for it to refresh all of the desktops used by the lawyers, legal assistants and secretaries at its Houston offices late last year, the firm opted to lease the systems instead of purchasing them.
“This represented a large expenditure of roughly $60,000, so leasing that equipment frees up capital, and we don’t have to worry about paying for it all right away,” says Juan Yznaga, director of technology for Hicks, Thomas, which has 15 partners and associates. Yznaga, who oversees the firm’s technology operations by himself, was able to construct a three-year lease for 19 Lenovo ThinkCentre A57 desktop machines and monitors, 17 Lenovo ThinkPad X200 and T500 notebooks and four HP LaserJet P4015tn printers. Yznaga likes the fact that the three-year lease gives him options.
“It gives me the flexibility to evaluate whether the equipment is sufficient to last 36 months or whether it can last longer, so I can forecast better for the next lease,” says Yznaga.
The agreement provides Hicks, Thomas several critical financial benefits while supporting the law firm’s technology strategy, says Yznaga. Breaking up the $1,721 monthly payments for the equipment over three years makes it easier for Yznaga and the company’s finance team to budget for other IT equipment purchases, he says. In addition, the company didn’t have to make a big initial payment to obtain the systems.
Plus, under a standard purchasing agreement, Hicks, Thomas would have had to depreciate the cost of the equipment over a five-year period. By contrast, the lease agreement enables the company to receive a bigger tax benefit by depreciating the full cost of the machines over three years. “It’s a much greater write-off,” says Yznaga.
IT equipment leasing is a financing option that can pay huge dividends to companies like Hicks, Thomas — particularly during the current economic turmoil when cash flow may be extremely tight and small businesses might want to break out of the 30-day payment cycle, says Howard Rubin, professor emeritus of computer science at Hunter College of the City University of New York.
It can also be advantageous to add a clause into a lease agreement that permits the customer to refresh the equipment during the course of the contract in order to take advantage of new functionality as it’s introduced, such as multi-core processors, says Rubin.
Ski resort operator Aspen Skiing has leased virtually all of its IT equipment for the past five years. Previously, the Colorado company had purchased desktop machines for use in its hotel division, says Paul Major, the company’s managing director of IT. “But we’re dealing with upwards of 650 PCs, so cash flow is key.”
The company, based in Aspen, operates the Snowmass, Aspen Mountain, Aspen Highlands and Buttermilk ski resorts, which are also used for mountain biking, disc golf, paragliding and a slew of other recreational activities. “We have a very capital-intensive business,” says Major. “The ability to lease and spread those costs out over three years is a financially effective tool.”
Major, who manages a 20-person IT staff, also likes the fact that under IT leasing agreements there is no need to dispose of heaps of equipment when it comes time to refresh their systems.
Leasing IT equipment fits in well with Aspen Skiing’s IT strategy, says Major. “Every year, our goal has been to get more for less — more RAM, more power and more processing at less cost,” he says. “Each year, I’m able to assess our organization’s needs and get more good stuff for the same amount of money. I’ve been able to absorb more equipment in my lease costs at a lower operating expense.”
The company leases roughly 650 of its 800 PCs and 60 of its 70 servers. The resort operator also leases its EMC storage area network (SAN) and disk backup systems, as well as its IBM iSeries midrange systems, says Major.
The lease-to-buy option may offer a strong incentive to organizations that are looking to avoid a big upfront purchase payment.
In February 2006, the American Nuclear Society (ANS), based in La Grange Park, Ill., was having trouble finding replacement parts and service providers for its aging telecommunications system. Rather than shell out $50,000 for a new communications platform all at once, the nonprofit organization decided to lease an Avaya IP Office system under a five-year lease-to-purchase agreement, says IT Director Joseph Koblich. For ANS, the lease-to-buy option came in handy because the nonprofit’s finance committee had finalized the organization’s budget in November, and the decision to acquire a new telecommunications system was made three months later, says Koblich.
“With a big capital expenditure like this, which occurred after our budget cycle, lease-to-buy was our best option,” says Koblich, whose IT organization operates on a $9 million annual budget (which represents less than 5 percent of the total annual operating budget). “We have sufficient reserves, so we don’t find ourselves in a month-to-month crisis to meet our financial obligations,” he adds.
The lease-to-buy approach has delivered several other financial benefits to the association, says Koblich. For instance, the Avaya system includes a built-in teleconferencing bridge. With this feature, ANS has been able to save $10,000 a year that it would otherwise spend on third-party teleconferencing services, he says.
“It took a little time for us to ramp up to using the Avaya teleconferencing features, but once we did, the savings kicked in,” says Koblich of the system.
ANS has two years remaining on its five-year, $46,000 lease of the Avaya system, he says. The society has an option to purchase the system for $1 at the end of the lease, which Koblich expects the group to exercise. “With a $1 buyout, I don’t see any reason why we wouldn’t,” he says.
One great advantage of leasing IT equipment is the option to buy systems at fair market value once the lease has run its course.
Under the terms of a three-year agreement for an EMC storage area network (SAN), Aspen Skiing, based in Aspen, Colo., has the option to purchase the storage environment for just $1, says Paul Major, managing director of IT for the four-season resort operator.
“We figured [the SAN] would have a longer shelf life and usability than a typical server,” says Major. And even though a new SAN might offer higher-density storage than the current EMC system, “the speeds [for data access] should be about the same,” he says.
There are other benefits to Aspen Skiing’s lease-to-purchase arrangement. Once it makes the final lease payment for the SAN, the company will pay for monthly maintenance at a cost that’s less than half of the lease payments, says Major.
The resort operator applied similar logic to the purchase of 22 notebooks, which it acquired at the end of 2008 for a few hundred dollars.