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Many companies aren't getting expected IT leasing benefits
27 September, 2004
by Chris Talbot
Although the leasing of IT equipment is increasing, many
companies are not getting the benefits of leasing equipment
that they originally perceived they would get. According to
Dan Flagstad, co-CEO of Relational LLC, IT leasing is a growing
area, but many companies are not getting out of leasing what
they initially thought they were going to get when they signed
their leases.
A survey conducted by Global Insight for the Equipment Leasing
Association found that 65 per cent of respondents said the
most important factor in choosing to lease IT equipment instead
of buying it is that it facilitates the maintenance and replacement
of equipment. However, Flagstad said many organizations don't
receive that benefit. Many companies are focused on getting
the lowest initial rate. They sign the papers and then forget
about it until it's time to close the lease three years later.
Flagstad likens that to buying a furnace and then forgetting
to have it checked twice a year or even changing the filters.
"Some of the potential benefits of IT leasing have always
been off balance sheet financing where available for companies
concerned about the leverage shown on their balance sheets.
In the larger companies, that has always been a significant
issue," Flagstad said. "In addition to that, the
planned refresh of technology assets has always been a main
driver in IT leasing from the user perspective."
In other cases, leasing has been used as an alternate source
of capital for companies in which their access to capital
is stretched, Flagstad. It's another avenue to raise dollars.
Since the dot-com implosion, companies have been looking at
their IT assets with more scrutiny, and the control of IT
acquisitions has moved in many companies from the IT managers
and CIOs to the CFOs. Return on investment is of high importance
on every financial acquisition made, he added.
Relational is an independent IT portfolio management company,
and Flagstad said the starting point with its clients is determining
whether leasing is the best option for their businesses. So
how does a company decide whether to lease or buy? According
to Flagstad, it's important to understand what drives the
business and what factors are important to it.
"We look at the leasing side of things as a mechanism.
It's just a financing mechanism," he said.
There are continually opportunities for companies to do a
buy-sell-hold analysis of their IT assets and gain more utility
while reducing the financial impact or lowering their budgetary
spend, Flagstad said. Unfortunately, with leasing, a lot of
companies believe they are getting maintenance and constant
evaluation from which they lease their equipment from, but
they have failed to understand what they really are getting.
"You really have to look at the motivations of the partner
you choose to do business with and what they're really in
business to do," Flagstad said.
For instance, a captive financing company's business is to
expedite the sales of new equipment and technology refresh,
he said. While that's not necessarily a bad thing, it must
be aligned with the customer's business strategy for it to
be the right solution. The goal for the customer is get as
much utility for the money they spend.
Leasing over the last couple of years has increased by about
25 to 30 per cent, Flagstad said. He added that the tremendous
growth is as a result of the previous few years being really
slow for leasing. Pent-up demand, as well as a change in the
way make IT acquisition decisions, is driving the growth in
leasing. Leasing is expected to continue to grow at a 6.5
per cent annual rate going forward and will have a total estimated
value of $28 billion (U.S.) by the end of 2005.
Another reason for the demand for leasing is that the economy
is picking up and companies have more uses for their capital
besides acquiring IT equipment, Flagstad said.
"The real key is making sure you have a partner that
can align their services with your corporate goals, because
that's the key in this environment -- and really paying attention
to what the partner you choose, what their motivations are
and making sure that you as a leasee or a user of technology
that your goals are aligned with the financial partner or
portfolio management partner you choose to work with,"
Flagstad said.
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