May 3, 2011
Why Leasing Can Help Keep Your IT Perishables Fresh
Let’s face it. No matter how “cutting-edge” or “state-of-the-art” your information technology (IT) is, the aging process often begins before the solution is even installed. Many IT solutions lose their edge in 30 months or sooner. Changes in business applications and user expectations, in addition to newer IT solutions with better potential for savings over time, place pressure on IT managers to continually re-evaluate, replace and refresh.
Selecting the optimum funding solution offers the best possible way for you to keep your IT solutions cost-effective and operationally viable. It also gives you an opportunity to realize significant savings in your budget.
Quick Solutions for Savings
The following funding solutions are designed to deliver both immediate and lasting operational and financial benefits. When you incorporate creative funding solutions into your overall IT budget plans, you can often beneficially impact both your current year budget and your ability to manage future budgets (i.e., run rates).
Installment Purchase with Residual Discount
Lower your capital expenditure (CAPEX) and cash outlay by using a structure that offers you a residual value discount upfront. This solution is simple, easy and straightforward: you purchase, take title and commit to a return timeframe and receive a discount off the sale price. Benefits include immediate cash savings as well as decreased budget impact. For example, if your Installment Purchase is $1M with a 30-month return commitment, the residual discount would be 10 percent and the discounted purchase payment would be $900,000.
Sale Lease Back
If CAPEX restrictions are delaying projects, now is the time to recover capital buried in legacy systems. You can sell these systems to a lessor and lease them back for the remaining period of intended use. If the sale is done at book value, there is simply an exchange of cash for title and a monthly payment obligation tied to the asset’s remaining useful life. Your end result? Cash for your mission critical business and IT projects plus a beneficial reduction in current year budgetary run rates. Savings will be based on the client environment.
Just-in-Time Storage (JIT)
As much as possible, budget managers often seek to avoid return trips to the budget “well”. Frequently, this means they buy extra capacity today so as not to run out in two or three years. An alternative funding approach allows you to project your capacity growth trends, and then enter into a multi-year funding agreement to access the needed capacity at the time when it will be required (versus upfront). This approach allows you to benefit from the downward trend in pricing and does not require you to spend as much money today. With JIT, you benefit from future marketplace reductions as well as managing your budget to a fixed run rate. This solution provides you with a way to avoid buying more than you need today, and can save companies 13 to 15 percent annually.
Capital Saver (Prepaid) Funding Solutions
The Capital Saver (Prepaid) Funding Solution allows you to effectively “purchase” usage rights to IT solutions for a selected term, avoiding external interest expense while retaining all the operational and financial benefits of an IT lease. While a prepaid funding solution does require a cash outlay upfront, the amount is normally 10 to 15 percent less than a capital purchase and translates into an immediate reduction in your annual budget.
For instance, instead of purchasing a $1M IT solution with a three-year accounting class life, you might enter into a prepaid funding solution for $900,000. The prepaid funding solution would cover the same usage period of three years, but would impact your budget at $300,000 per year versus $333,333 for a purchase.
Custom/Deferred Payment Structures
Your funding solutions partner should also be able to work with you to arrange custom payment structures. Deferred payments can allow you to gain usage of IT solutions while not remitting the initial payment for several months. Payment structures that anticipate increases in year-over-year budgets can also provide beneficial budget relief during the current year. Custom designed balloon payment structures can also be a means to relieve today’s budget pressures.
(Note: As with any customized solution, it is important that the appropriate internal financial and accounting people participate in the discussion early on to ensure the solution meets the objectives it is designed to meet.)
Early Rewrite and Extend
Far more than capitalized assets, IT solutions under a usage contract are optimum candidates for an early contractual rewrite to achieve an immediate decrease in expenses in return for a longer usage commitment. Run rate reductions of 15 to 25 percent or more often result from exercising a one year extension option during the term of the lease.
Customize for Success
No matter which funding solution you select, be sure it is tied to your specific business requirements. For instance, rapidly increasing storage requirements combined with material capacity enhancements of new storage solutions along with escalating hardware/software maintenance costs could prompt you to update your storage solutions every 24 to 36 months, while other assets (i.e., portions of networking solutions) can remain operationally viable for four years or more.
You will realize the greatest benefit when you evaluate several different funding solutions that allow you to pay for the value you consume and access the most cost-effective technology available to meet your operational and budgetary needs—today and tomorrow.
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