Buy vs. Lease for Communications Technology
In the current capital-constrained times, enterprises are examining their options for procurement. Is it time to consider leasing instead of buying?
Communications technology is following the path of IT. Call servers, gateways and IP phones are not expected to remain in use much beyond five years. Communications technology life has been shortened considerably. The question becomes, "Should we buy or lease the rapidly changing communications technologies?"
Technologists often respond: "We have the cash, so why lease? Leasing will cost us money that we can save by buying the IT technologies." This can make sense from a simplistic point of view. But this is not necessarily the view of the CFO.
The CFO has to ensure that the cash is there when needed and is not tied up in a technology purchase that cannot be changed. The CIO/communications manager likewise needs to maintain the flexibility to react to changes in technology and the demands of his or her user group.
Avoiding paying interest and financing charges can be very attractive. Putting money in a bank pays interest to the enterprise, whereas leasing costs the enterprise interest. Cash, however, is not really free money to spend. It is a limited enterprise asset that can be applied to many areas of the enterprise, and thus there is an opportunity cost associated with it. The CFO may have better, more profitable uses for the cash on hand than buying communications technology.
Arranging financing can take time when an enterprise wants to take advantage of a business opportunity or business climate change that requires fast action. No cash on hand, then no opportunity and no flexibility to respond to the changes.
In addition, there can be tax advantages to leasing that are not available when the communications technology is purchased. Leasing is also beneficial because of the residual value of the technology—i.e., what the lessor (the provider) can expect to recover from the sale of the technology at the end of the lease period. The residual value will contribute to a reduced lease cost. Further, the residual value of the communications products will reduce the Total Cost of Ownership (TCO) for the enterprise.
The communications technologist may think that keeping the technology for four years makes purchase more sensible. But communications technology continues to improve, making earlier systems obsolete sooner; emerging technologies are constantly being offered.
Furthermore, a major shift is occurring towards greener operations in communications. Owning older equipment that consumes more electrical power will result in higher operating costs than the new, more energy-efficient products. Leasing allows the technologist to replace the power hungry equipment with less-costly-to-power systems. Replacing the equipment can reduce the power consumption by as much as 25% according to the EPA Report to Congress on Server and Data Center Energy Efficiency released in August, 2007 . This will actually more than pay the interest charges on the lease.
EVER CHANGING TECHNOLOGY
The constantly changing communications technology offerings create a difficult situation for the communications organization. Keeping up-to-date is a never ending process. Products go through an ever shortening life cycle:
* A product is announced.
* The product is shipped to the first customer.
* A newer, more capable product is announced.
* There is an end of sale date (sales terminated) for the earlier product.
* There is an end of maintenance date for the earlier product.
* There is finally an end of support date for the earlier product.
* The total elapsed time can be 36 to 60 months.
In IT, the pricing half life for storage systems is about 15 months, and servers about 36 months. It is common that the PC on the desktop, network routers, and switches are eclipsed with new products every 1 to 2 years. The same is happening to communications technologies. This encourages the enterprise to consider replacing the technology even faster. This fast replacement will be facilitated through leasing rather than purchase.
A technology refresh program is common in many enterprises. Leasing allows a fixed monthly payment while delivering proactive technology replacement.
Disposing of purchased communications technology is a hidden cost that is rarely considered. This hidden cost does not appear until the disposal time for the technology. The hidden cost will increase the communications budget, but with no return from the investment (money and labor) for disposal. In a leasing arrangement, the lessor has to deal with this disposal, at no cost to the enterprise, simplifying the communications procurement.