Lessons in leasing

You need more bandwidth right now, but the company is in the grip of layoffs and budget cuts. Should you scale back your plans and purchase only the most crucial equipment, or lease everything you need and saddle your firm with payments for three years?

Network executives regularly wrestle with the thorny issue of whether to buy or lease network equipment and applications. Unfortunately, there is no pat answer that is right for all situations.

"From a tech viewpoint, it would probably be easier if we had the cash in hand and simply purchased," says Charles Savage, MIS director for Atkinson-Baker, a court reporting firm in Glendale, Calif. Nevertheless, due to tax and other financial advantages, he leases 80% of the company's equipment, including servers, hubs, routers and switches, as well as the network operating system and groupware.

If you're facing the lease vs. buy dilemma, consider these guidelines for making a decision and getting the most from a leasing deal.

1. Lease when you're short on cash.

"Unless they are strapped for capital, companies tend to buy equipment," says Carl Pitasi, an analyst with IT consulting firm Compass America. For those experiencing cash flow problems or budget cutbacks, leasing offers the ability to acquire gear right away.

For educational, nonprofit and healthcare organizations in particular, leasing opens the door to more advanced technology. "Leasing provides the flexibility to refresh technology as needed and provides a steady monthly cost so there is less of an impact on the budget," says Mike Nunnelly, a network administrator for Deaconess Hospital in Evansville, Ind.

However, the ease with which leased equipment can be acquired carries with it the same potential for overspending as credit cards. So don't go increasing bandwidth just so employees can download MP3s. Instead, adopt a firm policy of only leasing equipment that will lead to greater productivity or higher income.

2. Buy equipment you're going to keep a long time.

Decide how long you'll be using the equipment. If it's more than three years, consider buying; otherwise, leasing might be more attractive. Gartner analyst Lawrence Orans points out that core routers and switches are relatively mature technologies with a five-year shelf life, so you should probably buy them. On the other hand, less mature components such as load balancers are typically upgraded every two to three years and make better candidates for leasing.

3. Be careful choosing a lessor.

What you may not know is that once the paperwork is signed, many firms will sell your lease to a financing company that collects the payments and enforces the terms. This can create trouble, especially when it comes time to close out or renew the lease. So search around for a leasing company that will be there for you in the long term.

Atkinson-Baker went through several leasing companies before settling on American Equipment Leasing, now a part of CitiCapital."The relationship between the three parties - the vendor, the lease company and us - is very important," Savage says. Nowadays, he ensures that all parties work well together before signing anything.

It also helps if you can find a lessor that will cover equipment, software and installation. Most specialize in hardware, since that can be repossessed. But it simplifies life if a lease covers an entire project and rolls everything into one monthly payment.

4. Pay close attention to lease terms.

Before signing, pull out your crystal ball and take a look at what happens when the lease expires. A common problem with leasing is not understanding the terms of the agreement and getting into a bad deal.

"We do a lease buyout, never planning to return the equipment at the end of the term," says Thomas Ranalli, IT director for Lyon & Lyon in Los Angeles. This puts his intellectual property law firm in control of when and what equipment gets replaced rather than it all being dictated by the lease terms.

If you want to trade in hardware at lease termination for new models, closely examine terms regarding return or disposal of equipment, extension of the lease and added fees.

5. Focus on the bottom line.

Because it all comes down to money in the end, you should have a good grasp of financial basics and how they relate to equipment acquisition.

That way, you can competently advise the CFO in terms of return on investment and optimizing cash flow. Be sure, then, to take into account the full range of financial factors, such as taxes, interest rates, amortization, depreciation and lost opportunity to make the most informed decision.

These can swing the final price of equipment up or down by 20%, depending on your firm's financial situation.

Although the CFO may end up making the final decision whether to buy or lease, if you know the game and the business repercussions, you'll be in a better position to recommend the right course of action.

Robb is a freelance writer in Los Angeles specializing in technology issues.