The Lease Piece
When Don Peterson started in his role as IT director of Merced College (Calif.) about a decade ago, the community college's IT core was in need of some muscle. A network refresh every five years was in order but not feasible, Peterson says. "How do you every five years get the appropriate money to redo the network? The only way it made sense to me was to lease it."
Merced leaders currently lease all network servers, SAN storage, and core switches, as well as edge switch equipment from HP.
With payments spread over five years, the institution is avoiding a one-time up-front cost, which would have been difficult to absorb into a single budget cycle. Leasing all but guarantees a refresh every five years "without having to find that million-plus to put down [initially]," Peterson says.
"Leasing offers organizations a very affordable, flexible path to taking advantage of the latest and greatest technologies without requiring much in the way of capital expenditures," explains Tom Mace, manager of Polycom Financial Services.
While there can be options to buy, even for a single dollar, after the leasing period is up, generally making the choice to lease means turning in the equipment at the end of the amount of time written into the agreement. Purchasing and financing experts are seeing more leasing going on these days. The main driver, says Chad Wiedenhofer, a vice president at First American Equipment Finance and the firm's education division head, "is the current macroeconomic environment we're in. A lot of schools have faced frozen budgets and are evaluating alternative funding."
Following is a crash course in leasing, with 22 things that are good to know before signing on the dotted line.
1. It's probably already happening across campus. Even if the CIO and CFO aren't in on it directly, leasing deals are likely being cut at the department level. "We had a lot of leases going on that hadn't gone through the proper approval," recalls Gary Link, currently senior vice president of contracts at E&I Cooperative Purchasing, of his time as a campus procurement officer.
2. For fast-moving technology hardware, it's a no-brainer. "Anywhere you have technology that is progressing at some reasonable clip, that's fertile ground for leasing as opposed to buying," explains David Jones, executive director of the Coalition for College Cost Savings, for which he creates commodity and services contracts for approximately 600 private higher ed institutions. Maryann Von Seggern, director of worldwide channels development for Cisco Capital, puts the rationale for leasing technology this way: "If a given fixed asset gains value over time, one should invest in it, and if it loses value it should be financed." In nearly all instances, only hardware can be leased, as there's nothing to reclaim after a lease term with software, explains David Doucette, senior sales manager for higher education at CDW-G.
3. It allows for budget flexibility. Upfront cost is the 800-pound gorilla that leads many institutions to look at leasing, says Michael Cuno, spokesman for HP Financial Services. "It makes it very, very easy to predict and budget your expenses." Tyler Kelsch is vice president of finance and operations at Carlow University (Pa.), which leases network infrastructure equipment, telecom infrastructure equipment, larger computer room server upgrades, and larger PC orders. He explains that with leasing, "in your budget cycle you've now flatlined and guaranteed the price." And, adds Mace, in the end, leasing is often more cost-effective than purchasing. "People are often surprised to learn that."
4. The forced replacement cycle can keep you competitive. With institutions looking to differentiate their campuses from their peers based on the amount of support to students, leasing is also a way to keep up on the IT level, says Weidenhofer.
5. The lease is separate from the purchase. Kelsch explains the process this way: "IT will develop the scheme for the equipment and work in conjunction with me to badger and harass the vendor to get the best price. Once we settle on that, John [Hallis, CIO,] turns to me and we look at who has the best financing. Those business decisions are made separate from the equipment purchase." Even at a company whose financing arm is handling the lease, once it's in the financing stage the seller is out of the picture, he adds.
6. Yet?lease terms can be negotiated prior to purchases. That strategy, says Kelsch, involves establishing a line of credit and revolving lease terms. "You've got that preauthorization of dollars and as projects come up you add it to the lease." Hallis, an employee of SunGard Higher Education, which manages IT operations at Carlow, notes that showing a leasing company a plan of what you intend to spend can result in getting better rates based on that volume.
7. There are two main types of leases. Operating leases are like rentals, with no equity in the equipment building up, while capital leases are like installment purchases, with a buy-out at the end for a dollar, fair market value, or some other determined amount, explains Link. Based on his experience at E&I and in previous jobs, he says campuses are entering into both types of lease agreements. Capital leases must adhere to Financial Accounting Standards Board criteria. With a fair market value buy-out, Cuno notes, an institution could wind up with equipment worth more or less than an initially determined fixed purchase price. With operating leases, according to Mace, institutions usually can get the lowest payments and the most flexibility at the end of the term.
8. There may be tax implications. When selecting a lease type, be sure to run it by the controller's office or a tax accountant. Many public institutions are tax exempt on capital leases, says Link. With operating leases, the leasing company may charge the institution taxes on equipment they own and build it into the payments. "That's another catch they can get you on," he adds.
9. Collective buying power can bring the best deal. As Jones has seen with CCCS schools, an institution with lower purchasing levels?such as 1,800 students and a budget of $85 million or $100 million a year?can really benefit from lease terms negotiated on behalf of multiple institutions. "You get into what is the usual and customary terms and conditions for the industry," he explains. "An individual school might not be able to have the clout to argue those terms away."
10. Funding out clauses are worth asking about. In Link's experience, nearly all public universities, and perhaps some private institutions, can qualify for such a clause, which allows for getting out of the lease without penalties or charges, should funds not be appropriated or approved.
11. Supplemental warranties should be considered. As Peterson explains, if Merced has a five-year lease on equipment where the standard warranty is three years, these kinds of programs are a good idea. "We learned that the hard way last time," he says, adding that administrators held their breath and the extended warranty wasn't needed.
12. Agreements should note that normal wear and tear is allowed. "Schools can face an uncertain cost at the end of the lease term because things like this are not disclosed adequately in writing," cautions Wiedenhofer. Dents and dings qualify, although damage requiring replacement would not.
13. Lease length matters. To help determine the ideal length, Cuno suggests checking surveys from Gartner, Forrester, and other research firms for the optimal life cycle of a particular type of equipment.
14. Disposal should be duly noted. Some financing companies offer disposal services as a standard part of the lease contract, others use contracts that would require an add-on, says Doucette. As Wiedenhofer points out, a leasing company is often better connected to efficiently redistribute equipment than a college after a lease is up. At disposal time, the leasing company takes back the equipment and can recycle or refurbish and remarket, says Mace. Companies such as HP, says Cuno, may provide disk-wiping services to help ensure that confidential data has been taken off of machines.
15. End-of-lease options are worth exploring. If the institution is purchasing equipment after the lease, Mace advises being aware of the notice period for renewals or tech-refresh options. "In some cases, if you don't notify the leasing company specifically, you may be locked into a long renewal period." In other words, your campus may be stuck with equipment that's way past its prime. Yet sometimes the latest and greatest isn't necessary. Wiedenhofer has seen many institutions with "a trickle-down system where they'll take assets from a moderate-use lab and route them to administrative uses."
16. Default worries need not be top of mind. If an institution finds itself in dire straits, unable to make agreed upon leasing payments, leasors may well be willing to sit down and figure out an extended lease term with lower payments or some other solution. "No one wants to embarrass anyone. Most of those circumstances would be short-lived and the suppliers want business continuity with that institution for years to come," says Jones.
17. There are three main sources of leases. Lease suppliers may be banks, vendor-affiliated firms, and independent financing companies. Banks may offer competitive rates but won't desire refresh structures, Wiedenhofer says. "They don't want your 1,000 desktop computers back." Yet, Jones adds, banks may go above and beyond to ensure they get a local institution's business. Vendor-independent companies work with a number of suppliers, allowing flexibility on equipment brands, Wiedenhofer says. A technology vendor may be able to walk institutional leaders through the various leasing options. CDW-G product account managers, for instance, work with customers to find an appropriate leasing company and has leasing consultants on staff who can walk customers through the process. Vendors may also try to use sweet leasing terms to seal a big deal?such as interest-free financing or additional products or services, Link says.
18. Customer service counts. When choosing a leasing company, consider indications of service levels. With First American, which is the preferred leasing vendor of CCCS, a liaison acts as the institution's advocate if issues come up with, say, billing or lease fulfillment, Jones explains. He notes that it's a good sign of service if the company offers online tools and assistance.
19. A single finance company can simplify matters, but shopping around is key. At Link's previous institutions, he found that standardizing leasing terms and conditions with a single financial institution was beneficial. "We periodically checked the market for the going rates and found it to be much more convenient, consistent, and financially advantageous," he says. Kelsch has found that with a financing partner that keeps the rates "fair and equitable," it makes sense to stick with that partner for multiple programs. Still, "you have to look [at other options] on a case-by-case basis," he adds. "It's always good to keep them hungry and keep the competition on their heels." When evaluating options, says Cuno, be sure your analysis is an apples to apples comparison.
20. Handling your own financing is a possibility. Some states, and even single universities, have borrowed large sums of money and then arranged for and controlled their own internal leases from within that pool, Link reports.
21. An institution's CFO is best equipped to make final lease decisions. Hallis makes the point this way: "Do you take your car to an authorized mechanic or your brother-in-law? The finance people are the finance people for a reason." Sure, a broader team can help evaluate the options, but in the end, it's the CFO who's trained to do the number crunching.
22. Campuses that have never leased need not jump in head first. When speaking with member institutions that have never leased, Jones tries to engage them by noting several key reasons to consider leasing instead of a capital purchase. He'll suggest campus leaders choose one or two areas, such as a computer lab, and just try out leasing to see how it goes. "It doesn't have to be an either/or. I think the right mix is leasing and buying." As Cuno notes, it's the institution's call. "But we think there are a lot of advantages for consumers, particularly in these cash strapped times." Once customers try leasing, he adds, "they see that there's more to it than first meets the eye."