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The Almighty Buck Businesses

Is Leasing Really Worth It? 378

Posted by Cliff
from the rent-to-own dept.
llamaluvr asks: "As I understand it, there are some financial benefits for businesses leasing hardware equipment. Does anybody know what exactly those are, and how much they really help? Do they really outweigh the additional costs of replacing, repackaging, and returning old hardware? How do the size of the business and the computing environment affect these benefits? Additionally, what is the best balance between leasing and purchasing equipment -- would leasing desktops and laptops, but purchasing monitors be best, or should one just lease everything?"
"A little bit of background: I work in the IT Operations department for a BU of a Fortune 100 company, and we lease practically everything right now. We have 4 full-time employees for about 800 workstations, and, while we seem to have enough manpower for managing projects and tickets, we have a tough time getting to returning the equipment, so a lot of it is already late. Complicating this is that many of these PCs are in a harsh industrial environment, and often have at least one failing part, which then costs us a fraction of the entire workstation (for example: a busted floppy might cost us $150 or more, unless we test the PC and replace the part, of course). Corporate has been more attentive to this drain on our time and money lately, and they have talked of outsourcing this process, but in the meantime, we're stuck with it. BTW, we lease IBM equipment through ePlus."
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Is Leasing Really Worth It?

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  • Leasing servers (Score:5, Interesting)

    by suso (153703) * on Tuesday April 05, 2005 @02:37PM (#12145917) Homepage Journal
    If it was a server, I think a major factor would be how far in advance could you get your boss (if you have one) to buy replacement servers so that you can start migrating the services to the new system. A lot of times, server and service migrations take longer than expected and so you might wind up having buy the server outright at the end of the lease because you aren't ready to migrate yet. Its not like leasing a car (which I do) where you can just take your stuff out, put it in your garage and then go swap cars.
    • I agree and support your conclusion.

      Buy servers (at end of lease or up front), leaese desktops and laptops. Migrating them is easier than migrating a server.

      My experience leads me to believe that the useful life span of a server longer than a desktop or a laptop.

      • Re:Leasing servers (Score:5, Informative)

        by strider5 (15284) on Tuesday April 05, 2005 @03:06PM (#12146249) Homepage
        One other thing to consider:

        leasing is a straight-forward writeoff for tax purposes while buying will involve amortizing the cost over multiple tax years.
        • Re:Leasing servers (Score:3, Interesting)

          by MarkGriz (520778)
          "leasing is a straight-forward writeoff for tax purposes while buying will involve amortizing the cost over multiple tax years."

          What are the tax implications of leasing and then purchasing at the end of the lease, as the parent suggested?
          One would assume they'd be more complex (glad I'm not an accountant)
          • Re:Leasing servers (Score:5, Informative)

            by ePhil_One (634771) on Tuesday April 05, 2005 @04:00PM (#12146905) Journal
            What are the tax implications of leasing and then purchasing at the end of the lease, as the parent suggested?

            As all things, the answer is "It depends".

            I'm a fan of the $1 buyout lease, for tax purposes this is the same as buying. If the lease is structured more in line with a FMV (Fair Market Value) buyout, it would usually not be treated as such, and the leasing company would take the write off (helpful for a start up that won't be making a profit and thus makes no use of the tax write off, since the leasing company IS profitable and thus can bundle the tax savings into the payment

            Another potential benefit is in the company books. Since the company doesn't OWN the equipment, it doesn't show up as an asset, and since it can be treated as a monthly "service", the debt doesn't have to be disclosed on the books like a loan would.

          • Re:Leasing servers (Score:4, Informative)

            by spauldo (118058) on Tuesday April 05, 2005 @04:09PM (#12146997)
            IANAA (I am not an accountant) but I used to do the books for my old computer shop, so I know a bit about it. I may be wrong on this one, though. YMMV.

            Generally, when you purchase something, it goes down in your books at cost, and stays at the value you purchased it at. Another account keeps track of the depreciation - it's calculated differently depending on what it is, but generally it's a curve. The lowest spot on the curve is at the end of useful life, when the value recorded for the machine minus the depreciation is the amount you've estimated you can salvage it for.

            If you're buying a piece of equipment at the end of a lease, it's the same thing. You move it into an asset account at the value of what you purchased it for, and start depreciating it. The main difference here is that you're probably only going to have the machine for a short time, so your depreciation is very fast.

            Bear in mind that to people who don't work with accounting methods, they don't make any sense. It's all based on 14th century financial theories and it takes some training to figure out exactly what's what. The methods are standardized though, so it's always roughly the same for every company (barring international differences).
          • Re:Leasing servers (Score:5, Informative)

            by Lord Dimwit Flathead (668521) on Tuesday April 05, 2005 @04:17PM (#12147082)
            At the time of the lease's inception, if it meets any of the the following criteria, it is classified as a capital lease, and thus the payments are a capital expenditure that must be amortized over the useful life of the underlying asset:

            1. the lease term is greater than 75% of the property's estimated economic life
            2. the lease contains an option to purchase the property for less than fair market value
            3. ownership of the property is transferred to the lessee at the end of the lease term
            4. the present value of the lease payments exceeds 90% of the fair market value of the property
            If none of these conditions are met, the lease is an operating lease, which means that the payments are expensed when they are made.

            If the company exercises a purchase option at the end of an operating (expensed) lease, the lease-end purchase price is capitalized and amortized over the remaining useful life of the asset; it has no effect on the original classification of the lease. I don't remember the rule regarding an exercised purchase option at the end of a capital lease (it's been a long time since I had to know this). FASB Statement 13 [fasb.org] covers this in excruciating detail if you really want to know more, but beware of all the interpretations and amendments [fasb.org]...
      • Re:Leasing servers (Score:3, Insightful)

        by Zen (8377)
        My company has a weird take on this. We are a large US based Healthcare company. We buy most of our largest servers (We're an IBM shop: Mainframes, Regatta's, etc). But we typically lease a lot of our midrange UNIX based systems. Our Windows servers are all bought and paid for, as well as all the backend switches/routers/etc. But desktops are leased for about $50/month, and laptops are leased for about $80/month. Monitors are purchased as far as I know. I believe we're on a 3 year rotation for the de
    • Re:Leasing servers (Score:5, Informative)

      by Rei (128717) on Tuesday April 05, 2005 @02:57PM (#12146144) Homepage
      Also: If the poster is in an environment where things tend to break often, leasing is probably not for them. The whole point of leasing is that the item being leased gets use beyond what you would put it through, thus extracting enough extra value from it such that it proves cheaper for your company and still provides enough extra profit to the leasing company to justify their expenses. If the item tends to break on your watch, you might as well just purchase.

      In general, leasing of anything is optimal if:
      A) The item has a long usable lifespan (i.e., damage from use is minimal) and low maintenance costs compared to purchase costs
      B) The lessee only needs it for a short time
      C) Item devaluation is minimal

      Does this really describe your business model here?
      • Re:Leasing servers (Score:2, Interesting)

        by Splab (574204)
        That really makes no sence to me...
        If I were to lease (rent) something and it broke I (here in Denmark) would just return it and ask for it to be replaced. And I'd call bs on the amount of time, we got a couple of servers on lease for 4 years now, it would have been cheaper to buy them if you just look at the cost and divide that by the rent, but thats not how you do those calculations - you need to look at the value of investing the money vs. buying the hardware, which leads us to point C - you would do t
      • Re:Leasing servers (Score:5, Informative)

        by crath (80215) on Tuesday April 05, 2005 @03:20PM (#12146397) Homepage
        I agree completely, but feel an example will help everyone understand why the poster is correct.

        At the end of the lease an asset has residual value. That residual value is determined when you execute the lease. The benefit of leasing comes when the asset has a high residual value; thus the lease payments can be viewed as a loan of sorts, a loan for the difference between the purchase price and the residual value.

        For example, if the purcahse price of a server is $10,000, and its residual value after 3 years is $2,500, then the lease is effectively a loan for $7,500, repaid over 3 years. Thus, if you intend to refresh the server after 3 years, you get use of the server for 3 years for $7,500 (plus interest); whereas a purchase of the device would ential use of the server for 3 years for the cost of $10,000 (plus either interest or "the cost of money") and less what you manage to sell it for.

        The potential gain from leasing must then be compared with the overhead associated with maintianing an organisation that tracks down and returns assets ON TIME; since late fees detract from the benefit.

        There are also non-traditional reasons for leasing. In a former job my boss introduced the leasing of all servers and desktops, where the lease costs were paid by Corporate IT (instead of each department's budget). This allowed Corporate IT to standardise the hardware configurations, and enforce regular refresh of assets, where old assets did not hang around for extended periods of time consuming software licenses and support.
    • To a degree (Score:5, Interesting)

      by jd (1658) <imipak @ y a h o o .com> on Tuesday April 05, 2005 @03:31PM (#12146547) Homepage Journal
      Leased hardware isn't yours (by definition), which places certain constraints. For example, it'll usually require an off-site technician from the company leasing out the hardware to do any maintenance. In a time-sensitive environment (ie: just about everything), the cost of downtime can swamp the cost of hardware.


      The second constraint is that those doing the maintenance have no ties to you, which mean that they don't have to do anything effective. I've been in companies where "guaranteed support" from contracts really didn't exist. The contracts had too many get-out clauses and fine-print, exempting them from any kind of quality of service, even though we were paying through the nose for those extra guarantees.


      The third problem is that you're likely to get refurbished equiptment with an unknown history and minimal to no quality control. Even if there were checks, though, reliability is an unknown. From electron migration to thermal damage on chips to hairline cracks in the motherboard - there are many faults that are hard to identify in any simple laboratory test, but which are exceedingly likely for older equiptment.


      Security is a big issue, these days. You think a refurbished server or router is going to be running fully-patched, fully-tested environments? Chances are, even those who own the equiptment will have no idea of what is actually running. It is unlikely, but possible, that "logic bombs", root-kits and other hard-to-spot malware may be running on the device when you get it.


      Buying a commercial off-the-shelf solution is not perfect and won't PROPERLY fix any of the above, but it's a better bet for anything that is mission-critical.


      The "ideal" is to buy the component cards from the manufacturers, assemble & burn-in test in-house, and then deploy. Then, you have 100% control over the steps and actually can provide a higher level of assurance. True, it won't have any fancy warranties, but as downtime is the most expensive part of any IT operation, fancy warranties that companies rarely honor anyway are of little value.


      The gratest fallacy in IT is to rely on stickers, labels and other scraps of paper. (a-la the certification issue discussed on Slashdot recently.) These things add nothing and frequently cost lots. What adds value is whether the hardware works and works well.


      If you want the job done right, do it yourself. That has been true for hundreds of years, and if modern practices have changed things at all, they have made it all the more important to remember.

      • Falacy (Score:3, Informative)

        by TinyManCan (580322)
        You example of buying components and assembling boxes yourself is exactly what you do _NOT_ want to do in a critical production environment.

        Establish long lasting relationships with large systems integrators and builders such as HP, IBM or SUN. Work with your vendors to get a solution that matches your requirements.

        Then, hold your vendor to the agreement. If your not getting what you need, call your sales rep. Call the VP of customer relations/support for the company. Talk to the money people rather than
        • Re:Falacy (Score:3, Insightful)

          by op00to (219949)
          Unless you're an investment bank or reinsurance company (read: dropping millions of dollars on support contracts), your vendor is probably going to offload you on some sweatshop support house in India. My organisation has one of the oldest support contracts around with a vendor you mentioned above who shall remain nameless. We've been running into problems recently with memory errors in some of our larger (8+ CPU) boxes. Support 'figured out' the problem after repeated kernel log mailings, and told us th
      • Nonsense (Score:3, Informative)

        by ePhil_One (634771)
        I'm not sure what leasing you have done, but this is the most rediculous answer I've ever seen. I lease only new equipment in general, and they are typically covered by the exact same warranties they would be covered under if I had purchased them new, except by leasing them I can usually lease warranties in advance for the full lease term, meaning I don't have to deal with it for three years, and I know the CEO can't decide we can't afford warranty extentions this year.

        Also, if you were to lease refurbi

  • by CaptainZapp (182233) * on Tuesday April 05, 2005 @02:39PM (#12145936) Homepage
    Mate, your question makes about as much sense as asking "How long is a piece of string?".

    For starters: I assume that you're in the US, but could imagine that some of the tax laws, which apart from keeping your liquidity fluid, but for a price, is about the only fathomable reason why you would want to lease in the first place, differ from state to state.

    If it's a matter of keeping your gear in top notch condition and fixed 30 minutes after failure you might be better advised with a support contract including a service level agreement.

    Cutting to the cheese: You are better advised to ask your CPA, or if you insist on getting fancy, your tax attourney.

    HTH, HAND, etc...

    • by Otter (3800) on Tuesday April 05, 2005 @03:00PM (#12146182) Journal
      Also, be aware that whether you lease and how you structure the terms affects your assets (and therefore your ROA and similar ratios based on assets), classification of cash flows and all sorts of other accounting arcana. This doesn't matter in a small private company but damn well does to a Fortune 100 firm.

      Other people are telling you to leave the decision to someone else -- my advice is that if you want to understand how the decision is made, that's great and you should look into it! Just realize that you want to talk with the accounting and finance people, not with the folks here. Slashdot is for evidence-free arguing about Linux TCO, not about the stuff affecting this decision.

  • Too Many Factors (Score:5, Insightful)

    by American AC in Paris (230456) * on Tuesday April 05, 2005 @02:40PM (#12145938) Homepage
    Dear Slashdot,

    As I understand it, sin(x) can have values between positive 1 and negative 1. Is my x going to be positive or negative?

    A little bit of background: I have a value of x somewhere between 0 and pi.

    Snark aside, this really isn't an issue where you should be guided by ancedotal evidence posted to Slashdot. You're working for a Fortune 100 company, for crying out loud--you need a carefully-planned methodology, not a bunch of yammering 'experts' giving you off-the-cuff advice on a very complex problem...

    • A little bit of background: I have a value of x somewhere between 0 and pi.

      Mmmmmmmm pie...

    • by American AC in Paris (230456) * on Tuesday April 05, 2005 @02:55PM (#12146123) Homepage
      Dear Slashdot,

      As I understand it, I'm a total freakin' idiot when it comes to basic trigonometry.

      Where do I go to turn in my geek badge?

    • you need a carefully-planned methodology, not a bunch of yammering 'experts' giving you off-the-cuff advice on a very complex problem...

      I once worked for a Fortune 100 company that had a very good accounting staff and formal training in financial theory for engineers who were coming up through the ranks - and one year we peaked at three flip-flops between "buy PCs" and "lease PCs". Each one accompanied by a very authoritative letter from a Tax God proclaiming that This was the correct treatement.

      Reality

    • by HermDog (24570) on Tuesday April 05, 2005 @03:16PM (#12146354)
      Snark aside, this really isn't an issue where you should be guided by ancedotal evidence posted to Slashdot. You're working for a Fortune 100 company, for crying out loud--you need a carefully-planned methodology, not a bunch of yammering 'experts' giving you off-the-cuff advice on a very complex problem...
      I used to work for a Fortune 50 company, where these types of decisions were evidently often made based on which vendor had the cutest sales staff.
    • 1. Lease (or buy)
      2. ???
      3. Profit

      I agree that the solution to this involves spreadsheets rather than anecdotes. Figure out how much it would cost to maintain what you own if you bought it instead of leasing. Figure out the MTBF and cost of dealing with the F part for each item. Figure out how many man-hours it would take to prepare things to return from lease. Work to maximize efficiency in the numbers. The numbers are something that you (the original submitter) are you a uniquely good position to k
    • by corvair2k1 (658439)
      Burning karma, but I'm gonna make it a point that I know math, too. =)

      A: If your x is between 0 and pi, it's always positive. ;)

      B: If you want to know whether sin(x) is going to be positive or negative, it ranges from 0 to one from 0 to pi. Therefore, positive again.SIN(x) [analyzemath.com]

      Trig is your friend!
    • by bonzomcgrue (719128)
      >> Is my x going to be positive or negative?

      This isn't a complex problem requiring carefully-planned methodology. Your x is going to be positive.

      You provided a helpful clue here:

      > I have a value of x somewhere between 0 and pi.

      Please tell me how to collect my cash and valuable prizes.
    • by DVega (211997)
      Definitively positive!

      1 | _---_
      | _/ \_
      | / \
      |/ \
      0 +------------------
      0 Pi
  • If you lease, you pay less now. If you purchase, you potentially pay less later. However, there are complications on your taxes for either (depreciation vs. amortization, lease payment costs, etc.) In General, I would expect purchasing to be a better deal unless you are expecting to have high turnover of machines and volatility of business (i.e. contract job only requiring machines for 12 months = definitely lease!)
    • Relevant Article (Score:4, Informative)

      by zoombat (513570) on Tuesday April 05, 2005 @04:20PM (#12147120)
      Funny this question should come up now.. Just 10 minutes ago I finished reading an article [healthdatamanagement.com] in Health Data Managment about hardware maintenance. In the paper version they had a special sidebar about leasing vs buying. In the electronic version, it's at the bottom.

      In short, they found that if you want to turn over your computers frequently and on schedule, and were good at asset managment, leasing was generally favorable. But if you decide you want to turn them over ahead of schedule, make changes to the systems during their use (like add memory), or aren't amazing at tracking assets, then the administrative burden could be really heavy.

      They also had a neat description of a procurement system that facilitated the vendor bidding process.

      Overall, the article is a nice balanced look at the topic.
  • It's all about taxes (Score:4, Informative)

    by mencik (516959) <steve@mencik.com> on Tuesday April 05, 2005 @02:41PM (#12145951) Homepage
    When businesses lease equipment, they write-off the whole amount in that tax year. If they purchase equipment, they have to depreciate it over a number of years. With the large amount of IT equipment, keeping track of what was purchased when, and how much has been depreciated is a CPA's nightmare. Thus, the equipment is leased, even if it ends up costing more money to get lesser capable equipment.
    • that makes sense... but why do government agencies lease then? They don't care about tax breaks...
      • by mencik (516959)
        Many Government agencies don't lease. At least the Federal Government agencies I've worked with all tended to purchase equipment rather than lease. I can't speak for local and state government. The only reason I can figure for leasing for the Government is that their initial budgets are limited, and they can "buy" more equipment sooner, and then pay for the out-years using Operations and Maintenance money rather than Procurement money. You have to remember that Government agency budgets contains lots of di
        • All NASA centers lease from LMIT [lockheedmartin.com] (was OAO [oao.com])... and get charged quite a bit more than retail in the leases.

          My PC is $151/mo for three years ($5436 over the lease), but was ~$3000 from the manufacturer (the government price would have been even less). This is on top of monthly charges for support ($135/mo), email ($19/mo), network access ($34/mo), calendaring ($7.50/mo), manditory external file storage ($40/mo). All of these charges are out in the open and anyone who can multiply can see how bad the governm
      • Because the accounting for depreciation is very labor-intensive and difficult. The government doesn't do any work it doesn't want to.
  • by arete (170676) <areteslashdot2@x[ ]net ['ig.' in gap]> on Tuesday April 05, 2005 @02:41PM (#12145955) Homepage
    Basically, it's because the tax law depreciates most of that hardware over something like 7 years. So in the first year you'll get to write off something like 20% of the value.

    With a lease you expense 100% of the amount you pay as soon as you pay it.

    This is why a very common option is lease-to-buy with a very cheap buy option at the end of some number of years. This is essentially an apparently legal scam to allow you to write it all off. (It's legal because the leasor really does still own it until the end)

    The next-best option is to sell the hardware the day you stop using it, because then you immediately get to write off the difference between the amount you've already devalued it and the amount you actually got for it. Because computers aren't worth anything much sooner than 7 years, you always get a tax benefit when you sell a computer that just became obsolete.

    • by arete (170676) <areteslashdot2@x[ ]net ['ig.' in gap]> on Tuesday April 05, 2005 @02:55PM (#12146122) Homepage
      I decided I should clarify this. The important bit, which I just sortof assumed, is: money now is a lot better than money later, especially because as a corp you probably borrowed money from somewhere, so you're paying interest on anything you have to spend now. This is what "Return on Investment (ROI)" is all about - to spend more money on something it has to be worth substantially more in the long term, not just a little more.

      (The rest of this is all massively, massively approximated. I am also not an accountant.)

      Say you have an originally $1000 3 year old computer that's 60% depreciated If you keep it, you'll eventually get to write the other $400 (40%) off - over the next 4 years. This might save you $200 in taxes over those 4 years.

      If you sell it for $2 you get to write off the rest of it immediately - so you immediately get $398 of writeoff and $2 - or $201 you've made, and it's all right now. This equation only gets better if you get more than $2 at the end.

      This tax part basically hugely exaggerates or perhaps magnifies the "money now" part of a lease, especially if you can't guarantee that you'll immediately dispose of it.

      So a lease for $400/yr for three years might be $200 after tax each year, while buying it is more like $850 the first year and then it gives you some money back each additional year.
      • Arete wrote:

        : The important bit is: money now is a lot better than money later ... This is what "Return on Investment (ROI)" is all about

        Actually this is "Discounted Cash Flow". Its part of ROI but ROI is more than you need to compare alternative payment plans.

        Plus money now is better than money later if you are receiving it. If you are spending it the opposite is true.

        A couple of things to be careful of.

        Unrealistic residual values can bight you depending upon the terms of the lease. If you have

    • by SunFan (845761) on Tuesday April 05, 2005 @02:59PM (#12146168)
      This is essentially an apparently legal scam to allow you to write it all off.

      When it comes to reducing taxes, nothing is a scam if it is legal. Paying the lowest tax allowable by law is every citizen's duty to their country.

      • When it comes to reducing taxes, nothing is a scam if it is legal. Paying the lowest tax allowable by law is every citizen's duty to their country.

        Too bad the IRS doesn't see it that way. They can rule a legal practice abusive after the fact and go after you still. While the particular practice discussed in this sub thread has nil chance of that happening, there are a lot of people facing huge tax penalties and jail time right now because they took your philosophy to heart.

        For example:
        http://www.usatod [usatoday.com]
    • Just a minor point, but US tax law allows for computer (and most other technology) items to be depreciated over five years, not seven. Which is a little more realistic.
    • You've got a few misconceptions here.

      First, it depends on the equipment. In the heyday of leasing, the IRS did assign ludicrously-long depreciation schedules for computer assets, but that's no longer a problem. It's possible to depreciate most computer equipment over 3 or 5 years (depending on whether it's a desktop/laptop or a server), IIRC.

      Second, those leases that have a $1 buyout at the end aren't "true" leases, and so they don't qualify as such for tax purposes. "True" leases mean the option to bu

  • Personally, no. (Score:3, Interesting)

    by AKAImBatman (238306) * <akaimbatman@gmai[ ]om ['l.c' in gap]> on Tuesday April 05, 2005 @02:42PM (#12145969) Homepage Journal
    I can't say that I'd ever consider leasing unless it turned out to be MUCH cheaper. Old hardware can always be reused and/or sold off for temporary budget increases. Not to mention that high-wear equipment like laptops tend to break, thus requiring you to pay for the damage.

    That being said, it does have certain political advantages. Having your equipment on lease ensures that the company *must* allow you to upgrade the equipment or go without.
    • Old hardware can always be reused and/or sold off for temporary budget increases.

      Budget increases yes, but not necessarily for your department. At the company where I work the money from any equipment sold off goes into the general fund. Because of this we usually end up giving equipment away to other departments if they can use it.
  • by ajs (35943) <ajsNO@SPAMajs.com> on Tuesday April 05, 2005 @02:42PM (#12145971) Homepage Journal
    • Depending on the lease terms, you may simply get replacement equipment once your current is obsolete (e.g. workstation is a couple revs out of date).
    • Tax benefits can be dramatic. Speak to your tax accountant / lawyer.
    • Depreciation of assets can look very bad on a publicly traded company's books. To avoid this, many public companies lease as much as they can.
    • Often leasing means consolidation. In this day of CDW and the like, that's not as big a benefit, but it used to be huge.
    There are probably other advantages I'm not thinking of. Of course, the down side is that you can't just treat the hardware as your own. Your developers (if you have any) will be especially displeased to hear that they're not allowed to just slap in some RAM or a hard-drive they had lying around.
  • ...is your accountant. The advantages of leasing versus buying exist in the world of tax writeoffs and accounting rules. Asking Slashdotters about that stuff is as dangerous as asking them for legal advice.
  • Finance Issue (Score:5, Informative)

    by Hamfist (311248) on Tuesday April 05, 2005 @02:43PM (#12145987)
    Leasing effectively moves the value of the leased item out of the Fixed Assets of the balance sheet, reducing the overall fixed assets. This has the result of improving the ratio of asset turnover, a prime measure of business performance. It also has an effect on the operating statement, as it becomes a straight cost. It is a much more transparent way to deal with something that will probably get cycled out within 3 years. As others have mentioned, your tax benefit mileage may vary.
    • Leasing effectively moves the value of the leased item out of the Fixed Assets of the balance sheet, reducing the overall fixed assets. This has the result of improving the ratio of asset turnover, a prime measure of business performance. It also has an effect on the operating statement, as it becomes a straight cost.

      I don't fully understand it, but it sounds crooked. I think after all the lawyers are thrown to the bottom of the ocean, maybe accountants should be next to go. ;)

      BTW, how does it improve


      • I'm not an accountant, so I'll agree with you on the first part. I will however, go a little deeper with the explanation.

        Assets are something that you own, supposedly to produce some positive result. If I produce 1 million dollars in sales with 500K in Assets, the performance ratio=1M/500K=2. If I currently have 250K in computer assets and I switch to a leasing plan, the performance ratio changes from 2 to 4 (1M/250K). This indicates that I am using the things that I own (Assets) to produce more sales.
  • Assets and Lawsuits (Score:4, Interesting)

    by DeathFlame (839265) on Tuesday April 05, 2005 @02:44PM (#12145988)
    One area where leasing stuff is useful is during lawsuits.

    In a smaller company if you lease your office, the furniture, the computer hardware, basically no real assets, when you get sued (which seems to be a when not if thing, in the US market) and if you lose, you have nothing to give up.

    But if you want to own the stuff you lease, that's easy too. Just need a second company, company B. Company A leases the stuff from Company B. You own and run company C, which owns and runs companys A and B. This is only a small part of a giant company chain that can exist for several reasons.
    • by jerdenn (86993)
      Actually, it's not that simple. If there is a demonstrable relationship between the companies, they are 'related' ventures, and assests of all of the related companies may be subject to the suit.
    • by C10H14N2 (640033)
      You ever been to court with that?

      If the companies in the chain appear to exist for the sole purpose of doing business with each other, you gain precisely zero protection except for a certain sense of self-satisfaction for making things more complex than they need to be.

      Yes, this is done all the time, but no, it does not afford the protection people think it does. Now, if each company does some TINY percentage of its business with one of the others, you might succeed. But if you are your only customer...it
    • In a smaller company if you lease your office, the furniture, the computer hardware, basically no real assets, when you get sued (which seems to be a when not if thing, in the US market) and if you lose, you have nothing to give up.

      So, let me get this straight. If you lease everything and own nothing and get sued your left with nothing. If you buy everything and get sued and all assets are taken and your left with nothing.

      To me that sounds like a loose/loose situation.

      Also, if leasing is more cost eff
  • by wren337 (182018) on Tuesday April 05, 2005 @02:44PM (#12145989) Homepage
    One thing I have heard from the hosting group is that when a group buys a server, it's difficult to migrate off of it once the hardware is obsolete. You can't really sell it easily, and who would you sell it to? It still runs, so how do you get the business owner to pony up for newer hardware? Before you know it you're heating the server cage with a half dozen Apollo DN3000's.

    When the client is paying hardware rent every month it's easier to say "good news, for the same rent you can get the latest hardware".
  • The big reasons to lease

    a: Flexibility. But this is often overridden by the lease turms

    b: Taxes. Because a lease is an expense, you can write off the full value instead of doing depreciation, which is painfully slow for computers.

    OTOH, if you cycle through your computers fairly quickly and resel them, you can then write off the part that wasn't depreciated, so the tax hit for buying doesn't get to be so bad. This is the trick car rental places use, and why they sell their fleets so quickly.
  • Did you take intro economics? or at least pay attention to elementary school word problems?

    It's really easy. Take the net cost of buying a machine, divide by expected lifespan. Take net cost of leasing a machine [include shipping, and the such], divide by lease time. Compare cost per time. Pick the lower value.

    Though that assumes that large companies like Fortune 100 sorts are actually make logical decisions. More likely than not, an uppity up in your company plays golf with an uppity up in the leasing co
    • Obviously you haven't taken economics either.

      You also have to factor in the interest rate, the possible returns of that money elsewhere, and the tax implications of depreciating capital purchases over time versus writing off expenses directly.
    • It's really easy. Take the net cost of buying a machine, divide by expected lifespan. Take net cost of leasing a machine [include shipping, and the such], divide by lease time. Compare cost per time. Pick the lower value.

      No, it's not really easy. You left out depreciation, the $100k non-depreciation allowance each year, whether or not capital purchases are allowed by management, disposal, etc,
    • You really should have taken more accounting, and learn a bit more about the IT industry if you think that is all there really is to it.

      There are several other considerations:

      Taxes

      The tax issues alone could override the costs of the equipment itself. Depending on the situation the company is it and how much taxable income it has, will completely change the dynamic of this. That's not even discussing the costs of figuring out the taxes (at points, the man power to accurately figure out what the savin

  • Leasing equipment vs. Buying equipment depends on how and how long you are going to use the equipment. Think about how people buy/lease cars with this. If you are going to keep a car for 6 months/3years you might as well lease. If you are going to keep it until it has 225k miles on it and the headgasket is going, buy the thing. Same with PCs. If you want to keep your PCs always at the latest and greatest, lease. But for those you are going to keep and upgrade (thin clients and low power pcs qualify he
  • by Cros13 (206651) *
    For easy management why not try out a terminal server system? The clients can leased easily, and the ease of managment should free up a bit of your guys time. your boss will like it because of the effect on the bottom line.

    You can also lease the terminal clents.
    They are simple devices, very little to go wrong and drop-in replacement is another advantage.

    I'm working on a combo grid/shared memory/terminal server system atm to try and create a distributed destop TS system for our particular setup here.

    Termi
    • Yeah but when it crashes,,,you have (depending on the size of your company) ALL the users who cant work at all! I wouldnt want to be in the shoes of the I.T. department that have over 200 users that do nothing because their terminal server went down.
  • I know of companies that lease, and they spend alot of $$. One guy worked for a company that purchased new computers every 18-24 months. They auctioned off their old systems to help pay for the newer ones. Thier thinking is they would never be stuck paying 100% of the cost of a new computer network, they were always upgrading.

    I see that as waste, just like leasing. So what if you get a $1000 computer for $50 a month, at the end of the month you paid for half the system. I know it sounds good that at the e

    • I too have seen this. one stickler comes to mind though. All the companies that i know of who upgraded everythign at once, generaly takes a loan out to do so. The are still paying the price of a lease to upgrade thier setup. Another anoying fact is that i noticed with leases, the computers tend to have a better backup policy/proceedure then company owned ones. I think this is because the leased computers will usualy just get swaped out if somethign goes wrong were company owned computer get fix and retur
    • I think computers are being sold like snake's oil elixer, as a cure to everything. Have problems, upgrade!

      The reason corporations lease, and get rid of old machines like PII and PIII, is not that they are obsolete, but because it is difficult to get a PII machine working with a P4 Ghost Image with such radically different hardware. Maintaining multiple images for all your P4's would be hard enough, but to maintain a version of each image for PIII and PII would be a nightmare with 20,000 machines.

      There
  • If you buy your own hardware, it's much harder to convince management to upgrade it 3 or 4 years later when it's ancient technology. Where I work, we used to lease equipment, and it was always upgraded on a fairly regular basis. One day they decided it would be more cost effective to buy our own, which we did. That was 6 years ago. We still have people using P2-400 machines with 128MB of ram. This is horribly inadequate for our needs, but once management has realised how much money they can save by having s
  • The reasons for leasing are twofold.

    As everyone here has said it's due to taxes. I also believe (but I'm not an accountant) but the leases don't appear as capitol purchases.

    Secondly equipment can be kept somewhat up to date by replacing old with new. We all now technology changes at a rapid pace, and this allows the company to keep up.
  • Two scenarios in which I'd lease something:

    1. Buying something very expensive but wanting to pay over time. In this case, leasing is just like a loan with a package of services. You can value both those and see if the lease is worth while or not.

    2. When a capital good is not 100% fiscally deductible. E.g. in Belgium, a car is not fully deductible. When leasing a car, the total cost is somewhat higher but is totally deductible (since the lease is a service).

    In some businesses leasing is also used
  • by dancornell (95530) on Tuesday April 05, 2005 @02:50PM (#12146066) Homepage
    I am not an accountant, but I am a small business owner so I have some idea about this stuff.

    The advantages of leasing are primarily:

    1. cash flow benefits
    2. tax benefits

    One of the primary things that small businesses (well, all businesses, but especially small businesses) have to manage is their cash on hand and their cash flow (when cash shows up, when it leaves) If I have to buy a $3000 server and I pay cash then I need to have $3000 cash right now and that cash goes away. If I lease that server, then I might have monthly payments of $50/month. Over the life of using the equipment I pay more, but at the outset I don't have to have all of that cash around.

    Also, when you pay money to buy something of value, for tax purposes you don't take all of that cost off your profit immediately (you pay taxes on profits, not gross income) You have to depreciate it out over a period of time which is supposed to represent the useful life of the equipment. This means that while you might have paid the money out (in cash) you can't claim that they money has all gone away yet for tax purposes. Not fun!

    When you lease an item the leasing company owns that capital expenditure and so they depreciate the item. Your monthly payments can be treated as expenses so they come off your taxable profits immediately. Plus you don't have to account for the depreciation, etc.

    In my business most of my costs are salaries for my people, not workstations for them to use so workstation costs are a small fraction of my expenses. It makes sense just to buy a decent workstation outright rather than haggle with the lease people and try to return or buy out the eqipment later on. Other businesses will operate differently.

    My $.02
  • In some cases, you can deduct the entire lease amount in the first year -- which is a big tax savings, especially since you can include things like MS Office if purchased with the hardware.

  • by dybdahl (80720) <info@Nospam.dybdahl.dk> on Tuesday April 05, 2005 @02:54PM (#12146103) Homepage Journal
    Renting is more expensive than leasing because you can halt the contract with short notice.

    Buying means spending more money to start with.

    Borrowing money to buy instead of leasing would be the obvious choice IF the lender knows that you will succeed. If there is doubt about whether you will succeed with your new company, it will be very expensive to borrow the money to buy the stuff, and then leasing is cheaper.

    That's it.

    Lars Dybdahl.
  • Leasing may work on paper for our company because we bill it to our clients as part of our services. But from an efficiency standpoint it sucks. We tend to run on cutting edge equipment leased at obscene rates, equipment that still costs an arm and a leg to purchase when the lease is up (mostly Sun and SGI). Then you have to migrate stuff (which seems to happen every time you turn around), change disks, scripts etc...

    If you aren't billing clients for the cost, I would recommend going with less bleeding

  • This is not something you should be doing, especially if it is for more than just your site. I would recommend speaking with a procurement firm* which may help you in analyzing the costs you have. The number of variables going into this is going to be so large that you probably may know a couple (or a dozen) but miss out on a lot more.

    The easy answer: do {leasing, buy your own} if you can afford it, as it reduces a lot of headaches as long as your {service provider, in house staff} is dependable.

    * Such as
  • by anomaly (15035) <tom.cooper3@gmai l . com> on Tuesday April 05, 2005 @02:57PM (#12146148)
    This idea made no sense to me back in the days when I worked for a 'Big Six' accounting firm - you know, when dinosaurs roamed the earth?

    However, at the time, this organization was legally a limited liability partnership. As such, any assets were problematic for a couple of reasons.
    1. Capital expenditures must be depreciated over a multiple year cycle - you may pay $10K for that box, but you have to treat the box as if it's worth $10K this year, $6K next year, $3K the next, etc. We all know that computers depreciate more rapidly than cars, and there's no way that you could recoup 60% of the purchase price 12 months after purchase of a box. Expenses, however, are written off as they happen. Spend $10K on a lease this year, and you write off $10K THIS year.

    2. You also show no value for that asset because it's not yours. This matters when the partners are concerned that a lawsuit loss might cause assets to be liquidated and LLCs like to have as few assets as possible. The less there is, the less that can be taken - or so the thinking goes.

    So, it may cost more actual dollars the way you're doing it, but I bet that the accountants and lawyers have it figured out so that it's really in the best interest of your organization to 'waste' that money.

    Hope this helps!

    Regards,
    Anomaly
  • Leasing assumes you can't find a use for obsolete kit. Plus it's a right royal pain in the arse to administer.

    Well, if you design your systems correctly your kit will still be in use long after it has depreciated.

    That means *don't* put the power on the desktop where it will be obsolete in 18 months. It also means make use of *all* of your computing power. It isn't difficult, there's loads of (free) software out there to help. e.g. http://gridengine.sunsource.net/ [sunsource.net] . Oh oh oh. Look! It has that "Grid" buzzw
  • by Ma$$acre (537893) on Tuesday April 05, 2005 @03:00PM (#12146174)
    My company traditionally purchased their own equipment, but at one point was offered a "killer" deal. We were a major software company which was recently taken over (ahem). The leasing deal looked great on paper (i.e. the Bean Counters LOVED it). In practice, it sucked wind. Not the pleasant kind I find blowing by my window as I type this, but rather more of the offensive sewage variety. It created a maintenance nightmare, added overhead that required more staffing to deal with returns, getting off-lease equipment returned from people in the field, which required new leased equipment, a rebuild, transfer of files, etc. despite the fact that the machines were plenty good enough to handle the current software load for another year. By the time the dust settled, my department vowed never to lease anything so transient as user desktops/laptops. Some large cost items which made sense and didn't require extra staff, tracking, and hidden work requirements were left on-lease. All-in-all, the CPAs can figure out how to get you some bang for the buck either way via depreciation, tax breaks, and what not. Don't be sold on leasing because someone tells you it's a better deal financially. When we ran the numbers after all was said and done, it ended up costing us much more in PeoplePower and requirements to make it all work - and even then it still sucked. Own your own. Accept no substitute.
  • I worked at a small company that ran on Macs. Whenever we needed a new one, we would add it to this lease. We only had about 15 machines purchased over the course of about 4 years. Nothing top of the line, but adaquate for Photoshop and Illustrator.

    When I left, the leasing payments were nearly $1,500 a month, which works out to almost the cost of a new machine.
  • by daBass (56811) on Tuesday April 05, 2005 @03:02PM (#12146205)
    The only reason (especialy listed) companies like this is for cashflow and not having it on the books.

    In one year you can choose to spend, say, 1M on IT. Or you can spend 250K leasing it every year. That leaves 750K looking good on the books and can be used to invest in other money making opportunities.
  • Does anybody know what exactly those are, and how much they really help? Do they really outweigh the additional costs of replacing, repackaging, and returning old hardware? How do the size of the business and the computing environment affect these benefits? Additionally, what is the best balance between leasing and purchasing equipment -- would leasing desktops and laptops, but purchasing monitors be best, or should one just lease everything?

    Maybe. Maybe. Maybe. Maybe.
  • From my experience companies use the same IT equipment with minimal upgrades for x amount of years before tossing them in the boneyard:

    Workstations: 3 years
    Monitors: 4 years
    Laptops: 2 years
    Printers: 4 years
    Servers: 4 years
    Phone system: 4 years ...so for example if a phone system is going to cost $60k to buy or $20k to lease for 4 years well then consider leasing.
  • Leasing hardware (Score:5, Informative)

    by Rocketboy (32971) on Tuesday April 05, 2005 @03:09PM (#12146278)
    We changed from buying to leasing hardware (desktops and servers) about three years ago. The primary reason we changed was to move the costs out of our capital equipment budget into the expense budget. We're not a huge business and prefer to reserve our limited capital for plant equipment.

    On the other hand, I wanted to change to leasing anyway. I time-phased the replacement schedule, so we replace 1/3 of our desktops/notebooks every year. For desktops, everyone getting new hardware every three years not only gives us a fair chance at keeping hardware fairly capable of running new software, it also cuts down on user complaints -- "They get new computers; we have to use old stuff!" Everyone knows that there's a three year cycle and when your turn comes up, you get new kit. It does also help with the disposal problem: our society is so saturated with cheap PCs that most charities, schools, and non-profits don't want old stuff. I'm willing to sell (or give, depending,) obsolete stuff to new employees but that hasn't worked terribly well in the past. Too many folks want too much support -- "Can I put a wireless network card in this old computer? What can I do to make it run this game my son bought?" -- that sort of thing. A few employees try to take advantage -- "You sold me this computer and it won't ..." yeah, we "sold" it to you for $20, including keyboard, monitor, mouse, and a Windows license.

    A downside is that for most leasing companies, you have to keep the original packaging material to ship the stuff back to them three years down the road. Never underestimate how much space all those boxes are going to use up, not to mention the time you'll spend trying to match PCs, monitors, laptops, etc. to their proper box.

    For servers, it means we get new servers every three years, which means that I don't have to hugely overspec the thing when I buy it in the hopes it will prove useful more than three years down the road. It also means that it gets complicated if you decide a year later that you need more memory or additional processors. The leases won't end at the same time or you buy it and end up with a box of useless kit when you return the server. It also means that for better or for worse you're going to end up doing server replacements (and all that entails, time-wise,) every three years. We time-phased this, too, so not everything gets replaced at the same time.

    We recently decided to go with five year leases on the servers. The rate of cycle-eating inflation with applications hasn't been too severe lately, so we think that even if it won't be top-of-the-line three or four years down the road, we can still find something it can do. For example, if the new one gets too slow running the database, maybe it could host a different application, or a set of aplications known to play well together when hosted on the same box.

    On the whole, after three years (one full cycle,) of leasing, I prefer it over buying. I spend a lot less time worrying that I'm buying too little hardware for my needs down the road and we're saving capital for other uses. I don't worry about what to do with older equipment any more and I know that when the manufacturer's warranty runs out, the hardware goes away and is replaced by new stuff with new warranties. As a smaller organization with limited resources, our little group hasn't spent noticable time on hardware issues for the past three years and that's a good thing.

    Rb
  • If you have a commitment to get some work done that will make you a profit, and you don't have the capital to buy the equipment, you can lease it.
  • by Chief Typist (110285) on Tuesday April 05, 2005 @03:16PM (#12146352) Homepage
    You're in a business unit of a Fortune 100 company. You have accountants that can answer this question.

    Every business is different -- ask a professional what is best for your business. That's what you pay them for...

    -ch
  • For the lessee, the answer is clearly yes. For the lessor, the answer is clearly no.
  • by tyates (869064) on Tuesday April 05, 2005 @03:18PM (#12146374) Homepage
    People are missing the obvious. Companies lease because they don't want to pay a lot of cash up front. Why drop $1.2m on 1000 computers when they can lease them all for at $40k a month for three years? It's the same reason people finance their cars. And yes, leasing is financing. Don't be fooled by the accounting treatment. When you lease, you make a promise to pay X for Y months, and then give back an asset worth Z. X*Y+Z is the cost of the asset plus some interest. Companies have two main financing alternatives if they want to buy an asset. They can sell stock or issue debt. The problem is, those two actions show up on the balance sheet and weaken the company's financial picture. Leasing doesn't show up on the balance sheet (also called off-balance sheet debt) and they get a tax savings for whatever they buy, and interest rates are usually good (because it's a real asset), so leasing's become the third, and typically the best, alternative for acquiring a capital asset. -- Tristan Yates, author of IT Leader
  • Rule of Thumb (Score:3, Informative)

    by Dracolytch (714699) on Tuesday April 05, 2005 @03:32PM (#12146558) Homepage
    Here's the leasing rule of thumb that an accounting teacher at my college once gave me:

    Every product you buy has an estimated replacement lifespan. Computers, for example, get to be about 3 years old before people tend to replace them. The cost of leases are usually calculated using this estimated lifespan.

    If you are going to use a product for LESS THAN 75% of it's replacement lifespan (switch computers every 2 years), you are better off leasing. Anything longer than that, and you're probably better off buying.

    Please note that the replacement lifespan is quite different than the actual product lifespan (Computers working 8+ years, etc).

    ~D
  • by FrankieBoy (452356) on Tuesday April 05, 2005 @04:14PM (#12147054)
    My company currently leases their computer equipment and it's a nightmare. The CFO sayes "it's good because you always have fresh equipment in the environment" which masks what's really going on. The technology is being driven by the lease, rather than corporate need. You can replace purchased equipment every three years also, nothing is preventing you from doing this if you realy want "freshness". By leasing you are forced to upgrade and migrate systems that do not necessarily need upgrading and you need to take time away from other projects to do it.
  • by dcavanaugh (248349) on Tuesday April 05, 2005 @04:48PM (#12147473) Homepage
    Pro
    ===
    1. Forced retirement of obsolete equipment at the end of the lease. Leases eliminate management discretion in the upgrade process. You can and will upgrade when the lease expires -- not before, not after. Useful when senior management is out of touch with technical reality, although the loss of discretion cuts both ways (see below).

    2. Monthly payments -- better short-term cash flow without actually borrowing money.

    3. The "temporary" nature of leased PCs is understandable by the average employee. If they KNOW their machine is going away in 36 months, they tend to find better places (file server, CD, etc.) to store their data. Leased servers have the same impact on sysadmins -- they can plan on a non-discretionary 100% replacement at a known date in the future.

    Con
    ===
    1. Mid-life hardware upgrades are a problem. Do you save the old parts to put the machine back to as-delivered condition when the lease expires?

    2. Who owns the software? Is that leased also? Usually the answer is "no" (see Microsoft EULA). But you have to wonder about the OEM packages that may be pre-installed and supposedly licensed to a specific machine. Of course, open source would take care of the problem :-)

    3. It is possible to have a lease that extends beyond the warranty period. How much do you spend to fix a computer you don't own? What happens when you return it and it's broken? If you are paying seperately for hardware maintenence, how happy are you going to be when the maintenance cost exceeds book value?

    4. Towards the end of the lease, the monthly payments will exceed the value of having the equipment. What do you do if the equipment is obsolete before the lease expires?

    I think the depreciation curve on IT equipment is too steep for leasing to make sense. I have some experience with leased equipment. My company bought a smaller company, and they had leased PCs. Not only were they leased, they were barely adequate when new and were obsolete at the time of the acquisition. Nobody would spend money to upgrade the PCs because the lease was going to expire in about a year. The cost of the upgrades (monitor, OS, memory, disk, etc.) was dangerously close to the cost of replacing the machines outright. The employees had to suffer with junkware for almost a year before the problem could be solved. If the machines were purchased, the problem could have been solved sooner. It's hard to acknowledge technical reality when money is going out the door every month. If the stuff is already paid for, it's a little easier to wake up and smell the cappuccino.
  • Tax tricks. (Score:3, Informative)

    by supabeast! (84658) on Tuesday April 05, 2005 @05:15PM (#12147851)
    Leases are 99% about tax tricks. The person to talk to is your accountant.

He: Let's end it all, bequeathin' our brains to science. She: What?!? Science got enough trouble with their OWN brains. -- Walt Kelly

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