Posted on Fri, Mar 19, 2010 @ 03:25 PM
If you are a numbers geek like me, the process by which you calculate a monthly lease payment is fascinating. If you aren't, however, then this can be quite a tedious process.
To simplify the task, I'd like to share with you a table that I find helpful in calculating monthly lease payments to determine their overall cost. When looking into several lease options, filling out a table like this can help sift through the details and determine which package offers the best deal, and how each would compare to financing costs for purchasing.
Example:
Let's say your business needs a $38,000 multifunction plotter. You can finance the plotter for $1,250 per month for 36 months, or you can lease it for $790 per month for 36 months. In this example, the lease price appears to be significantly less expensive per month.
Below is a pre-calculated lease for your new multifunction plotter. This example represents the major inputs and outputs that a leasing company or bank will use when calculating your lease payment. The goal is to understand the definitions of the various components that make up a lease payment.
The yellow highlighted cells are your inputs. All other cells are calculated for you. Please keep in mind that the example below is for example purposes only and does not reflect a live transaction.
Simple "Large Ticket" Lease Pre-calculated Example:
Before signing any lease agreement, there are likely a few basic questions that you'll want to be able to answer. Using the example and table above, let's go through a few of the major ones:
How do I know if $790 per month for 36 months is the correct monthly payment?
As you just learned in the above example, the $790 per month payment is calculated based on a number of factors. The factors that play into your monthly payment are the Total Finance Amount, Soft Costs, Term, Credit Worthiness, and Lessor Total Equity. So the payment is always correct. There is no grey area in the calculation.
How does the leasing company make its money?
The leasing company makes a small amount of money based on the debt rate spread. The lessor also has a cost of funds. If the lessor's cost of fund is 6% and passed along a debt rating of 6.25% the leasing company only makes 0.25%. Leasing is a competitive business so the spreads are typically very low.
The leasing company makes most of its money by reselling the plotter at the end of the term. It is in the leasing company's best interest to keep their Lessor Total Equity as low as possible while keeping the Lessor FV Equity as high as possible. Keep in mind that the leasing company cannot artificially set these amounts because the market for used plotters is based on industry established residual values.
How much interest am I paying?
In the above example your organization is paying 6.25% interest. Keep in mind that many leasing companies do not discuss interest rates, only money factors. There is no harm in asking about the interest rate being used to calculate your lease payment.
Am I getting a good deal?
In this example you got a good deal. The lessor is taking a very high position in the deal and is rating your organization's credit as investment grade. Your ability to get a "good deal" depends on two things.
- Your organization's credit — something that you, as the IT decision maker, cannot directly affect.
- The lessor's familiarity with the types of products that you are considering leasing — a leasing company that specializes in plotter leases will take a more aggressive position in your plotter lease than a leasing company that specializes in other products. Like your organization specializes in its core competencies, so do leasing companies.
So, as you can see, by taking a careful look at all the values that affect your total lease cost, you can determine the overall quality of the lease agreement and easily compare it with others.
Download a the Leasing Calculator Excel sheet which you can use to evaluate your next leasing option.
Focus on Leasing Topics:
- Leasing Vocabulary
- Financing Decisions
- Advantages of Leasing
- Capital vs. Operating Leases
- Understanding My Payment
- Picking a Lease partner
- The OEM Lease
- Interest-Free Leasing
- The Reverse Auction
- Managing Lease Schedules
Jeffrey Goldstein is Senior Consultant at MCPc and is responsible for the delivery of hardcopy and value added services within the Lifecycle Management Group. Jeff earned his BS in Management of Information Systems and Supply Chain Management from The University of Akron and his MBA from the Weatherhead School of Management, Case Western Reserve University. Connect with Jeff on LinkedIn.
Posted on Wed, Mar 17, 2010 @ 02:05 PM
Is it super geeky to admit that one of my goals in life was to win the NorthCoast99 Award?
Well, it's true. From the moment I first heard about the award in 1999, I knew MCPc could win it. I mean, we're the kind of company that treats employees with respect, has great benefits and keeps employees around a long time as a result. Our people are second to none, and I have always been so proud to work here that I wanted to shout it from the rooftops and let everyone know we're definitely one of North Coast Ohio's best-kept secrets.
So, I planned and schemed, sweated and cursed and submitted the application year after year until we finally won this incredible distinction last year. I literally cried when I found out we won.
But here's the thing: Each year we didn't win, we received a terrific outline of how we ranked in comparison to the companies that did. Then we, as an organization, took NorthCoast99's recommendations to heart and slowly evolved our workplace to be even better, and in a position to actually win the award. Seeing our executive team make a true commitment to improving - in aspects from compensation and benefits to communications and culture - made me so happy to be a part of this amazing team.
At the awards ceremony, we heard from Chris Gardner, author of The Pursuit of Happyness. We were all inspired by his true story, depicted quite accurately in the movie made famous by Will Smith.
One of my takeaways from his presentation was that you must always have the courage to do what you know is right, no matter how challenging or impossible it seems. We also learned at the awards ceremony that we were up against 34 past award recipients to win our award, which simply illustrates the need to continually improve each year if we expect to win it again.
And really, don't we want to continue doing all these good things that make us a great workplace, just for the sake of being a great workplace? MCPc is a terrific company of which I am proud to be a part. Speaking for myself and hundreds of others who work here, I know we will continue to have the courage to get better just because we know it is the right thing to do. Our associates truly make MCPc one of the best places to work ever.
What has your company done to make your place to work great? We're always looking for new ideas!
Beth Stec is the Director of Corporate Communications and Human Resources at MCPc, and is responsible for the development and management of personnel programs and policies. Connect with Beth on LinkedIn.
Image Credits
http://www.northcoast99.com/
http://www.art-for-a-change.com/blog/images/dec2006/vallen_pursuit_of_happyness.jpg
Posted on Fri, Mar 12, 2010 @ 02:05 PM
One topic that rarely comes up when speaking to clients about leasing options is capital vs. operating leases — a very important consideration. These are the two types of leases, and each has its own accounting treatment. The major difference between them is that capital leases transfer ownership of the leased product, while operating leases only transfer the right to use the technology.
Choosing the correct lease structure is critical because it affects how your finance department records the lease on your books.
Capital leases are reported on your balance sheet and operating leases are not. Even if you are a privately held company your finance team still keeps good accounting records and communicates on a regular basis with your major creditors.
Capital Lease
The most important concept to understand about a capital lease is the word capital, as in cash or credit. The accounting treatment of a capital lease is similar to an outright purchase. As the lessee, you are obligated to report a capital lease as an asset and a liability on your balance sheet. As such, your organization may claim depreciation on the assets.
- In a capital lease, your organization only assumes some of the risks of ownership. The lessor (leasing company or bank) purchases an asset on your behalf.
- The lessee (you) will have use of the asset during the lease term.
- You make rental payments (including tax and interest) to the lessor that covers a large portion or all of the original cost of the asset.
- Your organization records the capital lease on balance sheets as an asset and a liability.
At the end of term, you have many options available. You may choose to purchase the asset outright, return the asset to the lessor, or extend the term of the lease and continue to make payments. At the end of the lease, if you choose to purchase the asset, the cost to take ownership may be low, sometimes as low as $1. Keep in mind that a capital lease does not imply $1 out; a capital lease may have a fair market value (FMV) buyout. A FMV buyout may be cost prohibitive. Capital leasing is a creative way to acquire a bundle of technology products and services over a period of time. This option may be more attractive than using a bank credit line or paying cash.
Capital leasing is a creative way to acquire a bundle of technology products and services over a period of time. This option may be more attractive than using a bank credit line or paying cash.
Operating Lease
The most important concept to understand about an operating lease is the word operating, as in operating expense. In an operating lease, only the right to use the technology is transferred from the lessor to the lessee. When leasing IT products and service, it is harder to qualify for an operating lease due to the increased risk the lessor takes on.
Operating Lease Requirements (Statement of Financial Accounting Standards - FASB 13)
- The lease does not transfer ownership of the property to the lessee by the end of the lease term
- The lease does not contain a bargain purchase option (unlike the capital lease, where you are often able to purchase the asset at lease end).
- The lease term is equal to less than 75% of the estimated economic life of the property.
- The present value of the minimum lease payments, assuming an appropriate discount rate must be less than 90% of the fair value of the property at lease inception.
Operating Lease Basics:
- The lessor (leasing company or bank) purchases an asset on your behalf.
- The lessee (you) have use of the asset during the lease term.
- You make rental payments (including tax and interest) to the lessor, which only covers the use of the asset for the term.
- Your organization records the operating lease as an operating expense on income statements.
At the end of term, the lessee has many options available to them. The lessee can choose to purchase the asset outright, return the asset to the lessor, or extend the term of the lease and continue to make payments. At the end of the lease, if you choose to outright purchase the asset, the cost to take ownership can be very high. The FMV in a operating lease cannot be pre-negotiated. Hence, operating leases are a creative way to utilize a bundle of technology products and services over a period of time, typically followed by a refresh of the technology. Extending the lease term typically converts the lease to a capital lease for the new term. This option may be more attractive than capital leasing, using a bank credit line, or paying cash.
Applying Leasing to IT Projects
As an IT decision maker, you need to know your organization's preferred accounting treatment for leases. Knowing how your organization prefers to account for leases will affect your strategy when evaluating lease options.
For example, if your organization prefers operating leases:
- You probably will not find a 60-month operating lease for PCs, laptops, printers, or other IT products, because the lease life would exceed 75% of the useful life of the asset and payments would exceed 90% of the present value of the asset.
- You will be limited as to how many services dollars (soft costs) are wrapped into the lease, because services are not tangible and cannot be recovered by the leasing company, and payments would exceed 90% of the present value of the asset.
- You will most likely refresh your technology products and service at the end of the term because buyouts are based on fair market value and can be very cost prohibitive, and your money factor may require you to return all of the assets at the end of the lease.
- You cannot negotiate the residual value of the assets to be leased because the lease cannot contain a bargain purchase option and the low residual values may cause your payments to exceed 90% of the present value.
If your organization prefers capital leases:
- You can choose a longer lease term sometimes as long as 72 months for IT products and services
- Leasing may be a better way to make payments than using a bank line
- Easier to get approved for a capital lease than a new bank line
- You can bundle a lot of services into a capital lease
- There are no restrictions regarding the present value of the equipment
- May provide a way to finance services of a specific term
- You can negotiate your lease payment and residual value (FMV or $1 out)
- No restrictions regarding a bargain purchase option
- Creative way to keep your monthly lease payments low
Did you recently make a leasing decision after considering both capital and operating lease options? Which did you choose? What affected your decision?
Focus on Leasing Topics:
- Leasing Vocabulary
- Financing Decisions
- Advantages of Leasing
- Capital vs. Operating Leases
- Understanding My Payment
- Picking a Lease partner
- The OEM Lease
- Interest-Free Leasing
- The Reverse Auction
- Managing Lease Schedules
Jeffrey Goldstein is Senior Consultant at MCPc and is responsible for the delivery of hardcopy and value added services within the Lifecycle Management Group. Jeff earned his BS in Management of Information Systems and Supply Chain Management from The University of Akron and his MBA from the Weatherhead School of Management, Case Western Reserve University. Connect with Jeff on LinkedIn.
Image Credits:
www.techfin.com
www.miamism.com
Posted on Tue, Mar 09, 2010 @ 02:32 PM
Would you consider your last dinner party a success? What is completed on time and on budget? Did it meet your expectations and those of your stakeholder (i.e. your date, spouse or family)?
If not, what went wrong? Did you shop too late to get choice selections? Did you even make a list? Did you laminate your plan to protect against a messy counter? (I have actually done this.) Did you forget a key ingredient? Did the presentation resemble the photograph you were attempting to emulate? And finally, did the meal taste as good as the reviews suggested?
Wouldn't it be remarkable if just one thing could ensure a successful dinner, or IT project for that matter? There is, in fact, an often overlooked step that can make or break any project: a well thought-out plan.
Here, we will examine what steps, precautions, processes, tools and techniques within each project phase are a must to ensure a successful project — success being defined as the proverbial on-time and on-budget, plus achieving the client's business objectives.
At MCPc, we follow a six-step project delivery methodology, so I will use this framework for the discussion.
In addition, it's important to consider two more steps after project delivery, listed below as steps 7 and 8.
- Plan
- Define
- Design
- Build
- Deploy
- Close
- Optimize
- Stead-State
The importance of Project Planning
So, to continue with the dinner analogy: if you prepared a nice meal recently, how much time did you spend planning it, compared with how long it took to actually prepare the meal?
My last big dinner was for Valentine's Day. I spent hours researching, reading reviews and contemplating alternatives (what would I do if snow prevented me from accessing the grill?) before building my grocery list. This is analogous to the requirements-gathering process for any project.
The way to make a project successful in all aspects is to plan it carefully, not just to start work quickly.
The Plan Phase should identify the scope of the project, define the rules the project will follow and generate a schedule for the major tasks of the project.
And, please don't confuse a project plan with a Gantt chart.
The project plan is the project keystone. It unifies all other management controls and gives the project coherence. Your plan should define:
- Project scope and objectives
- Planning assumptions, constraints, and risks
- Time management and reporting
- Cost management and controls
- Quality management and policy
- Human resource plans and organization
- Communication channels and strategy
- Risk management
- Issues management
The plan phase must contain processes and checks to help ensure that defined goals and objectives — not activities — drive the way a project is managed. Objectives for the project must be quantifiable, concrete, documented, and accepted before the project team begins work.
Really, the most important aspect of the plan phase is to slow down, and take a thoughtful approach that respects and maintains a project tempo while still carefully crafting the project's quantifiable goals and objectives, as well as other management controls.
I challenge you to try this approach on your next project. Encourage your team to create clear deliverables before launching into the next phase in your delivery methodology.
Your thoughts:
- What steps or processes do you insist on completing during the plan phase of your projects?
- What are the key deliverables of your plan phase?
Ira Grossman, PMP, is a Director of Project Management at MCPc, and has more than 15 years of technology project management and supply chain experience. Connect with Ira on LinkedIn.
Image Credit: www.conceptdraw.com
Posted on Thu, Mar 04, 2010 @ 09:47 AM
Often, I have met with clients who want me to quote them a "buy price" and a "lease price" for new technology procurements - a very reasonable request. What I have learned, however , is that my client was really asking a very different question: "How much does your solution cost and what is the most cost-effective way for my organization to pay for it?" This is where the confusion starts.
Example
Say you see an advertisement for a "brand new 44" multifunction plotter starting at only $399 per month."
You think, "wow, what a great deal. We can afford the payment." But let's dissect the offer. Below is a list of questions that you should immediately ask yourself.
- Is this a purchase or lease price?
- What is the down payment?
- What is the term? (There's a big price difference between 36 months and 72months, for example.)
Here is where the math gets tricky. Let's think back to the buy price vs. lease price question. If your organization needed a 44" multifunction plotter, the $399 per month is very attractive. But think about that offer: If you know that the cost to buy that printer outright is $38,000 plus tax, that would mean that financing plotter for 72 months would equate to a cost of more than $550 per month. Keeping in mind that 72 months is six years, how is it possible to buy a $38,000 unit for only $399 per month?
Most likely, the $399 per month payment is for an operating lease, which provides a low monthly payment for the use of the machine. You only pay for depreciation for the duration of your lease term, and do not own the machine at lease end. If the plotter generates monthly revenue, there is an advantage to keeping your monthly payment lower than the revenue it generates, thus increasing ROI. This low monthly cost is the advantage of the operating lease. At the end of the lease term, you can turn in the existing multifunction plotter and lease another new one, effectively upgrading for a very low cost.
In this example, the major benefit is that you have successfully increased your buying power. In contrast, buying the plotter outright would cause a drop in available cash, result in a lower ROI and require an expensive upgrade in the future. The trade-off is that leasing requires more discipline and commitment than buying. For example, you don't get to keep the printer unless you buyout the lease. You also need to consider the cost of end-of-lease processes.
Advantages of Leasing
In any leasing scenario, there are several potential advantages to consider when making a procurement decision.
Options
Leasing provides your organization a lot of ownership options. Your new IT products and services can be leased for a term and then returned, renewed, extended, or purchased.
No Down Payment
It is typical to put $0 down when leasing IT products and service. However, making a down payment lowers your monthly lease payment, so it may not always be the best option.
Everything is New
Almost all leases for IT products require that the products being leased are brand new. This means that you get the full benefit of the manufacturer's warranty and don't need to worry about existing wear and tear.
Increased Purchasing Power
There are two basic ways that leasing can increase your purchasing power.
- If you only have $30,000 in the bank and you need to buy a $38,000 multifunction plotter you can lease it. A leasing company is extending you credit.
- If you know that you are going to need a new $38,000 multifunction plotter every four years, then leasing is a great way to keep your payments as low as possible.
Balancing Cost and Value
Leasing gives you an advantage if the monthly lease payment for a bundle of IT products and services creates a return that exceeds its cost. By using equipment for lowest possible monthly price, you increase your monthly net revenue.
Fixed Rate Financing
Your money factor is fixed for the term of the lease. Fixed-rates financing make it easier for your organization to project monthly cash flows. Very little consideration is given to market fluctuations after the lease is signed.
Less Sales Tax
Instead of paying the full tax amount up front, a portion of every monthly lease payment is paid for sales tax. In addition, you pay tax only on the dollar amount of the technology products and services value you are using, not on the residual value.
Flexible Payments
In many cases, you can negotiate monthly lease payments that meet your needs. Adjustments to your monthly payment can be made by adjusting the term of your lease or by correcting the residual value of the IT products and services due at the end of the lease.
Fewer Service Issues/Costs
Many IT products come with a three-year manufacturer's warranty. Leasing potentially gives you the advantage of never being out of warranty, therefore keeping your ongoing service and maintenance costs down.
Conserve Working Capital (cash)
Leasing allows you to keep cash in the bank or invested in higher priority projects. Compared to other company assets such as property, plants, and manufacturing machines, IT product lifecycles and depreciation are very short - sometimes as little as three years. Paying for IT products and services for lifecycle refresh projects with cash may not be the best use of your cash.
Preserve Your Credit Lines
Your bank lines are more useful to your organization for inventory, accounts receivable, and emergencies. Tying up bank lines with fixed assets decreases your borrowing power, while leasing allows you to finance your IT products and services without disturbing your bank lines.
Gap Insurance Included
Some leases include free gap insurance meaning if you break your laptop beyond repair and/or it is stolen, and there is a gap between what your insurance company will pay you for the loss and the amount you owe, you'll be covered for the loss.
What factors were the most important in your last IT procurement?
Focus on Leasing Topics:
- Leasing Vocabulary
- Financing Decisions
- Advantages of Leasing
- Capital vs. Operating Leases
- Understanding My Payment
- Picking a Lease partner
- The OEM Lease
- Interest-Free Leasing
- The Reverse Auction
- Managing Lease Schedules
Jeffrey Goldstein is Senior Consultant at MCPc and is responsible for the delivery of hardcopy and value added services within the Lifecycle Management Group. Jeff earned his BS in Management of Information Systems and Supply Chain Management from The University of Akron and his MBA from the Weatherhead School of Management, Case Western Reserve University. Connect with Jeff on LinkedIn.
Image Credits:
http://wilpf.org/docs/BlueDollarDrop.jpg
http://farm4.static.flickr.com/3118/2625862787_1952f58e2a.jpg
Posted on Mon, Mar 01, 2010 @ 06:55 PM
Are you getting out of your x86-based server hardware what you are putting in (return on investment)? Is the size of your datacenter shrinking or growing (carbon and physical footprint)? How quickly can you recover from a disaster (disaster recovery and business continuity)? How long does it take, and how much does it cost to bring a new server online (flexibility and adaptation)?
The Datacenters of Yesterday
The datacenters of yesterday are not the datacenters of today. In years past, mainframe and midrange servers ruled the datacenter. In the datacenters of yesterday, the AS400 and UNIX operating systems were preferred.
Today, it is a different story as X86-based servers are beginning to dominate the datacenter, and the preferred operating systems are Microsoft Windows and LINUX. With that said, the rules that governed the datacenters of yesterday need to be adjusted to meet the needs of quickly advancing business and technology demands.
The Datacenters of Today
For a business to stay relevant in today's market, it must adapt quickly to change. If you are not moving forward then you are falling behind! The demands of business and technology do not wait for anyone. The datacenters of today have become more like an aircraft carrier than a jet fighter - powerful but difficult to manage and navigate (i.e. multiple servers and multiple locations without a centralized management system can make for inefficiency in IT).
Although different in appearance from the datacenters of yesterday, the static nature of today's datacenters make change and adaptation difficult to say the least.
What does the Static Datacenter look like?
- Single Application X86-based servers utilizing, on average, 15% of available resources.
- Rigid and costly disaster recovery (DR) run books are difficult to manage and test.
- Power and cooling costs are going up, not down.
- High carbon and physical footprint caused by too many underutilized physical x86-based servers.
- Adoption of new technology and the retirement of old is a long and drawn-out process, requiring downtime and the potential loss of productivity.
The low utilization of resources, costly DR run books, large carbon and physical footprints, and the drawn out adoption and retirement process makes change difficult, if not impossible, in a static datacenter.
The Datacenters of Tomorrow
The datacenters of tomorrow must be agile and flexible. The highest possible uptimes, even when faced with a disaster, are critical. The datacenters of tomorrow must have a smaller physical footprint as well as a smaller carbon footprint, and must provide an aggressive ROI. They will also require strategic and efficient policies and procedures for the adoption of new technology, as well as the retirement of old physical assets and technologies that are no longer relevant to the strategic goals of your business.
How will all of those things be accomplished? The answer to that question lies in the creation of a dynamic datacenter through X86-based server virtualization and consolidation.
Server virtualization is not a new concept. It was developed in the 1960s by IBM as a way to partition large mainframe systems so that multitasking could be used to run multiple applications and processes on the same physical mainframe. X86-based server virtualization is no different. The consolidation of x86-based servers onto individual hypervisor based physical server(s) will not only increase server resource utilization but also shorten the capital expenditure ROI.
What else can you expect from a dynamic datacenter?
- 75% to 85% physical resource utilization when you virtualize and consolidate your underutilized physical x86-based servers onto a host server.
- Flexibility, reliability, and lower-cost DR run books. This includes the ability to test your run book at anytime and on almost any x86-based server hardware.
- Reduction in the number of physical servers, resulting in the reduction of power, cooling, and physical space requirements.
- The ability to bring new virtual servers online quickly for production, development, and troubleshooting increases your ability to change proactively with your business, and not just reactively as others move ahead of you in the market.
- The ability to retire or repurpose physical x86-based server assets with no downtime or impact on day-to-day operations.
- Centralized management of all x86 based servers is baked in.
As the speed of business increases, so must a business's ability to change and adapt. DR and business continuity are critical regardless of your organization's size. Plus, the business requirements around becoming more "green" (i.e. carbon footprint reduction through decreases in datacenter power and cooling) are a reality in today's world. Server virtualization and a dynamic datacenter can help you to achieve these goals.
Are you ready for the datacenter of tomorrow? How quickly can you recover from a disaster? How"green" is your datacenter? In today's economy, these are all very important questions.
If your management team asked you these questions today, what would be your response?
Jason Dell is a Converged Network Solution Consultant at MCPc, and is responsible for developing and programming custom solutions for clients. Connect with Jason on LinkedIn.
Posted on Fri, Feb 26, 2010 @ 07:47 AM
Now that we have the leasing vocabulary down, it's time to starting digging into how organizations make financing decisions for new IT projects. This week I will discuss a couple of basic ways in which most organizations evaluate IT purchases.
Example Exercise: Think About Personal Finance Decisions
Let's start with an exercise that will frame up our conversation. Pretend that you are in the mood to purchase a few new items from your local electronics store: a 70" plasma TV ($5,000), a Blu-Ray disk player ($200), and a Blu-Ray disk movie ($20). Note, in this example all of the items go on sale in different weeks, so you cannot purchase all three items at the same time. This is a very wide range of prices, and having limited funds available in the ol' checking account to pay for such wonderful new toys, you have to weigh your options on how to best fund your new purchases. Here are your choices:
1) The electronics store is offering 24 months interest-free financing for purchases over $1,000
2) You have a personal credit card with a high limit
3) You can write a check and/or pay cash
With this information in mind, you decide that the best option is to:
- Use the 24 month interest-free financing option to purchase the TV. The purchase price of the TV plus 7.5% tax equals $5,375. That's approximately $224 per month for 24 months.
- Next, put the Blue-ray player on your credit card. That way you can save your $200 until your next credit card billing cycle, essentially deferring the payment a little. In the mean time you will collect a paycheck or two, allowing you to save up the $200 required to pay off your balance.
- Finally, simply pay cash for the $20 Blu-Ray.
Being the wise shopper that you are, you have just used your personal credit to finance your purchases. By appropriately spreading out the payments, and by managing your personal cash flow, you can now enjoy 70 inches of HDTV greatness. The payment methods you chose for Blu-Ray player and movie were far less complex, but still important.
Apply This Rationale to Business Decisions
Let's apply similar logic to your organization. Like to your checking account, credit card, and a 24-month financing option, your organization has a number of options when it comes to financing IT decisions. Being financially stable, your organization most likely has cold hard cash in the bank, as well as various existing credit lines with banks and other lending institutions. Your organization can also choose to open a leasing account, or can choose a "pay as you go" or "pay per use" option, essentially renting new IT products.
So, what are the details of these common options for procuring new IT products, and what are their pros and cons?
Outright Purchase
When you purchase your new technology products and service outright, you assume full ownership at the time of purchase. There are two basic ways to finance your outright purchase: You can pay cash, or you can use one of the company's lines of credit. Once you make the purchase, your company will likely choose to either expense or depreciate the IT assets, generally determined by the dollar value.
Pros:
- You own the assets
- You get to squeeze every last drop of useful life out of the assets
- You can choose to expense or depreciate the assets, potentially giving you an accounting advantage
Cons:
- You just took cash out of the bank or leveraged a credit line to make the purchase
- You just paid the full sales tax amount for the purchase (unless you work for a school or non-profit)
- You may have limited ability to return the product and/or upgrade inexpensively
Leasing
Leasing is simply another type of credit line that is extended to your company by a bank or leasing company. There are two basic types of lease arrangements: Capital and Operating.
Capital Lease
In a capital lease your organization assumes only some of the risks of ownership. The most important concept to understand about a capital lease is the word capital, as in cash or credit. The accounting treatment of a capital lease is similar to an outright purchase. As the lessee you are obligated to report a capital lease as an asset and a liability on your balance sheet, and your organization can claim depreciation on the assets.
Pros:
- Spread out your payment over the term of lease
- Sales tax payments are spread over the term of lease
- End-of-lease options include outright purchase of the residual or return to the lessor
- For a fee you can terminate your lease before the end of the term
Cons:
- Considered an asset and a liability on your balance sheet
- Money factors and mothly payments are typically higher for capital leases vs. operating leases
Operating Lease
In an operating lease only the right to use the technology is transferred from the lessor to the lessee. The most important concept to understand about an operating lease is the word operating, as in operating expense. When leasing IT products and services, it is harder to qualify for an operating lease than a capital lease. Operating leases do not show up on your balance sheet.
Pros:
- Spread out your payments over the lease term
- Sales tax payments are spread over the term of lease
- Payments are treated as an operating expense
- Typically lower money factors and payments vs. capital leases
Cons:
- Harder to quality for an operating lease than a capital lease
- You cannot negotiate upfront for a end-of-term buyout price
- Early termination can be very expensive
Pay-Per-Use
In IT, pay-per-use is typically attributed to software as a service (SaaS) and copier/printer technology refresh projects. Pay-per-use models typically include a bundle of products and services. For example, a pay-per-use model widely used in the copier industry is cost-per-page. Your organization's cost-per-page may include fees for the lease or rental of the copier, toner, service, and maintenance for a specific term.
Be aware that it is nearly impossible to compare a pay-per-use procurement option to a non pay-per-use. This is because pay-per-use procurement options are usually slightly more expensive than a typical lease or outright purchase, however they also come bundled with more value.
Pros:
- Essentially a rental agreement that can be treated as an operating expense
- Flexible options to stop using the service (common of SaaS programs)
- You get a lot of extra value for the dollar
Cons:
- You always have a payment
- You never get to own the product, only use it
- Can be difficult to compare to more traditional procurement models
Just like with personal financing, when your organization is procuring new technology products, understanding the options available can help you make smarter purchase decisions. What options have you taken advantage of in procuring new technologies? How have they worked out long-term?
Spotlight on Leasing Topics:
- Leasing Vocabulary
- Financing Decisions
- Advantages of Leasing
- Capital vs. Operating Leases
- Understanding My Payment
- Picking a Lease partner
- The OEM Lease
- Interest-Free Leasing
- The Reverse Auction
- Managing Lease Schedules
Jeffrey Goldstein is Senior Consultant at MCPc and is responsible for the delivery of hardcopy and value added services within the Lifecycle Management Group. Jeff earned his BS in Management of Information Systems and Supply Chain Management from The University of Akron and his MBA from the Weatherhead School of Management, Case Western Reserve University. Connect with Jeff on LinkedIn.
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Posted on Tue, Feb 23, 2010 @ 09:50 PM
Historically, storage arrays were developed with only minor differences in basic design. However, in today's world of storage virtualization, there are several options to consider, including: traditional storage, modular storage and Intelligent-Clustered Storage (ICS), the next generation of modular storage.
When evaluating these critical data storage systems, everyone seems to agree on the key desired attributes:
- Acceptable Levels of Performance
- Easy to Manage (including Remote Administration)
- Snapshots or Continuous Data Protection (CDP)
- Ability to Replicate Data to Remote Locations (i.e., Disaster Recovery Planning)
- Non-Disruptive Additions
- Non-Disruptive Scheduled Maintenance
- Pay-As-You-Grow (Substantial Scalability)
- Industry Standard Technology (non-proprietary)
- Realistically Priced
- Support for Virtualization Platforms (e.g., VMware, Citrix, Microsoft, Linux)
- BONUS Feature: Automated Tiered Storage & Automatic RAID
- BONUS Feature: Support for SSD (Solid State Disk) Drives
- BONUS Feature: Support for Data Encryption or Enhanced Security
- BONUS Feature: Power Friendly (idles drives not being accessed to conserve power)
So, how do different data storage solutions stack up?
Traditional Storage Arrays
Traditional storage arrays are comprised of a head unit that typically holds one or two storage controllers, the various interfaces to the storage network, and connectivity for storage shelves or cabinets. This design can scale only to a certain point and consequently a specific level of performance. Once those limits are reached, a forklift upgrade to a larger system is required.
For this reason, one must usually estimate the projected storage growth and acquire a system much larger than what is required to meet current storage needs.
Often people do not like the idea of buying more than they need in anticipation of future developments, nor are they interested in expensive proprietary systems since "open" alternatives are plentiful.
In data storage, nothing is more "open" than a truly virtualized storage environment because of the flexibility afforded by the basic premise of the design.
Modular (Virtualized) Storage
A more modern approach, offered by storage manufacturers like DELL EqualLogic, Compellent and Hewlett Packard (LeftHand P4000), is the modular storage node architecture reminiscent of a grid-computing paradigm. Each storage node includes controllers, interfaces and drive space; therefore, scalability is much greater than the traditional storage array architecture.
A significant comparative to traditional designs is that one need only purchase the amount of storage required to meet current needs. This is because simply adding another storage node accommodates expansion. Due to the integrated virtualization layer in modular storage units, more storage is usually accomplished without the complicated reconfiguration required by traditional storage arrays.
Of further contrast to traditional designs, the modular storage node approach actually realizes a performance increase as it is expanded. This is a result of each node having controllers and dedicated storage network connections, in addition to disk space,
Also worth noting, day-to-day management, system upgrades and important features like Snapshots, Thin-Provisioning and Replication (synchronous and asynchronous) are more easily implemented in the modular design — typically at a much lower cost and decreased levels of downtime.
Note: Some manufacturers offer storage virtualization solutions in the form of front-end appliances or host-based software solutions that are positioned in front of these traditional storage arrays. This offers an opportunity to upgrade an otherwise outdated system without a complete overhaul.
The Latest Option: Intelligent Clustered Storage (ICS)
Some people view ICS technology as being so significant that they refer to it as a paradigm shift in the way we'll work with data storage going forward. This intriguing storage technology has roots in the General Parallel File Systems (GPFS) that were created several years ago by IBM in partnership with Intel. In fact, this technology is pervasive in the majority of production super-computer platforms deployed today.
Essentially an ICS solution is comprised of a number of physically independent storage nodes that have complete awareness of one another, and present themselves as a single, logical pool of storage.
The storage nodes are referred to as intelligent because each node has processors, controllers, memory, network interfaces and hard disk drives along with the enabling software. This could be considered to be storage virtualization software, because what is presented to the host operating system is not the true physical storage, but rather a logical representation of the storage that we want the operating system to see or have access to.
Fault resilience is inherent in this design, as data is automatically saved to multiple intelligent storage nodes. Consequently, a single disk failure, or the failure of an entire storage node, will not disrupt service. This is because data is split into blocks that are striped across all of the nodes within the intelligent storage cluster. In fact, some manufacturers can provide protection from multiple storage-node failures in their design.
While the storage system attributes mentioned above are difficult, expensive or unavailable in traditional storage array solutions, they are commonplace in the ICS design.
Virtual Storage Options Offer Increased Business Agility
Bringing server virtualization together with storage virtualization enables an environment that can respond quickly and effectively to business changes that require more computing power and/or more storage. Furthermore, it is no longer necessary to bet too much capacity as a hedge against the dynamic nature of business, saving money both upfront and ongoing.
In the early adoption phase of this virtual technology wave, management of virtualized storage solutions may have been labeled complex or cumbersome. Those days are behind us as manufacturers have made great improvements in easing management techniques and interfaces, as well as simplifying underlying architecture.
Today, virtualized storage options are affordable, scalable and easy-to-manage, and worth consideration if you are looking for a new, dependable storage solution that can grow with your business.
Perry Szarka is the Datacenter Strategic Business Unit leader at MCPc. He works closely with clients to understand their business objectives and discover solutions to help them achieve their goals.
Posted on Fri, Feb 19, 2010 @ 09:51 AM
Greetings! My name is Jeff, and for the next ten weeks I am going discuss the topic of technology leasing. So, before we get started, I think it's important to frame up our conversation and find some common ground. Let's take a moment to quickly build some value into our conversation.
From an IT perspective, I know that leasing and financing are not the hottest topics, and I can bet that learning about leasing is not in your top 10 priorities. Having said this, let me take moment to set the stage with the following scales.
The Cool Scale (1 - 10):
- Technologies such as VoIP, Visual Communication, and Virtualization - 10
- Leasing - 0 (Didn't make the list)
- Leasing cool technologies such as VoIP, Visual Communication, and Virtualization - 3
The Importance Scale (1 - 10):
- Having the appropriate technologies that drive down the cost of doing business - 10
- Appropriately financing those technology investments in order to maximize ROI - 10
So, even though leasing may not be very cool, per se, having knowledge about the topic can certainly help you make the case for obtaining the technology your organization needs in the most cost-effective way. My goal over the next ten weeks is to help those who make technology investment decisions better understand leasing, and how it can positively impact your future technology lifecycle refresh projects.
As the IT decision maker, it's important to be able to have relevant conversations with your CFO, the manufacturer or OEM who makes the products you're considering, and the bank or leasing company that has been recommended to you. This will help you find some common ground with finance, and even make better-informed recommendations for new technologies. As we move forward, I encourage you to ask questions and provide feedback. I sincerely look forward to assisting you in meeting your business goals and objectives.
What are the important terms to understand when considering leasing?
To lay the foundation for future posts on technology leasing, following are some general leasing terms and what they mean. Understanding this vocabulary will help you ask better questions, and get better answers when engaged in a leasing conversation.
Time Value of Money
This is the fundamental, underlying principal that guides investment decisions. I'm offering you a risk-free return, no strings attached, however you have to pick from only one of two options:
- Option 1: I will give you $100 today
- Option 2: I will give you $100 a year from now
The time value of money simply suggests that the best option is to take your $100 today. Why? Because $100 today is not worth $100 one year from now; if you wait a year, you are essentially losing money. The simple takeaway is that money now is better than the same amount later.
Lessor
The lessor is the party/company/bank who is leasing the technology products and service to you. Though you may have a technology consultant guide you through options and offer advice, this company is typically not your lessor — the lessor is always a bank or other financial institution. If your technology partner (VAR) highly suggests that you lease directly through them, as opposed to evaluating multiple lease options, run!
Lessee
The lessee is the person/company leasing technology products and services. (This is you.)
Term
This is the length of the lease agreement. Typical technology leases range from 24-60 months, depending on the technologies being leased; however, a lease can be for any term. When comparing lease options, do not fall into the trap of comparing dissimilar lease terms. Make sure you compare "apples to apples."
MSRP
You most likely already know this term, but it stands for Manufacturer's Suggested Retail Price. Many advertised lease offers are based on MSRP or above. However, the MSRP is not necessarily your final price.
Capitalized Cost
This is basically the negotiated price of the technology products and services. Think of this as your complete bill of materials (BOM). Capitalized cost becomes one of several figures used in calculating a monthly lease payment.
Residual Value
This is the lessor's prediction of what the technology products will be worth at the end of the lease. The residual value is also important because it affects your monthly payment: the higher the residual, the lower your monthly payments.
However, software and technical/professional service have no residual value because the leasing company cannot resell them at the end of the lease. For this reason, bundling software and service into one lease can have a dramatic affect on your lease rate.
Sales Tax
If you hate paying taxes, you are going to love this aspect of leasing: when you lease a product you do not pay sales tax the same way that you would if you were to outright purchase the exact same product.
Instead of paying the full tax amount up front, a portion of every monthly lease payment is paid for sales tax. In addition, you pay tax only on the dollar amount of the technology products and services value you are using, not on the residual value. Think back to the Time Value of Money, Capitalized Cost, and Residual Value concepts. Would you rather pay your full tax bill today or spread your payments over a specific term?
Security Deposit
The security deposit is usually equal to one monthly payment. Multiple security deposits can sometimes be made to reduce the interest rate and, consequently, the monthly payment.
Payoff Amount
Sometimes called buyout amount, this is the amount of money you have to pay to own the technology products and service that you originally chose to lease. The payoff amount might be different from the residual value because of a refunded security deposit.
Early Termination
If you are not happy with the products that you have leased, or you believe you will gain a lot of value by switching to a different product before your lease term is up, you may be able to start from scratch with an early termination of the lease. Be careful: this can be a useful tool, but it can also be very costly.
Depreciation
This is the amount by which property (in this case, some technology product or service) loses its value. In leasing, depreciation is the difference between the cost of the technology product when it is brand new and the value of the technology product at the end of the lease (plus tax, interest and various leasing fees).
As with residual value, software and technical/professional service have no depreciation because they are essentially worth $0 at the end of the lease.
Subsidized or Subvented Lease
To make a lease more attractive (i.e. make the monthly payment lower), manufacturers (OEM) sometimes subsidize or subvent the leases. This means that the manufacturer or OEM is either offering a very low interest rate or is inflating the residual value of their products. Both tactics have the effect of lowering the monthly payment for you, the consumer.
Excess Wear and Tear
Most lease contracts have a clause which states that the company leasing the technology products and service is responsible for the cost of "excess wear and tear" to the products when they are returned. Read your contract carefully to understand what is considered "excessive."
One extra step that may help you avoid having your security deposit revoked or incurring extra charges from the leasing company is purchasing end-of-lease servicing, which will bring your laptop back to like-new condition.
Gap Insurance
If you break your laptop beyond repair and/or it is stolen, there might be a gap between what your insurance company will pay you for the loss and the amount you now must pay to the leasing company. If you take out gap insurance (it is included in some lease contracts), this will cover you for this loss.
Money Factor
Pay close attention to this one. Your approved money factor will heavily influence the amount of your monthly lease payment. Also called a lease factor or even a lease fee, this is the interest rate you are being charged.
It is expressed as a multiplier that can be used to calculate your monthly payments. The money factor is calculated using a Present Value formula and is based on: the total dollar amount being leased, the lease term, your company's credit worthiness, your security deposit, and the residual value of the technology products and services that you intend to lease.
Thank you!
Thanks again for your time today. If you found this information useful, I invite you to read my future posts (upcoming topics are listed below) on leasing over the next several weeks.
I would love to know how leasing may affect your business decisions, and welcome you to leave comments and ask questions about topics you'd like to see addressed.
Focus on Leasing Topics:
- Leasing Vocabulary
- Financing Decisions
- Advantages of Leasing
- Capital vs. Operating Leases
- Understanding My Payment
- Picking a Lease partner
- The OEM Lease
- Interest-Free Leasing
- The Reverse Auction
- Managing Lease Schedules
Jeffrey Goldstein is Senior Consultant at MCPc and is responsible for the delivery of hardcopy and value-added services within the Lifecycle Management Group. Jeff earned his BS in Management of Information Systems and Supply Chain Management from The University of Akron and his MBA from the Weatherhead School of Management, Case Western Reserve University. Connect with Jeff on LinkedIn.
Image Credit: TheMortgageReports.com
Posted on Wed, Feb 17, 2010 @ 02:22 PM
I had the opportunity to attend the VMware partner conference in Las Vegas this week. My wife suspects that it may have been just a ploy to get out of town to avoid dealing with the 2 feet of snow that just happened to hit town while I was away. Pure coincidence. Really!
Not only was I lucky to avoid shoveling snow, I was fortunate enough to spend some time with Rick Jackson, VMware's Vice President of Marketing. The conversation turned to The Cloud and what lessons from the past might teach us about what lies ahead.
The Example
Rick observed that how some organizations used Lotus Notes holds a valuable lesson for CIOs. Notes is a powerful and flexible tool, with one of its biggest benefits being the ability to develop custom applications and tools that integrate directly into the program.
Managers in the industry quickly figured out that using Notes, they could simply work around IT and implement their own solutions, thinking, "We don't need to have IT involved. We can work faster and cheaper without them." This would go on for some time, with more and more independent projects working from Notes.
Thus, the CIO would get run over by a proverbial bus* because then came the inevitable — something would go wrong.
- Lost data wasn't backed up.
- An audit turned up a licensing violation.
- There was a security breach.
- An intellectual property dispute erupted.
At this point, everyone turns to the CIO and collectively says, "This is your fault, what are you doing about it?" In essence, the organization puts the bus in reverse and runs the CIO over — again. Nobody ever said life being CIO was fair.
The Lesson
Rick's advice to CIOs in this situation is to take control now. Clearly communicate to your organization that you have a plan for The Cloud, because if you don't, people will develop one of their own.
Nowhere is communicating your plan more important than to the managers who are responsible for budgets, particularly if their budgets include charges for IT services, as these are the ones likely to be driving that bus.
Questions to Ask:
- Are you helping your employees understand what The Cloud means?
- Do your education and communication strategies include risks as well as rewards?
- Do you have a migration plan?
- Are you including managers' input in helping build your plan?
* Disclaimer on Rick's Behalf: The overused bus analogy is 100% mine. Rick is far too eloquent a communicator to have to resort to such a crude technique. My many thanks to Rick for so generously sharing his time and thoughts.
Lance Frew is the President and Chief Financial Officer at MCPc and helps guide the organization in achieving its strategic vision as an industry-leading technology products and solutions provider. Connect with Lance on LinkedIn.
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