The Lease-Versus-Buy Equation

By Adam Stone | Posted April 11, 2003
Web hosting firm C I Host does not own a single router.

Sure, the Dallas firm owns its switches, but those are cheap. It leases the really big devices, at a cost of about $10,000 a month. Why would a firm that depends on routers for its day-to-day operations choose to lease the things rather than own them? For CEO Christopher Faulkner, it is a matter of flexibility.

"We have purchased equipment in the past, but then when new stuff comes out, the old stuff is no good, and when you go to trade it in, this piece that you paid $100,000 for is suddenly worth $3,000 or so," he explained. With leasing, "when a bigger router comes out, we can expand the data center. At the same time, we can keep our cash in the bank and use it to grow the business."

Faulkner is not alone. While the buy-versus-lease equation may be a complex one when it comes to things like cars and office furniture, with strong arguments on either side, information technology is a different matter. In almost every case, experts say, leasing is going to be the better option.

"The reason a small-business customer never buys information-technology equipment is because there is an obsolescence curve," said Irv Rothman, president and CEO of the $8 billion-strong HP Financial Services.

Buying makes sense if you plan to keep something for a long time, but technology typically becomes outdates every two to three years. "When you know something is going to become obsolete, why does a small-business customer want to be an owner of that equipment, instead of simply a user of that equipment?" said Rothman.

Leasing comes with its own potential drawbacks, of course. A lease payment typically includes an interest component that a cash purchase would not include. Moreover, leasing requires the business owner to be fairly aggressive in the realm of asset management.

"You are usually talking about assets that are pretty hard to track," said John Baschab, co-author of The Executives Guide to Information Technology, newly published by John Wiley & Sons. "With a car you will usually know where it is, but even medium-sized companies have a lot of trouble tracking any given laptop. So now you decide to lease all your laptops, and when the lease is up it is suddenly very hard to find them all. Computers and printers and all those things, they just move around a lot. And if you can't find the laptop, how are you ever going to find the external floppy disc drive and all the cables that came with it?"

Leasing requires another kind of management skill, too. That is: Lifecycle management. Whereas buying typically means picking up something inexpensive to do the job right now, leasing means that a business is looking at the bigger picture, planning for future upgrades and evolving needs.

That is a plus, according to Matt Millen, vice president for small- and medium-sized business operations at Gateway computers. "When most small businesses go into an acquisition, they are not thinking three years down the road. They don't have a plan," he said. "What leasing can do is to put some rigor and some planning into that acquisition. It provides a level of discipline and road-mapping on the front end to a customer who otherwise might not be looking that far ahead."

An IT lease also will typically include a service contract for the life of the lease. With a purchase, on the other hand, there always exists the possibility that the item will still be in use after the service contract expires. This raises the potential for costly out-of-contract repairs.

Leasing also helps a firm to build up a credit relationship with its bank. By financing a lease through your regular financial institution, "it creates a certain amount of activity, which shows that you are a real player," said Angelo Tomasello, director of information solutions at Interactive Business Systems, an IT private consulting firm specializing in small- and medium-size businesses. In this way, he said, a business can strengthen its position when it comes to future borrowing.

Finally, there is the human element. In purchasing IT equipment, many firms tend to cobble together mismatched elements, whereas a leased system typically will deliver a far greater level of uniformity, according to Mike Vorel, emerging technologies consultant with IT outsourcing firm Bowne Business Solutions. "The last thing you want is people being frustrated because there is a new software out or a new toolset out there and it does not work on their machine."

With all these elements to speak in favor of leasing, experts say, IT is one place where the lease-versus-buy equation falls so squarely on the side of leasing, it really is no contest.

Do you have a comment or question about this article or other small business topics in general? Speak out in the SmallBusinessComputing.com Forums. Join the discussion today!

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