What are your thoughts on leasing versus purchasing computers and servers used in our business environment? It seems that technology changes so quickly that a new computer is outdated as soon as I take it out of the box. Would it be better if our company leases the computers and servers or purchases them outright?
– Pat Murray, Systems Administrator
Accurate Forklift Inc. (Santa Rosa, CA)
Duncan Murphy: Ask yourself, “Does this new technology materially improve performance and productivity?” Do not change just because it is there. Each company has a variety of positions requiring a range in IT needs. We tend to play “hand-me-down” to place technology where it is needed. We therefore purchase most machines and extend their life to five-plus years. Leasing has a role if cash preservation is critical and if your people really need cutting-edge machines for their job. This can be driven by changing software and its requirements.
Richard Donnelly: We are leasing our servers and buying our laptops. At one time we leased our laptops, but we were charged for damages when we returned the units at the end of the lease period. This made it more expensive than buying. In our industry, salespeople and technicians are going to scratch and damage the units as they meet with customers and work on the equipment. Today, we buy laptops in quantities of 10 or more and are able to depreciate the cost. If you are considering leasing, be sure to read the fine print at the end of the lease.
Ron Rechenbach: Several factors influence the decision of whether to lease or buy. The company that you choose to supply this type of equipment should provide you with the best service and support. If the leasing company will make it easier for you to update or change, then go with that company. The capability of your staff in terms of working with computers, servers and software often determines the proper decision. A more capable staff can implement the changes and updates under the direction of the chosen company, thereby reducing costs. There are no right answers, but support from the chosen company is critical.
Dave Reder: Purchasing this equipment has been better for us than leasing. We are constantly evaluating the newest technology to be sure that our knowledge is reasonably up-to-date. We look at what business needs can be better satisfied by newer technology and then decide if the gains outweigh the cost. In some cases, it’s better to stay with the existing technology. Owning the equipment allows us to use older equipment in less-demanding applications as technology needs arise in new and different areas. On the other side, leasing computers is a way to preserve cash to finance inventory and accounts receivable. The best approach is to sit down with your financial staff or advisors and consider which works best for you.
Stan Sewell: The decision to lease or buy PCs is primarily a financial one. If your company is cash flush or can finance the purchase more effectively through other means, then buying normally is the best decision. Lease contracts that make provisions for upgrades come at a premium price, and generally do not offer value if the total cost of ownership over time is taken into account. Our company has a large number of PCs spread over a wide geography. We have found that purchasing PCs every three years, with a three-year on-site warranty and internal software support represents the most cost-effective model.
Ken Shaw: The primary drivers for the decision to lease or buy typically are cash flow and the overall scope of the purchase/lease. For a smaller organization replacing a few workstations or servers at a time, purchasing the equipment probably makes more sense. The typical useful life of a workstation or server is five years. If you are leasing the equipment for five years, it is better to save the lease costs and purchase the equipment outright. An exception would be if you need to upgrade your entire network because all the workstations and servers were rolled out at the same time. For a larger organization where the investment in the upgrade impacts cash flow due to the number of workstations and servers, it may be better to lease and spread the cost over five years. In most cases, the changes in software don’t require upgrades any sooner than the five-year useful life of a workstation or server. The decision to lease or purchase depends on your budget, the scope of the replacement/upgrade and your current cash flow position.
Jerry Weidmann: The choice of lease vs. purchase is a function of the most cost-effective alternative and the availability of capital within your organization. The speed of technological change means that the rate at which you amortize your investment on the books should be short, such that it has been written off the books when it needs to be replaced. The cost of funds, term, residual, tax attributes and payment of the decision should be quantified and compared based on a net present value basis or a similar technique to determine the most economic alternative. Everything else being equal, the decision should be made based on the lowest overall net present value of the alternatives.
Another consideration is accessibility to capital. If your company is restricted in its available lines of credit for capital expenditures and your supplier will provide you with equipment on an “off-balance-sheet” basis and the payback on the technology is adequate for your goals, then a lease may be appropriate even if it does not meet the lowest overall net present value investment requirement.
Each alternative should be explored, the quantifiable and subjective values of each alternative compared, and the decision made based on the best value proposition for your company.