All about the money

IT budgets never seem to keep pace with organisational demand for technology, and CIOs are constantly faced with having to prioritise investments while placing others onto the back burner. The CIO thus has to juggle his/her strategic vision, external drivers like legislation, and user demands. Ultimately, someone has to be the loser somewhere.

Leasing assets has long provided a means for CIOs to obtain the technology they need, ostensibly at a lower cost than an outright purchase.

Needless to say, the lease versus buy debate is still raging, with financial departments wanting to know why the corporation should lease assets for a similar cost for which it can purchase them, and IT departments wanting to keep as much capex as possible available for strategic projects, for example. And while there are no easy answers, a number of factors, when appropriately considered, can help point an organisation in the right direction.

Renting, financing or buying IT assets outright have different implications for an organisation, and not just financially. There are a number of factors to be taken into account, the first of which is whether it's financially viable to rent or purchase an asset.

Says IBM SA global finance executive Jeannine Jennings: "Typically, it doesn't make sense to rent something that you will get useful life out of for a very long time."

Companies are taking a different approach to IT.

Jeannine Jennings, global finance executive, IBM SA

As a rule, if you're going to get use out of it for more than five years, she says, it's not worth renting it. However, it may be worth financing it if it's not viable to purchase something outright.

Other items, such as software, cannot necessarily be rented, because of the licensing considerations. Simply put, a rental house cannot buy the software and transfer the licences to a renter, and the licences cannot be transferred back to the rental house after the contract period ends.

Software can be financed though, as Jennings points out: "A lot of financial institutions have been reluctant to finance intangibles like software, as there is nothing for them to collect if the client defaults, but this is changing now and we are seeing companies offering such services."

Services can also be financed these days.

How you word things can be deceiving.

Goolam Aziz, director, Spartan

Says Jennings: "Customers are saying that they don't care what it is, or if we have the money or not. It's about laying out cash now and only seeing the benefit later. Also," she says, "companies are taking a different approach to IT; they're not just buying a server here or there. They're looking at big projects and wanting to know why we won't finance the whole transaction."

Rental and finance houses are also offering services beyond simply facilitating the financial aspect. Says iLayo Software Solutions MD Inana Nkanza: "The biggest problem most companies have is that they cannot track assets internally. The lease sits in the finance department and the equipment sits with IT. There is a huge disconnect. So, for example, an asset is under warranty but because IT doesn't know about it, the company still pays maintenance costs."

It is also remarkably easy to physically lose track of an asset once it has been brought into the organisation and deployed.

Says Rentworks' sales and marketing GM Stuart Lewis: "Things migrate and move around. It is amazing how much desktop migration takes place over time and how quickly reality is not the same as what is reflected on the asset register."

Then there's theft and damage to IT equipment, which is also not uncommon. As a result, IT rental and finance houses now offer both asset management and insurance almost as a matter of course, provided the client wants the service.

While leasing should theoretically not cost more than an outright purchase, it sometimes does, for a number of reasons. Says Lewis: "Leasing becomes more expensive if you run over the contract term."

While most contracts run for 36 months, periods are variable depending on client requirements and the nature of the asset being leased, so a CIO could rent a number of PCs for a project for 12 months should he/she wish, or finance business-critical software over five years.

Should a contract run over term, Lewis says, the lessor will be charged for the extra leasing period. This is something that should be clearly stated in the rental contract, he adds.

Spartan director Goolam Aziz concurs: "We place an emphasis on transparency in contracts. It is a big problem because a lot of companies have been burnt in the past. How you word things like the notice period can be deceiving."

Asset management also plays a role here - by tracking which assets are leased, and what the rental period is, IT departments can ensure equipment is returned on time and thus avoid incurring penalties.

Says iVolve MD Dries de la Rey: "Once the rental contract is over, we will take the machine and throw it away (read: dispose of it in an environmentally friendly manner), allow the customer to continue renting it for a further period, allow companies to offer it to their employees (we give them a settlement figure after which it is theirs), take it back and put it into our social responsibility programme, or, if it is still useable, put it into the pool used by our short-term rentals division."

Once the contract is over, the machine is no longer the lessee's problem, and disposing of it in a manner that meets environmental regulations is a service provided by most rental houses. Many will also clean any and all data off machines if requested to do so, thus assisting with compliance and governance headaches.

While contracts may be significantly more transparent these days, pricing isn't necessarily. Some companies will purchase the equipment outright from the vendor and rent it out.

Other companies prefer not to own the assets, rather facilitating the finance and leaving the CIO with a clear idea of the cash cost of the items. Many of the services mentioned above are not necessarily offered as value-adds, and will be charged for accordingly over the contract period.

That said, having a rental or finance house handle all of the above frees up the IT department to focus on more strategic projects and activities, which is never a bad thing.