In this fast-paced age in which everything from toothpaste to technology changes continually, renting, rather than owning assets, can seem a smart option.
Kuben Rayan, GM of Dell Financial Services, makes the case for rental: when a company purchases IT assets, he says, these reflect on its balance sheet and, when assets depreciate, there is a negative effect on return on investment and total cost of ownership.
Different assets have different depreciating periods, but the fact is IT equipment is upgraded almost every 18 months. "Power users want the latest and greatest technology, but they find their accounts departments feel differently about paying for regular upgrades. That`s why, in most cases, corporations opt to rent," he says.
Stuart Lewis, GM of sales and marketing at rental firm Rentworks, says the purpose of a piece of equipment, and length of time it is needed, should play the major role in determining whether to rent or buy it.
Companies think costs stop with the purchase price, and overlook maintenance and service costs.
Kuben Rayan, GM, Dell Financial Services
"If you have a mainframe that has scope for scaling and it is going to be adequate for five years or more, managed maintenance costs have been negotiated with the supplier, and the cost of the software licence upgrades, patches and warranty has been predefined, then a cash purchase is the best option," he explains.
On the other hand, says Lewis, if a company has 50 civil engineers working with notebooks that always need the latest programs, it makes more sense to rent the equipment.
"This also applies to corporate banks that want to always be tech-savvy because they want their partners and clients to perceive them as being up to date with technology," Lewis notes.
Technology refresh
Rental companies believe the potential for cost savings and flexibility make a good argument for renting IT assets.
Rental companies should take away rigidity in all forms, otherwise corporations might as well buy equipment for cash, Lewis comments.
Rayan says renting can provide flexible "technology refresh" periods. This can work well for an end-user as once the rental company takes back a product it inherits remaining issues with it, such as resale, upgrades or warranty lapse.
Renting removes concerns about software upgrades, equipment loss and the logistics involved in getting rid of old gear, Lewis confirms. Basically, renting addresses one of the biggest business concerns - risk mitigation, he opines.
Companies often have the misconception that if they purchase equipment, they stop incurring costs, says Rayan. "Companies think costs stop with the purchase price, and overlook maintenance and service costs."
Smaller businesses are especially hungry for cash; renting is definitely the better option for them.
Stuart Lewis, GM sales and marketing, Rentworks
Irrespective of how a corporation disposes of IT assets after a certain period, there will be cost implications, says Rayan.
Corporations are often charged hefty sums for the removal of old equipment, Lewis points out. "There are a lot of companies sitting with old IT equipment in their storage rooms because they can`t find a cheap way to get rid of it."
Renting eliminates the problem from the outset, as it does environmental issues involved in disposing of redundant equipment.
Balancing options
Given the case for renting, why do so many companies still opt for outright purchase?
Many firms have the cash to make a purchase, and often prefer to do just that, Lewis points out.
Contracts state they will be automatically renewed if not terminated within 90 working days of expiry ... companies misunderstand this to mean 90 days, but it actually calculates to about 120 days.
Goolam Aziz, corporate business director, Spartan Technology Rentals
Furthermore, there are organisations that have had bad experiences with rental for various reasons - notably the "victims" of the printer market, where poorly drafted contracts have given IT asset rental a bad name.
Nonetheless, both Lewis and Rayan argue, rather than tying up cash in IT assets and sweating those assets for returns, it makes better sense for most businesses to rent and invest the cash in areas which yield better returns.
"Smaller businesses are especially hungry for cash; renting is definitely the better option for them. Besides, they are able to handle their cash flow better with long-term rental agreements that have fixed costs," comments Lewis.
<B>Renter gripes</B>
Despite many positive comments about the advantages of rental, some end-user companies are less than enthusiastic.
Rand Merchant Bank (RMB) has moved away from renting assets due to bad experiences, says Tony Duncan, head of IT support and infrastructure at RMB.
According to him, the perceived cost saving at the time of deposing of the IT assets did not materialise, to the dismay of the company.
"Take laptop computers for example: at the end of the rental period they might have missing parts, like cables, and they might have also suffered some screen burn, which results in complications between us and the renter," he says.
In addition, the write-off period for most rental companies is five years, but devices such as laptops often do not last that long. Rental companies are inflexible when it comes to negotiating a reduction in this period.
"Basically it was costing us too much to get rid of the IT assets," notes Duncan.
Furthermore, as a bank, RMB is able to get financing for its IT assets at a much cheaper rate than a rental company, Duncan says.
A mistake companies often make when entering rental agreements is assuming asset management comes with the contract, and not negotiating it at the time of signing, says Goolam Aziz, corporate business director at Spartan Technology Rentals.
He advises companies, especially those with numerous rental agreements, to have efficient contract management policies in place. If a rental contract is not handled properly, it can have costly consequences.
"Some companies rent equipment with contracts that state they will be automatically renewed if they are not terminated within 90 working days of their expiry. Sometimes companies misunderstand this to mean 90 days, but it actually calculates to about 120 days, and they find themselves unnecessarily tied into lengthy contracts," he explains.
Should companies rent all their IT needs?
Aziz thinks not. As much as every company has different IT requirements, even the company`s different departments have unique needs, he notes. "For some departments like administration or even accounting, there is really no need for regular technology upgrades," he says.
Rental companies agree equipment such as servers are suited for long-tem rental, whereas notebooks and desktops and more suited for medium- to short-term periods - short-term being anything from one day to 12 months, and long-term from 12 months to 60 months.
Contracts: What`s missing?
<B>The world of printers</B>
The printer sector has always been at the receiving-end of bad rental stories, but Neil Rom, MD of Printacom, says times and contracts are changing for the better.
"Whichever model the customer is better suited to, numerous options exist. The customer must, however, be clear on which route suits them best before making a decision. Choosing the wrong path at the outset will lead to the kind of dissatisfaction customers have traditionally experienced with rental-finance models and, more specifically, those agreements in the traditional copier market," he says.
The traditional "acquire and maintain" option has not been ruled out completely, he explains. "The new rental finance simply offers customers the ability to convert printing into an operating expense - as opposed to a part-capital part-operating expense - a far more attractive option for many smaller businesses."
With introduction of the rental finance model, Rom says customers have found they are able to opt for a multifunctional printer with the kind of functionality they couldn`t afford to buy.
"It allows them access to functionality previously reserved for larger organisations, as well as greater agility and more professional results."
While the new approach does hold benefits, Rom says both models have pros and cons.
"Like so many things in the ICT market, it`s ultimately a 'horses for courses` scenario," Rom continues. "The main drawback of using the rental finance model is an increased total cost in the long run, since interest must be charged over the term of the agreement," Rom says.
Researcher Gartner recommends companies develop lease contracts that provide flexibility and enable business change.
While companies focus on contract terms and conditions, often little attention is paid to what is missing. Gartner highlights some of the key items most frequently omitted.
* Early termination
Early termination options are vital tools for IT managers who juggle sizable portfolios of rental equipment. Business conditions often change during the term of a rental. Examples include changing IT platforms, and mergers and consolidations. Failure to describe the method for early termination is likely to strain even the best lessee-lessor alliance.
Many rentals today incorporate "technology refresh" options that should not be confused with early termination options. Technology refresh allows an enterprise to terminate the rental after approximately two years, turn in the equipment, pay a pre-determined early termination fee and replace the equipment with new technology. An enterprise is not locked into equipment that may no longer be useful. One disadvantage is when invoking the option, companies are committed to a new rental term. Rentals containing a technology refresh option are typically priced higher than rentals that do not.
<B>What to rent</B>
The question of what should be rented and what should be bought usually receives as many different answers as there are types of IT equipment in a large organisation.
Goolam Aziz, corporate business director at Spartan Technology Rentals, believes the way technology is acquired by an organisation determines how much that company knows about its technology needs.
He says before even seeking a rental partner the company should:
* Define what should or should not be rented
* Have an understanding of the company`s long-term IT needs
* Know the technology`s lifecycle
* Know the asset management controls and procedures within the organisation
* Renewal
Unless positive action is taken to give a prescribed period of notice of termination, often a rental is automatically continued at the same monthly rate. Gartner recommends lessees negotiate flexible renewal terms that include fair market value renewal rates. For example, a month-to-month renewal period is preferable to a one-year renewal term as it provides additional flexibility to the lessee. To avoid the possibility of all-or-nothing renewal options, enterprises should reserve the right to extend individual items of equipment on each schedule.
* Purchase of equipment
The option to purchase equipment should be included in the rental contract. The option should provide for either a fair market value purchase or a fixed price or bargain purchase option. Caution is recommended: a fixed price or bargain purchase option may cause the rental to be classified as a financial lease.
* Assignment of product warranties
Since rental firms are the owners of equipment under rental or lease, warranties associated with the product belong to them. However, most of them do not want the responsibility for equipment defects and, accordingly, disclaim the product warranties. It is therefore essential the renter obtains assignment of any rights an owner has in relation to the manufacturer or supplier. The lessee`s obligation to pay rent is unconditional and is not affected by the failure of any equipment.
* Article first published on brainstorm.itweb.co.za
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