Hardware Today: The Lease vs. Buy Dilemma?

By Drew Robb (Send Email)
Posted Oct 16, 2006

Go into any car dealership and ask a salesperson whether it's best to buy or lease or that hybrid you have your eye on. The outright answer may be a hedge, but ultimately 99.9999 percent will want you to lease. Why? Because everybody from the auto manufacturer to the dealership to the salesman makes more money out of the deal that way.

Leasing nearly always benefits the lessor and thus often gets a bad rap. In the case of server hardware, however, the lessee stands to benefit as well. When does it make sense to lease equipment rather than buy it outright?

The same can be said of server leasing. Here, however, the economics may have skewed enough to make leasing beneficial to the lessee as well. Thus, it is an option worth considering.

"Traditionally, organizations have trended toward purchasing servers instead of leasing them because the useful life of servers is four to five years, yet they have no capital value after three years," says John Enck, an analyst at Gartner. "More recently, however, we are seeing more companies moving toward leasing arrangements, as they can cycle out their servers after three years in pursuit of the latest and greatest technology advancements."

He points to several factors driving this shift. The rate of change in the industry means server obsolescence is again a significant factor. What with dual-core and quad-core processors, new blade chassis and a wealth of other enhancements, two-year-old servers and blades may not be desirable. Further, the energy improvements occurring in servers in terms of lower wattage and smaller cooling requirements are pushing some companies to reconsider leasing.

Lease of Life

Leasing is a way for enterprises to mitigate the various risks that accompany the acquisition of IT assets. The lessor provides maintenance or swap-out of faulty gear and technology refresh options as well as assumes responsibility for proper disposal of equipment at the end of its useful life.

Most vendors are currently experiencing growth in their leasing departments and the options they offer.

HP, for example, offers a "continuum" of options from outright purchase (including the option to purchase additional server capacity as required), though leasing and metered capacity, such as its "pay per use" program.

"When looking at equipment that depreciates rapidly and loses much of its value in a relatively short period of time, it makes sense to lease." — Tom Adams, HP Financial Services managing director for the Americas region.

"When looking at equipment that depreciates rapidly and loses much of its value in a relatively short period of time, it makes sense to lease," says Tom Adams, HP Financial Services managing director for the Americas region. "According to the Equipment Leasing Association, effective leasing strategies can reduce the direct cost of equipment by 12 percent and can reduce total cost of ownership by 15 percent."

Asked when he thinks people should buy rather than lease, he hedged.

"Though customers sometimes prefer to buy outright, from our perspective, there are a number of reasons why leasing always makes good financial sense," he says. "Buying isn't necessarily as simple and straightforward as it may sound."

To his mind, buying involves a significant capital outlay, managing the asset across its lifespan, and someday retiring it. When enterprises finance equipment rather than buy, on the other hand, they avoid the large up-front payment and can set fixed payments with predictable expenses month to month.

Other vendors express similar sentiments.

Sun Microsystems, for example, is another fan of leasing. Its Global Financial Services arm provides enterprise customers worldwide financing for hardware, software and services.

Sun sees the advantages of leasing coming from three areas: Changing IT needs (customers that are expecting to increase or change substantially over the next two to three years); IT as a competitive advantage (users who derive a competitive advantage by deploying the latest IT innovations); and flexibility (users looking to reduce their capital expenditures).

Still, leasing isn't always the most appropriate choice, according Pradeep Parmar, x64 product line business driver at Sun.

"Buying is the best option for people that are looking to keep their IT equipment for a long period of time," says Parmar. "Additionally, if the customer has a financial strategy of making large capital expenditures, purchasing can be a better choice."

Like Sun and HP, Dell (through Dell Financial Services) offers leasing options. Its two programs are technology rotation and outright ownership alternatives through its Fair Market Value (FMV) or $1 Buy-Out ($1BO), respectively.

"With either offering there is no cash outlay, so the customer can expand their purchasing power through a monthly payment and save capital for other needs in their business," says Stori Waugh, senior manager PowerEdge Servers, Dell Product Group. "Leasing can also ease capital expenditures associated with technology refresh cycles, such as hardware and software or operating system upgrades."

Dell, it appears, has lowered the bar in terms of making its leasing terms available to a wider audience.

"Manufacturers like Dell are making it very easy for anyone to lease their equipment with little cash down. This is very tempting to many companies," says Roger Rohrs, publisher and founder of the Orion Blue Books by Orion Research Corporation of Scottsdale, Ariz. Like the Kelly Blue Book for automobiles, this company performs appraisals one more than 60,000 computer products. In the server category it covers low-end to midrange servers. Its fees start at $100.

"Leasing is the way to go in you have limited cash on hand and do not wish to effect the balance sheet," says Rohrs. "It can also be attractive when you have a limited amount of cash to put down, and might be able to take a deduction if negotiated correctly."

Lessee Beware

Rohrs, despite his Blue Book connection, isn't an all-out leasing advocate, either. Based on his experience, customers should buy servers rather than lease under specific circumstances.

"Purchase if you have the cash, good credit and can use the depreciation," he says. Also, "If your previous leasing experience did not work out well, why go through it again?"

He believe the purchase process is often easier, as well. There is no battle at the end of lease about the value of equipment, for example. Further, buying lets users decide when they want to replace gear, rather than having a lease dictate the terms.

For those who do lease, the big caution is to make sure to define the end of the lease terms carefully and read the fine print. What happens, for example, if you can't find all the equipment you leased and have to replace it?

"Use a third party, like Orion, to give the market value at that point," says Rohrs. "Also, watch out on small print about how much it costs to extend the lease. And obtain lease quotes from places other than your bank and the equipment manufacturer."

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