ServersHardware Today: Resolving the Buy vs. Lease Dilemma

Hardware Today: Resolving the Buy vs. Lease Dilemma

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With a new year now under way, vendors have fallen into their typical new-year pattern of offering deals on server hardware. The slightly brighter outlook 2004 brings with it means some IT departments may be looking to again purchase equipment. Shopping for server hardware brings with it the usual bevy of hard questions: Which server architecture to buy? Which OS will drive that at the lowest TCO? Which vendors offer the best deals once the range is narrowed?

Leasing is a popular option for enterprises looking to grow their server stables while saving on taxes and minimizing upfront costs. We examine the latest trends and discuss some lesser-known reasons to lease.

Not surprisingly, financing is often the No. 1 concern. Good financing can plug holes in a budget and protect investments, whereas bad financing can deliver a knockout punch to a shaky infrastructure. With this in mind, Hardware Today turns a warily frugal eye toward the age-old hardware question — buy or lease?

“Buy or lease?” can sometimes be thought of as “lease and/or buy?” because economic and strategic considerations may urge both options at once. Signing a fair market value (FMV) lease is one way to accomplish this.

An FMV lease, according to Chase (the consumer, small business, and middle market financial services franchise of J.P. Morgan Chase & Co.) is a lease that “for federal income tax purposes the tax incentives (including depreciation), related to the equipment, are retained by the owner (the Lessor) and passed on to the user (the Lessee) in the form of lower lease payments.”

Lease-back and technology refreshing two options found in FMV leases. Their presence often solves the conundrum many administrators face. However, even then, the question of whether to buy outright or execute an FMV lease can still be a riddle.

Manager of Worldwide Sales Enablement for IBM Global Financing Jonathan
Goldstine noted a “mixed” messages in 2004’s server outlook: The longer general usefulness of today’s servers may urge buying outright, while other factors urge FMV leasing. In particular, “The expense pressure that many customers have been under favors fair market value leasing, since it is often less expensive than purchase,” says Goldstein.

Other lease incentives he cites are server consolidation and the need for capacity flexibility, which make on-the-fly changes in server capacity easier.

Deciding whether to lease or buy may also be determined by the type of server under consideration. For example, Goldstine explained the lease likelihood in IBM’s server line, citing higher lease percentages for Big Blue’s zSeries mainframes and the upper range of iSeries and pSeries machines than for its lower-end systems. “With larger acquisitions and more expensive systems,” continues Goldstine, “the acquisition alternatives are more often evaluated by financial management, and FMV leasing often is less expensive than purchase.”

According to Goldstine, smaller servers can be more difficult to track at the end of a lease, further contributing to a bias in favor of leasing larger servers.

But while others corroborate this divide, they also note a changing forecast: an increase in Intel-Architecture- (IA-) based leasing. Mark Staehnke, vice president of Unisys Leasing Global Programs, said 45 percent of Unisys Clearpath (mainframe) customers lease their mainframes, while 35 percent (and growing) lease Unisys’ smaller IA-based ES7000 server series.

The reason for the increase? Smaller server customers are becoming more aware of what mainframe customers have long-since grasped: Deployment costs add up. “By virtue of acquiring many small-value components on an on-going basis over an extended period of time, no single acquisition ever had enough financial impact by itself to get attention …” Staehnke told ServerWatch.

“The result,” he continues, “has been a labyrinth of fractured acquisitions acquired under differing acquisition methods funded from different budgets and all with differing depreciation periods.” Staehnke believes enterprises looking to cut costs will find that the small costs of small servers will constitute a patchwork investment lacking in strategic focus, possibly cobbled together from multiple budgets.

In response, vendors, like Unisys, provide alternative solutions through umbrella financing programs, which consider the small pieces of an enterprise’s server procurement a cohesive unit, thus providing easy accountability for server budgets when the economic going gets tougher and management gets antsy.

Penny-pinching in the server room isn’t always sparked by an economic downturn. Natural IT and business cycles can urge leasing as much as depleted corporate coffers. “Many customers have fluctuating cash flow cycles regardless of the economic climate …” says to Kris Snow, senior director for Sun Microsystems Finance, “… lease payments can be matched to those cycles, making budgeting for IT procurement much more predictable.”

Snow also cites technology obsolescence and equipment disposal as prevalent incentives for leasing among customers. As for Sun in particular, according to Snow, customers might see the ease and financing of using Sun hardware, software, services, and third-party technology under a single financial arrangement as incentives to lease from the vendor.

Other vendors concur that built-in protections against obsolescence can encourage leasing. “Even companies that do not have any cash flow issues often take advantage of technology refresh terms built into a lease,” says Richard McCormack, vice president of product marketing for Fujitsu Computer Systems.

Technology refreshment may be a particularly compelling argument this year: McCormack also sees “pent-up demand” as a factor in server leasing or buying as 2004’s outlook slowly improves. “Assuming the economy in 04 continues to pick up, we expect technology refreshes to continue to pick up due to pent up demand,” McCormack continues. “This means some companies will want to use leasing options if they feel their capital budgets will be exceeded in 04.”

McCormack also anticipates tax codes changes in how depreciation is handled to result in enterprises scrutinizing server shopping options more carefully in 2004.

All of this is not to downplay the obvious. The two main reason enterprises lease equipment are because they do have the cash to purchase the equipment outright or that they are being tax savvy. “For customers with limited capital, financing avoids the upfront investment costs and minimizes cash flow impact …” says to Snow, “for others, an operating lease is most attractive because the IT asset appears as an expense item rather than a depreciating asset on their balance sheets.”

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