Attention to detail is key

When it comes to rentals, attention to detail is required, says Gartner, to continually question figures and compare different payment and delivery models.
1 May 2008

Gartner's Leasing Issues Raised at the 2007 IT and Software Asset Management Summit report was released as a follow-up to the event, where the analyst house had too many questions and not enough time to answer them. Below is a selection of questions and answers that we believe Brainstorm readers will find most relevant.

Q: PC lease terms are two to three years. Do you think this will lengthen as it becomes more common to keep PCs for four years?

A: No, accounting regulations may not permit the length of operating leases to be extended further. The optimum lifecycle can only be determined by modelling the cost of available options. Lifecycles vary, including user software requirements, the type of PC, industry sector and geographic location.

Asset cost modelling is the best way to strike a good financial balance. Understand the leasing market and you can reduce the need to exhaustively cost-model all variations. Many leasing options have tax and cost implications that work against longer lifecycles. For example, the residual value of older equipment is lower, but it can cost more to recycle it. Longer leases may also attract lower tax rebates. These considerations become factored in as higher leasing costs.

Q: Are you seeing companies factoring in the cost of disposal in the lease vs. buy model?

A: Yes, leasing companies are already starting to factor in the cost of waste disposal or its avoidance, so customers only need to factor disposal into purchase cost models.

As a result of rising awareness and increased legislation, disposal is being considered in procurement decisions worldwide. Even where there are no immediate legal regulations, corporate responsibility policies and public relations concerns are often being taken into account.

Returning equipment to the leasing company can make disposal simpler to manage, but organisations are also paying more attention to what the leasing company does with the equipment after it is returned. The residual value of many products can be reduced by disposal concerns.

Whether leasing or buying, record-keeping disciplines are essential to demonstrating environmental compliance. As the lessee of the equipment, you may still be pursued if equipment from improper disposal is traced back to you.

It then becomes your responsibility or at least your duty of care to demonstrate contractually and in practical terms that you disposed of electrical waste responsibly.

Q: Are leasing companies guaranteeing effective sanitation, specifically for government-leased computers?

A: Leasing companies are generally unable to provide total guarantees beyond attesting that they have followed a documented process. If the leasing company offers guarantees, then your ability to audit and enforce them should be carefully considered. The use of a computer system and the sensitivity of its data should be reflected in its security classification, as defined in your security policy. That classification will dictate how you specify the sanitisation of storage media. Not all leasing companies and contracts provide a complete range of sanitisation services.

Even when overwritten sev-eral times, there can be no absolute guarantee that, with sufficiently sensitive equipment and expertise, multiple generations of data cannot be recovered by analysing the residual magnetic resonance of the medium. In some cases, the data may simply be too sensitive for the storage media to leave the premises. In these cases, the lessee has little alternative but to purchase the storage components and ensure their destruction. Lease terms are critical. Some leases can require systems to be returned in "working condition" with their operating systems loaded. Compare your requirements with the services being offered to determine how well they meet your needs.

Q: Should independent leasing companies have better or worse lease rates than manufacturers' lease rates?

A: There is no reason why either should be better or worse, so be sure to make like-for-like comparisons. Lease rates are typically calculated as a decimal or percentage of the total cost, but costs can also include many other added-value services. Unless these are removed, they could result in an incorrect assumption that one kind of leasing company's rates are worse than another's.

Also pay attention to the terms and conditions of the leasing contract. The impact of the terms and conditions surrounding lease renewals, early lease terminations and end-of-lease purchase options require understanding and must be analysed in depth. If there is a significant difference in pricing between leases, then there is likely to be a significant difference in the leasing products themselves, either in their structure or their terms.

Q: What is the best method to determine fair market value (FMV)?

A: The method used to determine the FMV used in a lease contract (for example, to calculate an end-of-lease purchase option) is less important than ensuring that the method is precisely defined and described in the lease contract terms and conditions. Few contracts address FMV at all. Lessors might talk about it as the value obtained in an arms length transaction between an informed and willing buyer under no compulsion to buy and an informed and willing seller under no compulsion to sell.

Sometimes, lease contracts will specify that if lessees want to purchase assets at the end of the lease, then they must pay the in-place or system-installed FMV. Avoid this. Both of these values are arbitrary and not reflected by conditions in the external markets. Rather, they mean the value assigned to a piece of equipment installed and running. Typically, they are also substantially higher than a traditional arms-length FMV approach. The sources for FMV can vary greatly, ranging from the IT equivalent of "used-car price guides" to subscription-based FMV reports. Again, the key issue is the details captured in the contract. Also, the contract should contain provisions dealing with how a change in circumstances, such as what happens if the FMV report company went out of business, would be handled.

Source: Gartner Inc, Leasing Issues Raised at the 2007 IT and Software Asset Management Summit, Stewart Buchanan, Lars Mieritz, 2 August 2007.