Leasing IT equipment can reduce the cost of IT ownership, but only if you know how to manage your End of lease process.
Due to the short life cycles of IT equipment these days, Leasing has many benefits, not only from a cash flow perspective, but having the flexibility to add and replace IT equipment on a regular basis, ensuring your IT stays current whilst you write the cost off as an operating expense makes leasing an attractive way to procure the latest technology. There are however many things to consider when leasing IT, which if left unmanaged, will end up costing you more in the long run.
Not all equipment leasing and financing companies are the same, however they all have a common purpose – to make money. Leasing companies generate their largest profits from customers who cannot manage their end of lease process well. The fees and additional costs a customer can incur at end of lease could surely put them off leasing again, as the total cost of ownership argument for leasing flies out the window.
Below are 10 things you need to consider when leasing your IT equipment, which can help you manage your leases and reduce costs to your business.
1 ) Maintain an Accurate Asset register
You may have a mix of leased and owned assets or have leases from multiple leasing companies. Whatever the case, if you wish to avoid unnecessary costs, you need to have a good understanding of what you own and what you have on lease, as well as which leases the assets belong to. Your asset register should be updated every time a new lease is signed and every time you make a change to the status of an asset, especially at the end of lease (ie: return, buy-out or extend).
Whether you have a sophisticated asset management system or use spreadsheets, your asset register must be able to capture pertinent information including (but not limited to) the following information:
- Asset Description (make, model, part number)
- Asset Serial Number
- Lease schedule/reference number
- Lease start date
- Lease end date
- Asset location
Details of assets that are lost, damaged or have been replaced under warranty should be kept in this file to avoid discrepancies when dealing with the lessor. This asset register must be updated regularly to reduce divergence from reality.
2 ) Assign the appropriate resources to manage your leases
Management of your leases is an important task and should not be left to the IT staff to do in their spare time. Depending on the size of your organisation, end of lease management can be a full time job. The person/s responsible for managing your leased assets should have good negotiation skills, attention to detail and the ability to communicate with Finance and IT, especially at senior levels due to the decisions and sign-off required when renewing or adding new leases.
3 ) End of lease notification
As a lessee, you are responsible for notifying the lease company of what action you will take at the end of lease within a specified period of time prior to the lease ending in order to avoid penalties. Contract terms may vary, however some notification periods for an end of lease decision can be 90 days prior to lease expiration or even longer. Late notification of the end of lease decision could result in automatic renewal periods and unnecessary costs. A monthly report showing upcoming lease expirations should be extracted from your asset register to base end of lease decisions on.
4 ) Avoid inertia rent
Inertia rent, automatic renewal, evergreen rental, whatever you call it, it’s definitely something you should avoid. Inertia rent is charged at the same lease rate and results in higher total cost of ownership. Why continue to pay the same monthly rental on an asset that has significantly depreciated in value? Within three to four months, you could end up paying more inertia rent than the market value of the equipment, then if you later decide to purchase assets off that lease, you’ll likely be charged fair market value on top of the inertia you have already paid.
5 ) Lease extensions
By pro-actively managing your expiring leases, you can avoid inertia rent, but what if you’re not ready for a refresh yet, and haven’t yet decided whether to keep the equipment that has come to the end of lease? Fixed term or negotiated extensions are a more cost effective way to extend your lease for a period of time and pay an agreed reduced rental. Fixed term extensions may also be negotiated in order to include asset ownership upon paying the final extended rental amount.
6 ) Buying-out your end of lease assets
When IT equipment is bought out at the end of lease, it becomes your property and hence the asset information needs to be updated in the central repository as well as your balance sheet. Your buyout amount will likely be the residual value of the leased asset, or fair market value (whichever is higher). Buying out equipment will allow you to extend the life cycle of your assets, however once the equipment has reached end of life, you’ll have to have an IT disposal process in place to responsibly dispose of your equipment when no longer needed. When negotiating a buyout, consider whether your decision is just made to extend your equipment life cycle. Perhaps a 6 month extension will do the trick and may even work out cheaper in the long run. In any case, be prepared to negotiate your end of lease buyouts, do some research on product values and ensure you factor in the cost of disposition.
7 ) Returning your leased assets
The end of lease returns process can be very time consuming, as it also involves coordinating the replacement equipment coming in, and can seem like more than a distraction that a value added process. The truth is, if the returns process at end of lease is not managed correctly, it could cost you significantly. When equipment is marked for return at end of lease, the lease company needs to be notified of exactly which assets are being returned, down to the serial number level, – and in writing. This is to ensure the rental is suspended on the assets you are returning and to allow for the lessor to re-calculate any ongoing rentals for equipment you may still have on lease. You don’t want to be paying rent for equipment you have long since returned.
IT staff should be notified when the return decision is made to ensure appropriate plans for data backup and refresh of equipment is scheduled and to coordinate the labour effort to remove the machines from each desk within ample time before the end of lease. Depending on the lease agreement, the lessor may be responsible for collection of goods, or it may be your responsibility to return leased assets to a location determined by the lessor. To minimize costs of transportation, assets to be collected must be consolidated in an easily accessible area and packaged in boxes if possible (use the new boxes that came with your new equipment).
When returning equipment, ensure that all power cords, A/C adaptors, accessories and peripherals are also returned along with the equipment to avoid charges for missing items.
8 ) Safeguarding your data at end of lease
Prior to returning any equipment, ensure that your proprietary data is removed using industry standard data security techniques. Depending on your lease terms, you may have negotiated with your lessor to provide a data wipe service at end of lease, however it is recommended that you perform a low level format yourself prior to returning your end of lease assets to ensure your information is secure. Most lessors put the onus of the data wipe onto the customer, hence it is recommended you check your lease documentation. In any case, it is your organisation that is legally responsible for your data – not the leasing company.
9 ) Missing and Damages
Many leasing companies charge lessees for missing components, damages and excessive wear & tear on returned goods at end of lease. Leasing companies have a residual investment in equipment which is retured at end of lease that needs to be recovered by remarketing the equipment via IT Disposal providers, resellers and brokers. Damaged equipment will achieve a reduced sale price, hence the leasing company has every right to charge for any faults on returned equipment. Unfortunately, some companies take this too far and end up charging more than the market value of the equipment. When negotiating your lease terms, ensure the words “Fair Wear & Tear” are used as accepted return condition and you may even want to go as far as establishing agreed limits to charges for specific faults to limit your liability.
10 ) Asset Substitution
Most lease companies allow for “like for like” asset substitution when returning equipment. Asset substitution can be beneficial to your organisation if an end of lease asset cannot be located, has been lost, stolen or damaged beyond repair. To avoid significant penalties, any excess owned assets of similar technology should be substituted and returned to the lessor. Avoid returning leased equipment which belongs to another lease, this ends up causing you to perform yet another substitution at a later date, and can quickly get very messy. Asset substitution should be discussed with your lessor in advance of the return and details must be provided (make, model, serial number) as to which assets are being substituted.