Safety In Numbers

Leasing is one of the most common forms of financing high-tech acquisitions. Surprisingly though, more time, effort and thought are often put into the lease decision itself than into the selection of the most appropriate lessor. Poor or hastily made lessor selections increase risk and exposure to downstream problems that can complicate a high-tech acquisition.

Many companies establish a relationship with a lessor and keep adding more and more equipment schedules as new acquisitions are made. It’s easy. It’s simple. And it can blow up in your face!

Horror stories abound: lessors fail to arrange financing; you exceed your credit with the lessor; the lessor goes into bankruptcy protection after the deal is done, but you want to upgrade. Downstream problems with the acquisition can delay implementation of needed technology, consume resources and even limit your career.

Single-lessor relationships seem to develop over time. The equipment vendor’s marketeer offers a complete deal through the vendor’s credit subsidiary, making the acquisition seem easy. In other cases, the company may solicit bids and select a lessor from the group of bids received. In either situation, the lessor’s account executive (really a marketeer also) works hard to build a relationship based largely upon a perception of trust. This is not to imply that lessors’ marketeers create falsehoods. They simply strive to lock the lessee into a comfort zone and thereby eliminate or substantially reduce outside competition in future deals.

Do Not Get Comfortable

Too much comfort is risky and expensive. As previously mentioned, there is significant risk in today’s world that your lessor will disappear into bankruptcy protection. Size is not an indicator of strength. Large and small lessors alike have met that fate in recent years.

Comfortable single-lessor relationships also raise your costs by eliminating the force of competition. If you simply add more equipment to the existing master lease without shopping the price, you probably haven’t received a fair deal. Likewise, just negotiating a price with your current lessor does not verify competitive pricing or the most favorable terms and conditions.

Protect yourself and your company by developing a portfolio strategy. Leasing companies should be viewed as a resource available to you and your company. Mutually strong relationships with capable lessors are valuable because they help maintain competitive pricing and favorable terms and conditions, and they simplify the high-tech acquisition process.

The lessor portfolio strategy is based on the concept of diversification. Spread the risk over a manageable number of capable lessors and reduce potential downstream acquisition problems. However, diversification reduces risk only if it’s done properly. An improper lessor mix in your portfolio will have the opposite effect. Risk will be increased, not reduced.

There are hundreds of strong capable lessors from which to make your selections. Choose carefully and wisely because conditions and markets change rapidly. Not all lessors are created equal – they have strengths and weaknesses just as you and I do. The properly balanced lessor portfolio leverages lessors’ strengths to do your deals. Some lessors do mainframes but cannot competitively handle local area networks, mid-range computers, PCs, terminals, printers, etc. An appropriate lessor mix has to be maintained so that all your deals can be serviced.

Building a Portfolio

Portfolio building has five steps: determine requirements, research lessors, evaluate lessors, negotiate master agreements, and award master agreements. Each of these steps is a subject in itself. Only the basic issues will be discussed here.

Step One: Determine Requirements

Requirements can often be forecast from the information systems plan, conversations with management, or an analysis of existing equipment leases. In any event, it is important to gain a reasonable estimate of requirements by category of equipment for the next two to three years. Granted, requirements do change, but some idea of future activity is better than none at all.

Step Two: Research Lessors

The hundreds of potential lessors must be culled down to the select few who can service your deals effectively. Trade publications, word-of-mouth, previous dealings and rating services are all sources of information.

Step Three: Evaluate Lessors

Select a list of no more than 20 lessors. Request literature, financial statements and references. Invite sales representatives to visit. Carefully review all available sources of information. Determine which types of deals (mainframes, mid-range, terminals, etc.) each lessor can do best. Rate the potential lessors in a matrix with type of deal across the columns and a lessor’s name on each row. Rate each lessor’s ability from one to five. Enter a zero if you don’t think a lessor can do a particular type of deal.

Step Four: Negotiate Master Agreements

Take the top three lessors for each type of deal and begin serious negotiations of a master lease agreement. (Note: A lessor may do more than one type of deal well.) During negotiations, stress the portfolio concept. The ‘carrots’ to the lessor are: remaining in the portfolio (Zone of Consideration) for future deals, and enough potential volume to justify favorable terms, conditions, pricing and good service. Pricing will be negotiated at the individual deal level; however, it is vital to stress its importance at this stage.

Step Five: Award Master Agreements

Negotiate enough master agreements to provide at least three lessor sources for each type of deal you plan to do. When awarding the master agreements, inform each lessor that they are part of your portfolio and will be called upon for future deals they have been qualified to do. Keep their interest high and they will serve you well.

Once the portfolio has been built, lessors can be selected from it for each deal. The competitive bidding process can be preserved because you always have at least three sources for each deal. Furthermore, these sources are well known to you. The relationship has been established on firm ground based on detailed homework and professional, non-emotional negotiations. Risk is significantly reduced and confidence is high on both sides of the deal.

Portfolio Maintenance

The portfolio will require tune-ups because the world changes. It may become necessary to add or delete lessors for a variety of reasons. The portfolio should be evaluated on an ongoing basis. There are numerous factors to consider; the following is a list of the more important ones.

• Monitor lessor performance. Does the account executive show interest? Has service remained acceptable?

• Monitor lessor’s financial condition. Request annual reports and have your financial staff review them.

• Monitor the market. Is the lessor active? Is the lessor mentioned favorably in the trades?

• Network with your peers. Find others who use the same lessor (remember the reference check in Step 3?) and share experiences.

• Review activity. Has the lessor won any of your deals in the past year? A losing streak may indicate declining interest.

• Trust your instincts. Weigh all of the above information and perform a lessor reality check. Does it all add up? Is the lessor healthy, stable and delivering quality service?

When you get more negatives than positives for a particular lessor, it’s time to seriously reevaluate. Building a lessor portfolio may seem like a lot of work, but it can be done over time. In fact, you can start by simply reviewing the lessor(s) with whom you currently have relationships and build from there. The time spent in front of the deal will make the high-tech acquisition process run more smoothly. If the situation calls for leasing, you have a portfolio of known quantities available. Those dreaded downstream problems can be all but eliminated from your next deal.

Dave Whitinger is a senior consultant with technology procurement consulting firm International Computer Negotiations Inc. of Winter Park, Fla. ICN’s Web site is