To say that Ontario’s Simcoe County Board of Education desktops were out of date is an understatement.
With a mixed bag of Commodore 64s, Radio Shack computers and X86s, students were learning defunct DOS programs, less than 10 per cent of the desktops were compatible with Windows, and not one computer provided students with Internet access. The school board seriously needed to play catch-up or risk having its students’ technology education fall even further behind.
Instead of forking out money for a new line of PCs, the board decided to try leasing. This was a new concept for the school board but there was a no-brainer incentive, said Lyn Cowieson, the superintendent of student services.
“We want to maintain state-of-the-art equipment in the classroom,” she explained. “The old stuff wasn’t user friendly or interesting to students and teachers. There are a lot of computers that look like they’re useful but if they can’t run real-world business applications, they’re not much use.”
Starting last year, the board leases 1,700 PCs annually from Dell Computer Corp. The cycle runs until 2002. At the beginning of 2003, the PCs rented in 1998 go back to Dell and the leasing cycle continues.
Desktop leasing works in a similar manner to leasing cars. Most contracts range from two to five years and at the end of the agreement, companies have an option to buy the technology. But unlike car leasing, most companies have no desire to buy leased PCs. While an older car can be driven, the latest applications may not run on five-year-old desktops.
Leasing can also bring initial cost savings. If Simcoe County Board of Education purchased 1,700 PCs annually for the next five years, the bill would be close to $30 million, estimates Richard Green, the board’s computer consultant. In comparison, their leasing agreement totals about $6 million.
Those kind of numbers are starting to entice some corporations. In 1998, 28 per cent of respondents to an International Data Corp. survey said they were leasing IT equipment. Of that number, 48 per cent either leased or intended to lease their PC operations. “That’s up 34 per cent from 1997,” said Lorraine Cosgrove, an analyst for the Framingham, Mass.-based research firm.
LEASING VS. BUYING
Historically, leasing has been an acceptable alternative to buying mainframes and other high-end equipment. But with more total cost of ownership issues surrounding the desktop, leasing has moved down the food chain. Companies are examining the duration of their desktop-replacement cycles and whether it’s more advantageous to rent or buy, from a financial perspective.
Unsure about where to begin? First of all, realize that leasing desktops is not like leasing one mainframe. It can be difficult to keep track of thousands of desktops. That issue has caused Gartner Group to predict that 40 per cent of companies will ultimately abandon leasing strategies because few companies invest in a solid asset management program, said Frances O’Brien, a research analyst at Gartner. Without an efficient tracking mechanism, dollar savings from leasing can be eroded.
“Without [asset management] you’re begging to be hurt,” she said. “The big difference with PC leasing is it’s not one big piece of equipment; it can be thousands that you’re dealing with. You need something that can help you keep track of [PC] additions, moves and serial numbers. And if companies don’t advise leasing companies of changes with PC tracking, they can get billed.”
When Toronto-based Merrill Lynch leased 2,500 PCs from IBM Corp., the company negotiated to have the vendor’s asset management package bundled as part of the lease. O’Brien sees that arrangement as a wise move. “It can make things simpler because you’re just getting one monthly bill.”
While the initial equipment cost can be in leasing’s favour, don’t forget to investigate the even bigger cost: overall maintenance and upkeep of each desktop. Analysts suggest that companies try to get overall PC maintenance included as part of the lease. But one vendor says that’s not the norm.
“It is possible for all of that to be bundled in leasing agreements but typically, a leasing company stays detached from services,” said Chris Henderson, director of Compaq Capital Canada in Richmond Hill, Ont.
That doesn’t mean that you have to go the typical route. Don’t be afraid to shop around and get several bids from leasing companies. Simcoe County Board of Education sent out a request for proposal to all the major leasing vendors in Canada. A key issue for the board was finding a vendor that would be in charge of maintenance, according to Green.
“Dell services the computers on-site for five years,” he said. “They come out and fix them. We don’t have to worry about hardware because we’re completely under warranty for the next five years.”
If you stick to your company’s desktop-replacement cycle – whether it’s three or five years — leasing can make perfect sense. But there will be no cost benefit if you keep the desktops longer than the scheduled lease. If anything, costs will increase significantly.
“If a company has a PC lifecycle of five years, and you end up extending the lease, when you add up the payments you might as well have bought them in the first place,” Compaq’s Henderson said.
But some companies don’t lease to save money; they just want the most modern equipment available. “Our main focus is to just have new technology available to students,” said Simcoe County’s Green. He added that because school boards have limited funding, they don’t have to come up with all the money in one sitting.
BEFORE SIGNING ON THE DOTTED LINE…
A lease success or failure story often hinges on something else: the contract with the vendor.
Watch out for vague words and phrases in the contract. For example, terms like “good working order” and “at a reasonable time” should be avoided, Gartner Group’s O’Brien said. It’s important to clarify the terms with the vendor in order to avoid confusion and potential breach of the lease. What may be “reasonable” to the vendor may not be to your company.
Most leasing contracts for desktops are for three years but depending on your own company’s replacement life cycle you may decide to get a two-year or five-year contract. While agreements carry straightforward information like start date, end date, costs per month and equipment delivery date, there are some things that may get lost in the shuffle, if you aren’t careful. Bargain for everything that you can think of, industry observers advise.
What happens in the case of a merger or re-organization? Is the lessor or lessee responsible for removing equipment when the lease expires? Is early termination possible? What happens if some equipment gets damaged? These are the types of questions corporations should be asking themselves before putting pen to paper, analysts and users agree.
“It’s important that you think about these things now or else you have to change as you go, which can be frustrating,” said Rick Haier, senior vice-president of private client and corporate systems at Merrill Lynch in Toronto.
It might be a good idea to have an upgrade clause included in your lease, Haier added. Merrill Lynch had this provision added to their lease, for an extra fee, because it would allow the company to terminate the lease early, pay an early termination fee, turn in the desktops and replace them with new desktops. Something like this is especially crucial for companies that experience a high rate of technological change, Haier said.
And if the company is leasing more than desktops, vendors recommend different agreements to reflect each type of technology. While Simcoe County Board of Education has a five-year lease for PCs, it has a separate three-year contract for leasing 125 Dell file servers, according to Green.
That’s not to say that if you’re leasing X technology, you should also lease Y technology. “Be practical: you don’t have to lease everything or buy everything,” O’Brien said. “A lot of organizations buy monitors and just lease the CPUs because it’s more cost effective for them.”
At the end of a lease, you often have three choices: buy the equipment, keep leasing the current equipment or send it all back and get new equipment. Haier believes that the third option is likely for most companies.
“You just keep leasing. Generally speaking, the leasing cost will stay the same but your [computing] power will increase. You get more bang for your buck because the technology changes so quickly.”
And the Simcoe County Board of Education will continue to lease for as long as the Ontario government is asking for students and teachers to be up on the latest technology.
“The Ministry of Education wants teachers to write report cards but they need fast PCs to do that,” Green said, noting that this argument helped the board get their funding to lease the desktops.