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Debate, leasing computers vs buying computers

  • 1.  Debate, leasing computers vs buying computers

    Posted 09-20-2019 08:17
    We are having an internal discussion on leasing computers, turning them every three or so years, vs buying.
    We have internal folks who have IT duties and experience, as well as partnering with a local, outsourced IT company for higher level work.

    I would love to get thoughts from the Connection Cafe on lease vs buy.

    We are a mid-sized construction company.
    We believe we can beat leasing by purchasing a limited selection of computer hardware - the Dell vs HP choice, and using them for longer than three years.  Not all users have the same need for processing power.  We can rotate the computer stock through a smart retirement/replacement plan, achieving a longer use of the asset, and in the end, save money over a leasing program.

    Overall, hard dollar savings are hard to overcome in this discussion.

    Again, thoughts?

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    Joseph Harper CPA, CCIFP
    CFO
    Greater Dayton Construction Group
    Beavercreek OH
    (740) 607-1449
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  • 2.  RE: Debate, leasing computers vs buying computers

    Posted 09-21-2019 06:01
    Joe,

    This is a question every business (whether in construction or not) faces, but is hard to answer precisely without knowing the specific numbers since there is a calculation involved. It should be a reasonably straightforward calculation based on your annual lease costs versus the purchase price. The other factor to calculate in is the tax benefits of the equipment depreciation on the purchased equipment.

    The second aspect of your post is an implied question of whether you can get reasonably good usage out of the PCs for more than three years. In almost all cases the answer is "yes". PCs should have a reasonable life expectancy of four to five years, depending on how you use them and the "horsepower" you need. One technique I've seen used effectively is the "trickle down" method where by the heavy duty users may get a new machine every three years, but their PC is inherited by someone else in the organization that has less demanding needs, which prolongs the life by a couple of years. This prolonged life expectancy obviously helps sway the buy versus lease calculation in favor of the buy decision.

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    Don Cohen
    Staff Consultant
    CEM Business Solutions
    Montvale NJ
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    Original Message


  • 3.  RE: Debate, leasing computers vs buying computers

    Posted 09-21-2019 16:42

    Hello Joe,

    Nicholas Carr published an article in Harvard Business Review in May of 2003 titled "I.T. Doesn't Matter".  Carr was heavily criticized by I.T. industry for his comments, however, his point was, and continues to be valid.  Carr stated that for long time computing power had surpassed the needs of general computing. This is more true in the age of Cloud Computing than it was 16 years ago.

    As a CIO, I realized with the exception of production computers (e.g. CAD, Detailing, etc.) people wanted a new computer, but they didn't necessarily need one.  Therefore, your assessment of longer term use of PCs is a valid one.

    However, I would recommend purchasing a lower end computer, rather than reassigning a higher powered one for the following reasons:

    • For a computer to work efficiently, it needs to be completely wiped out and set up from scratch.  This removes all unwanted, or experimental applications that the previous user may have installed on the computer.  It replaces years of windows patches with a more recent production release one (i.e. Windows Service Pack ...). It replaces all the old drivers and their associated patches with the latest single version of the driver.  And, it will have a clean version of Windows registry DataBase, which impact the performance.  
    • Although the above process is simple, it takes time (i.e. Labor Cost).  As always, labor costs are going up, while hardware costs are coming down.
    • Older, more powerful computers consume more resources (e.g. power, space, etc.).
    • It creates a variation in type of computers that people get reassigned.  Users always love to compare their computer to their co-workers. Replacing computer in an area every 5 or 6 years has a tone of equality.
    • Taking a page out of Southwest Airlines purchasing strategy book, having the same model of computers makes the maintenance less expensive and troubleshoot much more efficient.
    We standardized on three models:
    • Engineering - The department specified the specs and they also managed their yearly computer budget, which made them more cost conscious. 
    • Management -  Higher end laptops.
    • Staff - Best rated entry level business laptop.


    Kindest Regards,
    Varoujan Adamian
    Principal Consultant
    Noravand
    Burbank, CA
    (818) 201-5111
    vadamian@noravand.com



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    Varoujan Adamian E-MBA, BS
    Principal Consultant
    Noravand
    Burbank CA
    (747) 333-8301
    vadamian@noravand.com
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    Original Message


  • 4.  RE: Debate, leasing computers vs buying computers

    Posted 09-22-2019 09:16

    Joe, we do rent and lease a good volume of equipment to our clients.  We see three primary reasons to finance:

    • The business has cash flow restrictions and equipment is old and holding up productivity. Rental/lease provides productivity without an upfront investment.
    • Owners want to turn IT into an operating cost versus capital, producing IT as a service. We often roll up labor, hardware, and licensing into five-year leases.  Labor can include project time to migrate applications or services to "the cloud." 
    • More people understand the benefits of always having current equipment versus holding onto a depreciated asset. Think about your smartphone.  The carriers stopped propping up new purchases and moved the market to "new phone every X".  Initially it was tough to swallow, but now I do appreciate always having a fast, stateful smartphone without large $600 cash layouts.  Same goes for computing IT.  You can't have a computer that is too fast.  Staying current with technology without capital peak spend is useful for many.

    We also have a large volume of clients to purchase IT equipment.  The key to equipment purchase is setting a life expectancy for the fleet.  I.e., we want to rotate hardware every four years every X quarters.  Then the process becomes a math problem.  If you have 150 computers and want to rotate out every four years you should look to replace ~38 computer per year.  If you are on a quarterly refresh cycle, budget for ten computers per quarter.  Desktops ~$1,100 each, laptops ~$1,800 each (docks, chargers, etc.)

    If you are disciplined and have a good working capital, then purchasing may be a good choice.  It depends on your philosophy and tax strategy.

    Regards,

    Greg "Head Sherpa" Gurev

     



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    Greg Gurev
    Head Sherpa
    MySherpa
    Wilmington DE
    (302) 781-3006
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    Original Message


  • 5.  RE: Debate, leasing computers vs buying computers

    Posted 09-23-2019 12:16
    Hello Joseph,

    I have had experienced with Firms (From the Accounting/Management side) in Firms who purchase computers and lease or buy/leaseback.

    The obvious advantage of purchasing equipment is that you own it and can use it well beyond its useful life. However, when you keep equipment too long, you may need to make large unplanned purchases if the older equipment fail unexpectedly. Does your Company the funds or access to capital when this happen?
    The advantage of leasing is managing cash flow since you are simply paying rent and this may qualify as off balance sheet financing (Debt is not recorded on the balance sheet). If your Company's Debt is not a concern with your bank, I suggest looking at an Equipment Loan.

    My experience with Larger Firms (over $200 million in Revenue) who lease Computers on a 3-4 year cycle is there will be a minimum 4-6 months overlap on when a new lease start and the old one end because you cannot leave your employees without a Computer. Internally, you will need 2-3 months on each end of the lease to get the computers setup and distributer on the front end and cleaned out and returned to the Leasing Company on the back end. Also, remember if you lease 50 computers, you need to return 50 computers in working condition. Ask yourself, How good is your asset tracking and systems (employees) to do this? Many IT departments will also cannibalize a non-working computer to fix other computers so you may be short when returning equipment.

    In many instances, we would buy out the lease at the end because we are unable to retrieve all the Computers or the IT dept. did not have time to clean out the Computers before returning. The Leasing Company usually prefer the buyout because they do not want to deal with old equipment.

    My suggestion is to only lease on a regular cycle if your Company have very strong Internal Policies and procedures in addition to a robust IT department.

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    Sam Lee
    Controller
    Architectural Resources Group
    San Francisco CA

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    Original Message