Deciding Between Equipment Leasing Models for IT Operations
Editor’s Note: In this article, Jay Remotti, IT Manager at ONTRAPORT, provides his expert opinion on how to control IT budgets on a per employee basis using fair market value leases vs dollar buyout leases. Thanks for sharing these insights on our IT Manager Checklist, Jay! Btw, ONTRAPORT is hiring, head over for openings!
Reasons for Leasing
In terms of business expenses, ONTRAPORT is very interested to move from Capex (upfront cost) to Opex (ongoing cost) because we are a SaaS company looking at monthly recurring revenues. Thus it makes great sense to use an Opex model which allows us to predict free cashflow much easier.
To support our goal of having more operating than capital expenses, engaging leasing companies will help a lot in this aspect. Especially for new and small companies, using free cashflow to buy capital equipment is not really feasible as a couple hundred thousand of dollars is simply too huge an expense. Moreover, the purchased equipment will likely be obsolete in 3-4 years, thus there is really no point in spending full price for a machine that is equivalent to 3 years on a lease, but not worth much once it’s paid off.
On the other hand, leasing equipment allows us to save up to 10% on the unit. We can roll-back the model to the leasing company and then get the newest equipment.
A separate but relevant point -- payment in perpetuity which allows us to plan budgets better and calculate cost much more granular per employee. There is a fixed operating cost per employee, and let’s say the laptop costs us $75/month, we can calculate a cost per employee in a 28 day cycle.
Coming Up With the Plan
I brought this to the executive team and had always heard that it’s more advantageous to do a fair market value at sufficient scale. If you are not scaling so fast where you are bringing on freelancers, interns or file clerks, it would make more sense to do a dollar buy-out since they wouldn’t need so many new machines. Then it makes sense to keep the laptops as long as you can.
Executing the Plan
I work closely with the director of finance to determine budgetary requirements for IT initiatives. We first focus on the overall budget and then break it down to a per employee number. In this way, I know exactly how much money I have to work with to accomplish my strategic goals.
For the headcount projection, the Executive team gives it to me - for example, wanting to have 50 engineering employees. And then I work with Finance to work out how much the ‘employee per month’ cost is, and work with vendors and partners to deliver the cost numbers. Obviously costs per employee will differ from departments -- we run virtual machines on the computers, so we would need a lot more RAM than for example, people in the sales department.
We also have a role based worksheet where there are different specifications based on department, e.g. engineering or marketing. We use this for things like monitor requirements monitors (e.g. graphic designer), network connection speed, VPN, security profile, access to internal resources. When HR onboards a person, the IT ticket has the role code for the spreadsheet. Everything will then be specific: access, which machine image, security, etc. And in the event where a new role is created, we discuss job duties and functions in a meeting to set up the specifications for that role.
Deciding Between Leasing Models
To get started, take your current requirements, e.g. 50 new workstations in the 3rd quarter to a vendor like HP or Dell and get a quote. Then speak with the leasing people first because that’s the easiest since they work best with their own salespeople. Get a quote for dollar buyout lease and fair market value lease, and present the 3 options to your manager:
- Outright cash expenditure - simply pay $40 000 outright.
- Dollar buyout - cost us $10k to start the lease, at the end we own the equipment.
- Fair market value lease - $30k for equipment which we’ll pay off over the next 3 years.
The difference between dollar buyout and a loan is that the former is secured by the equipment you are purchasing. If you default, they just take back the equipment. A loan could be secured by a personal guarantee or some other asset the company owned. In that case, whatever you are buying can be soft cost.
It is important to note that IT doesn’t make these decisions -- we bring the options to management. From there, the management will then factor in their model and make the right choice, since there might be other considerations like launching large marketing campaigns which take up free cash flow and make leasing more attractive.
Another interesting point is that we don’t use the model on servers yet, we are focusing on dollar buy out of the server to get the most bang for our buck.