Total cost of ownership: How leasing can help with acquiring IT solutions
Over recent years, professional buyers in all industries have become increasingly aware that the cost price of capital equipment should not be the main consideration when they make purchasing decisions.
The concept of total cost of ownership (TCO) is now well established, but it is worth reminding ourselves of exactly what is involved. The first step in the process of calculating a TCO is deciding how long a company intends to keep the equipment being acquired. This is known by some as the investment period and once decided, it is then a case of looking at all of the costs involved in acquiring and running the equipment over that period of time.
The main questions any buyer will need to address are:
1. Do we need to retain existing equipment or invest in a new solution?
2. If the answer is to invest in a new solution, then what should that solution be and which manufacturers and resellers will provide this?
In answering the first question, an analysis of the costs involved in retaining old equipment needs to be compared with the costs involved in any potential replacement. One key consideration in the ‘retain or replace’ dilemma is estimating the business impact if the IT network were to malfunction. Downtime costs can be significant and is one of the hidden costs of ownership. Buyers should give full consideration to the quality of service available from different manufacturers and their re-seller networks.
Once an investment period has been agreed, it becomes a case of ensuring all costs associated with buying and most importantly, running alternative solutions, is taken into account. These include some or all of the following:
- Purchase price
- Installation and set-up
- Preventative maintenance
- Software support
Once a full TCO analysis has been completed it often becomes apparent that the purchase price of equipment is not necessarily the largest part of all the costs involved. Indeed the whole point of any TCO analysis is to assess all costs over an investment period. Most costs are paid with use (consumables, hosting, service contracts etc.). Given that a key feature of a leasing agreement is that payments are normally spread evenly over an investment period, a TCO analysis should lead a buyer to favour this method of acquisition. After all, why pay ‘up front’ for something that will be used for the next three to five years when all other costs are paid with use?
A TCO analysis applied solely to leasing might also show that the real cost of leasing is less than the sum of payments made during an agreement. There is a cost to having money tied up in capital equipment and any company should consider the return that might be available on that cash if they chose a leasing option. Furthermore, leasing is treated as a normal business expense for tax purposes which means for any company paying Corporation Tax the real cost of rentals paid will be reduced by 19% (The Corporation Tax rate applicable for fiscal year 2018/2019).
Another important consideration for any organisation reliant on IT, which let’s face it is every organisation, is that hardware and software suitability will be subject to continual review. With advances in technology generally leading to regular additions and replacements, leasing products within the ICT market are designed to facilitate such needs by offering a range of alternatives to accommodate every type of system upgrade.
Once a customer has chosen to lease as a method of acquiring a new IT solution they will find that a wide range of contract lengths and payment terms will be available, at least one of which should suit any budgetary requirement.
Andy is an experienced sales and finance professional with over 25 years’ experience in sales aid leasing. Andy is widely recognised as an expert in business finance and has in recent years focused his attention on developing partner sales teams develop an understanding of how businesses secure project financing. His training programme – Finance Unlocked – is a highly rated customisable course and is offered at no cost to partners.
If you’re interested in helping your sales team overcome finance-related hurdles during the selling cycle, please get in touch with Andy on 07966 114 243 or email here.